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Driving innovation through ESG solutions

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In January 2004, the late former UN Secretary-General Kofi Annan, invited CEOs of big financial institutions asking them to be part of an initiative to integrate Environmental, Social and Governance(ESG) into capital markets including asset management, securities brokerage and research.

Subsequently, eighteen financial institutions from nine countries developed a report titled “Connecting Financial Markets to a Changing World”. The report was developed to increase awareness among all actors and start a broader discussion and clarify roles, without being prescriptive. Today, over 1 200 asset owners, investment managers and professional service par billionaires have become signatories of the United Nations-backed Principles for Responsible Investment (PRI). Since then, ESG has evolved and moved from the sidelines to the forefront of decision-making for asset managers and institutional investors. Increasingly, ESG considerations are being integrated into investment mandates, requiring careful consideration of these risks when making investment and stewardship decisions. In addition, globally consumers are becoming increasingly aware of the impact of runaway climate change, resource depletion and pollution on planetary wellbeing. This has led to an escalation in demand for more sustainable goods and services from companies, including investment products.

OUR APPROACH TO RESPONSIBLE INVESTING

At Old Mutual Investment Group, our approach to Responsible Investment is motivated by a clear understanding that environmental, social and governance (ESG) issues can and do impact returns. We fully embrace the fiduciary duty to our clients to address these issues and, importantly, by a belief that it’s both the right and smart thing to do. 

We began the journey in 2010 and focus on two priority areas:

  1. Deepening our ESG research and integration practices.
  2. Focusing our capabilities on investment solutions that address long-term sustainability issues (for example, renewable energy, education, ESG indices).

DRIVING INNOVATION THROUGH ESG SOLUTIONS

Our focused research since 2010 enabled us to innovate and bring ESG fund ranges to the market in 2016. These passive, low-cost products are designed to offer investors the opportunity to achieve benchmark-like returns by holding a basket of companies that is measurably better for the planet. With our ESG products ranging across institutional, retail and direct, we became a leading SA investment manager in the provision of ESG investment options to all clients across the investment spectrum – institutional, retail and direct.

Old Mutual Responsible Investment Equity Index Fund

In 2016, Old Mutual Investment Group launched South Africa’s first MSCI equity ESG index fund, the Old Mutual Responsible Investment Equity Index Fund aimed at institutional investors. The Old Mutual Responsible Investment Equity Index Fund invests in companies that have measurably better ESG performance than their sector peers. This is particularly attractive to long-term investors that value sustainable economic themes, given their extended investment time horizon. Looking through the lens of sustainability gives better insight into the risks and opportunities a company faces. 

Old Mutual Wealth Tailored Fund Portfolio Global Range 

In July of 2018, we launched the Old Mutual Wealth Tailored Fund Portfolio Global Range with ESG overlays which is exclusively available to independent financial advisers. The range targets real returns by incorporating mandates that track ESG equity indices in both merging and developed markets. It competes on the price of traditional market-cap passive strategies. ESG index tracker funds offer a viable, cost-effective solution for passive investors who, while mandatory holders of the index, are looking for a practical alternative to avoid the unsustainable practices of many listed companies. 

Old Mutual ESG Index Unit Trusts

In November 2018, we launched South Africa’s first ESG Index unit trusts, the Old Mutual MSCI World ESG Index Feeder Fund and Old Mutual MSCI Emerging Markets ESG Index Feeder Fund. These funds aim to achieve long-term capital growth by primarily gaining exposure to the MSCI Emerging Markets ESG Leaders Index, a free float-adjusted market capitalisation weighted index. These unit trusts are aimed at direct clients and can be accessed directly, online or from financial planners.

INVESTMENT PERFORMANCE

There is a myth among investors that ESG investments offer inferior performance and sacrificed returns when taking ESG matters into consideration. However, research confirms otherwise, and although future performance cannot be guaranteed, ESG investments have repeatedly demonstrated that capital employed sustainably can not only meet, but often outperform investors’ return expectations. 

INNOVATING FOR LOWER FEES

One of the key advantages of the indexation approach is affordability. We take our responsibility to grow and generate sustainable investment returns seriously and are committed to expertly managing clients’ funds while consistently ensuring that they remain affordable. 

INNOVATING FOR THE FUTURE CLIENT

High net worth individuals and Millennials, the generation between the ages of 18 and 34, have shown increased awareness of the negative impact of carbon emissions on the environment. These investors are increasingly allocating capital towards initiatives that address both global warming, as well as the rising rates of social degradation, such as a rising incidence of child labour, experienced in poorer developing nations.

Research from the Morgan Stanley Institute for Sustainable Investing in 2019 showed that 95% of millennials now express interest in sustainable investing, as opposed to 85% of the general population. 

Innovation in ESG investing has enabled us to respond appropriately to a growing customer need, and to invest for a future that matters. BM

This article was written by Jon Duncan, Head: Responsible Investment, Old Mutual Investment Group

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