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Is responsible investing the next bubble?

Momentum Investments

Definitely not, say investment officers at one of South Africa’s most respected investment firms 

  • Responsible investing has been around since at least the 1920s – and research shows sustainable returns
  • Momentum Investment Impact Funds have seen a return/growth since conception – despite Covid-19 headwinds
  • By looking at investments more holistically and creatively, Momentum Investments has invested in renewable energy projects, student housing developments, and retail centres in under-developed areas – to great financial return and positive social impact
  • And, perhaps surprisingly, Momentum Investments is keen for their competitors to get involved too

Institutional investment is arguably a key economic driver, providing the means by which many countries can grow and develop across many different areas – in many ways it is the ‘fuel’ that powers modern economies. But, as society increasingly grapples with what a modern, inclusive, socially responsible society should look like, so many are looking to re-imagine the ingrained structures behind elements of society that need systemic change.

Ranging from our reliance on fossil fuels and harmful products such as alcohol and tobacco, to issues of inequitable housing and social exclusion, the collective desire to solve these challenges are growing.

And this seems to be a new ‘fad’, if some nay-sayers are to be believed, and even more so when applied to something as established as institutional investing. What if this feel-good investing in environmentally friendly developments and socially conscious projects, is actually just a bubble, you may ask? What if, by applying stringent governance principles to something when considering whether to invest in it, you miss out on great returns?

A long, nuanced history of responsible investing

“Responsible investing isn’t new,” according to Sonja Saunderson, Chief Investment Officer at Momentum Investments. “It’s not a fad, and it’s not a bubble. We take responsible investing seriously, and have several funds dedicated specifically to socially or environmentally responsible investing. And perhaps the even better news for our investors is that we’re seeing very strong returns on these funds, even during Covid times,” she says. 

Although it has many names – socially responsible investing, sustainable investing, ESG [environmental, social, governance] investing – the history of responsible investing dates back to at least the 1920s, explains Saunderson. “It’s hard to say something’s a bubble when it has a history as long as this, and when ‘responsible’ means so many different things to different people.”

Religious principles in fact initially underscored responsible investing philosophies, with the idea that investing in alcohol and tobacco companies was not morally responsible. From there, other industries have been examined from this same view, leading to what Saunderson terms “exclusionary investing” – excluding certain categories or industries from being considered. 

This view has evolved over time into something more nuanced. “As scientific advances came to the fore and people understood that investing is not just about a societal impact, but also about an ecological and an environmental impact, so the conversation changed,” she says.

“Coal-fired power stations are a good example. From an environmental perspective, they’re clearly not sustainable. But from a social perspective, think of how many households are fed by Eskom. And how many jobs, communities, industries and livelihoods rely on being supplied with power consistently. Now, when you add the ‘social’ element to a discussion of whether we should invest in coal-fired power stations, the conversation gets complicated.”

But the ongoing fear – that such investing is a ‘bubble’ that won’t grow investors’ money – is easily dispelled by looking at the vast body of research on the topic, says Saunderson. A study by Morgan Stanley showed better returns on sustainable investments in 2020, compared to traditional. In a year dominated by Covid-19 concerns, this is proof of the investment philosophy’s resilience, believes Saunderson.

An analysis of more than 3,000 US mutual funds and exchange-traded funds shows that sustainable equity funds outperformed their traditional peer funds by a median total return of 4.3 percentage points in 2020. During the same period, sustainable taxable bond funds outperformed their non-ESG counterparts by a median total return of 0.9 percentage points.

Investing with purpose: going beyond financial returns

An integrated approach to any investing is critical, if you are to invest responsibly, explains Mike Adsetts, Deputy Chief Investment Officer at Momentum Investments. “What that means is that we disaggregate environmental, social and governance factors, and we think about every single type of investment we make from multiple perspectives.

“You need to be mindful of what the implications are if you decommission a fire station or close down a coal mine, for example. What are the alternative career paths in the new renewable energy place that you can put them into? That’s an example of what we consider from the environmental and social sides.”

Broadly, Momentum Investment’s impact investment funds focus on three areas – alternative energy, social infrastructure, and diversified infrastructure. “Sometimes this means investing in the unlisted space, which can be disconcerting to more traditional investors, but we believe there is real value to be found there.”

Importantly for Adsetts, these investments are closely linked to very specific United Nations Sustainable Development Goals (SDGs), to which Momentum Investment subscribes. “This is a level of commitment that we think is unique – not only in how we’re investing, but in how we’re matching these investments specifically with common, international goals for a better, more inclusive world.”

In practice: responsible investing, with great returns

Leading the charge on this is Motlatsi Mutlanyane, Head of Alternative Investments at Momentum Investments. Mutlanyane has the complex responsibility of identifying these purposeful investments, while being sure that they are not only right from a responsibility perspective, but that they will generate good returns on investors’ money.

“Finding purposeful investments may not be as hard as it used to be, but finding ones that will also generate a strong return becomes more complex,” explains Mutlanyane. “But this kind of strategic, goal-orientated investing also means that our investors can hold us accountable at the end of the day. I believe it makes for better decision making, and better-quality conversations with our investors.”

So far, this has ultimately come down to three funds at Momentum Investments, which are all generating strong returns despite the Covid-19 pandemic that has negatively impacted many other investments:

(1)     Alternative Energy Fund (domestic investment): Invests in the equity and debt instruments of sustainable energy companies and projects. Sustainable energy companies are those that are engaged in alternative energy technologies including renewable energy technology, renewable energy developers, energy storage, energy efficiency, enabling energy infrastructure. The portfolio will not invest in companies involved with fossil fuel and consumables, and related technologies.

(2)     Diversified Infrastructure Fund (domestic investment): Invests in core infrastructure assets that provide essential services and have measurable impact outcomes. It provides diversification benefits and attractive financial returns including income and inflation protection. Underlying assets have stable and predictable cash flows as well as strong environmental, social and governance features.

(3)     Social Infrastructure Fund (domestic investment): Deploys capital to address pressing social challenges, while also seeking a financial return. Investments are aimed at supporting the provision of student housing in the higher education sector, quality affordable housing as well as rural and peri-urban retail shopping centres.

“These funds are not only sitting on the bar, they are beating it, and are exceeding even our own expectations,” explains Mutlanyane. “The lack of infrastructural development in South Africa specifically – due to long-standing inequality – is in dire need of investment. Investing in such economic infrastructure certainly makes sense, because we’re able to see significant ripple effects, their job creation at scale. That’s good for our investors, and good for South Africans in areas where these developments are.”

“Government seems to want to work with the private sector to fund this kind of development. They’ve identified some 276 projects that they’re trying to get to a stage where they are bankable, and can be converted into projects that the private sector would be able to invest in. We’re already involved in this – and we’re actually hoping that more of our competitors will also get involved, so we can leverage this for everyone.”

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