The report surveyed more than a thousand offshore investment clients across South Africa, continental Africa, Jersey and Isle of Man, in a bid to understand potential barriers to including ESG investments in their portfolios.
Shalia Naidoo, Head of Behavioural Science at Standard Bank says, “A major finding was that three-quarters of the respondents didn’t know what the acronym ESG stands for, which is information that can be taken for granted by investment companies offering these solutions.”
Knowledge gap translates into an investment gap
Environmental, social, and governance (ESG) investing grew rapidly in both investor and public consciousness between 2017 and 2022 and accordingly, we saw global ESG assets surpass the $30 trillion mark in 2022. While ESG funds continue to grow their assets, the Standard Bank survey reveals there remains a misconception among investors around the cost of “doing good”.
While the majority of the respondents (61%) say they would still like to see their investments have a positive social impact, they believe this would come at the price of foregoing profits and, vice versa, believing that a strong performance is the opportunity cost of an environmentally or socially conscious investment.
A need for transparency and visibility
Additionally, Naidoo explains that a lack of understanding around what’s considered an ESG investment and the uncertainty around how an investment is classified as an ESG investment or how it contributes towards ESG-related issues are just some of the factors that survey respondents indicated as reasons holding them back from investing in ESG.
“While most respondents (86%) say that they invest mainly with the aim of strong performance and growing their money in the best way, they do care about the effect (or impact) their investment could have,” says Naidoo.
“Respondents indicated that they would be more willing to invest in ESG if more transparency and visibility was created around an investment's association with ESG and showing proof of impact of their investment. People want to know for a fact that their investment is making a positive impact or how it is contributing positively to society.”
There is a need for the industry to make ESG less complicated and this can be done by clearly highlighting what an ESG fund stands for, as well as its values.
“The typical naming conventions of ESG funds are particularly abstract for less experienced investors because they reveal very little about what the fund stands for. And since the research showed that respondents want to understand exactly what their money is doing, abstract information does not provide the clarity they need. These less experienced investors also tend to be part of the younger generations who are highly motivated by positive social impact but avoid complicated information,” explains Naidoo.
For example, naming a fund that focuses on marine sustainability ‘OceanGuard Sustainability Fund’, rather than ‘Core Equity Fund H’, could be more valuable in helping investors better understand the purpose of the fund.
Advisors play an important part
Lastly, Naidoo says advisors can play a pivotal role in helping change the misconception that ESG equates to lower performance - especially with clients who have communicated their desire to see their investment have a positive impact but whose investment choices have not reflected this.
“There is a clear need for education around the basics of ESG and investors need to be shown meaningful impact during portfolio review sessions. Beyond being able to explain the performance of certain funds, advisors need to be able to showcase how sustainable practices lead to sustainable results over the long-term,” she adds.
Naidoo believes that education on ESG and sustainable investing is essential if we want to see investors become intentional with investing for positive environmental and social impact.
Standard Bank investments playing an integral role
Duncan Wattam, Head of Investments for Standard Bank Group, says one of the Bank’s imperatives is to incorporate ESG and sustainable investing within the research and investment philosophy because generating long-term sustainable returns relies on stable and well-functioning social, environmental, and economic systems.
“ESG risks threaten a vast range of sectors, from agriculture to energy and infrastructure, but more than that, they impact every person and threaten the economic security of individuals, households and businesses around the world,” says Wattam.
“Considering how detrimental these risks can be to the economy, we believe investors and asset allocators play a key part in ensuring companies and funds we invest in consider ESG and operate in a sustainable manner.” DM/BM