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Driving Innovation Through ESG Investment Solutions

A journey undertaken by Old Mutual Investment Group (OMIG) over a decade ago and its incorporation into the suite of responsible investment unit trusts primarily for the institutional market and retail distribution is our commitment on sustainability matters in the context of investing. In the wake of COVID-19, the virus has not changed the need to solve for climate, strive for better governance and social coherence but rather has shone a light on the frailty of the market to withstand exogenous system shocks - making the case for sustainability hold in current market conditions.

According to Bloomberg, record flows of capital into sustainability strategies in the retail markets is evidenced by the fact that sustainability funds have weathered the current COVID-19 crisis remarkably well relative to fund performance across the board. This supports our view and is confirmed by the market that ESG funds are holding up well globally. The South African investment landscape has had to contend with a myth that pursuing ESG investment solutions comes at the cost of returns on the backdrop of significant social challenges. On the contrary, ESG solutions address domestic issues and provide scope for competitive innovation in the asset management industry. 

Our solution – The Old Mutual ESG Equity Fund 

Sound fund governance, controlled risk and return seeking are integrated at Old Mutual Investment Group along with solid team expertise. From a design and build perspective, there is an intentional focus on companies that have a high ESG rating and a lower carbon intensity relative to the benchmark underpinned by active stewardship both at a company and market level. 

The ESG team weaves in the philosophical investment beliefs in the investment process in crafting signals which is unique to our business. (or to our asset management business). A real value add with suitability metrics in the investment of quality companies that are socially, environmentally and governance conscience. The execution of the investment philosophy and process aims to amplify the exposure to highly rated ESG companies with the investment to low carbon intensity companies – both spanning across the extensive stock-specific process in companies we believe generate stable earnings and cashflows in outperforming the market over the long-term. Allowing us to identify quality, fairly priced and sustainable companies in a risk-controlled manner resonates with us and our clients as people first – a belief system we have as a team that backs the companies we invest in. 

The components that go hand in hand in resulting in a portfolio that encompasses these attributes at any point in time are – good returns on equity, high return on assets, well capitalised and a high free cashflow yields while the team takes measured long positions at a good price.  We have pioneered ESG indices and recently launched the SA ESG listed equity fund which targets a 40% reduction in carbon intensity versus the capped SWIX benchmark of choice as a starting point in the investment process. This providing for a wholistic exposure to quality highly rated ESG companies that target a low carbon intensity as a measure. The fund is therefore 45% less carbon intense than the benchmark, consisting of well capitalised free cashflow yield companies. A hyper-focused screening process involves qualitative (nature of the business) and quantitative (controversy scores) tests that determine the eligibility for investments in a universe of about 150 stocks. 

The launch of this innovative fund hinges on a deep belief in sustainable companies as the only impactful way of gaining a competitive edge over the long term that relates to a good financial performance in a risk cognisant portfolio.  BM

This article was written by Fawaz Fakier, Portfolio Manager, Old Mutual Customised Solutions



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