By Martin Soderberg, Partner, SPEAR Capital
The Scottish Widows Fund recently announced that it will dump £440m of company holdings that fail its Environmental, Social, and Governance (ESG) tests. Being one of the most far-reaching exclusions policies adopted by a major UK pensions provider to date, it’s important to take note of this action.
And as pension funds and asset managers across the world face increasing pressure to protect client portfolios from the risks of climate change, others will follow. Even as ESG becomes an imperative, however, fund managers will still be expected to provide solid returns to investors. That may become increasingly difficult, especially as some commentators suggest that ESG investing risks becoming another stock bubble.
Even if that turns out to be true, however, there are still real opportunities in the ESG arena, especially for funds willing to look at the Private Equity space and to Africa in particular.
High compliance standards
Given the kind of Africa-centric stories that typically reach Western audiences, that might seem like a surprising statement. How can countries grappling with corruption and wide-scale poverty offer solid ESG opportunities? Surely the best ESG opportunities are to be found in developed markets where more widespread access to technology and societal pressure have led to companies embracing it is a philosophy?
In actual fact, the situation is somewhat more complex. According to the 2019 Morningstar Sustainability Atlas, for example, companies in South Africa have levels of ESG compliance on par with those in Italy, Belgium, and Australia. Africa’s most developed economy fares particularly well when it comes to carbon risk, carrying levels on par with those of Switzerland, the Netherlands, Denmark, Sweden, Belgium, France, and the US. While ratings will vary across African countries, many South African companies operate across the continent, indicating a widespread willingness to embrace ESG principles.
That’s to say nothing of the fact that many African economies are set to outperform global growth rates despite the ructions of 2020.
Barring any state-imposed limits on how much they can invest offshore, there is no reason, therefore, for ESG-focused pension funds not to look at Africa.
Good returns, low cost
Another benefit is that many African countries have relatively less depth in the investment space, meaning far less competition for UK funds to make quality investments and, potentially, reap big rewards as a result of entry at cheaper comparative prices.
Of course, that’s not to say that there aren’t risks when it comes to investing in Africa. The developing nature of these economies mean macroeconomic conditions can be unpredictable at times. It’s therefore important that pension funds not simply barge into Africa of their own accord but partner with experienced players with a proven track record on the continent.
The power of private equity
Here, private equity (PE) companies have an important role to play. PE not only plays an important role in diversifying investor portfolios, but the companies that play in the space are geared to the long-term. That means they’re less susceptible to the vagaries of the stock market, something that’s become increasingly important in the wake of 2020’s economic shocks.
Additionally, PE firms are geared to not only generate returns for investors but also to contribute to the overall wellbeing of the companies they invest in. That can be a good thing for pension funds with high ESG requirements, as it means they won’t sacrifice long-term vision and values for short-term shareholder gains.
Betting on potential
As much as ESG investing should be a matter of principle, especially for pension funds, investors do require returns. And if, as some people suggest, that’s becoming more difficult to achieve in developed markets, then fund managers should look elsewhere. With the right guidance, Africa can provide these alternative opportunities and others that may not be available in the developed world. UK pension funds should embrace them.