In our quest to explore more about ESG and Impact Investing, WIFIN had an interactive Q&A session with one of its Global Advisory Board members – Vhahangwele Manavhela, Partner and Head of ESG, Aequalitas Capital Partners.
Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities. ESG metrics are not commonly part of mandatory financial reporting, though companies are increasingly making disclosures in their annual report or a standalone sustainability report. Numerous institutions such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (DRI) and the Task Force on Climate-related Financial Disclosures (TCFD) are working to form standards and define materiality to facilitate incorporation of these factors into the investment process.
Q: Why according to you, is ESG investing important and why are more firms complying with it? How is your firm complying with ESG practices?
I believe there is an increase in demand for embedded ESG practices in the firm and consideration is being driven by awoke society which is demanding sustainable practices be the norm when doing business rather than the exception.
There is a broader understanding of the market on the value add ESG can bring to the firm. ESG play a bigger role in building resilient funds and companies, defending them with good governance and unlocking value with smart ESG solutions.
Since inception we have been committed to embedding robust ESG practices, currently, we are in the midst of establishing a diverse and independent Board. We are also committed to developing our talent through a professional development program and a multi-focus approach to provide work-life.
Through our service offering the ESG practice, we enable our partners (Fund Managers, Investors, and Companies) to meet their key strategic objectives through:
Q: With Aequalitas Capital Partners being a SAVCA member, what are the investment policies and Governance structure policies regarding ESG within the region?
Institutional Investors on the continent had been looking at ESG factors for over a decade and has been increasing at the moment. Similar to other continents, there are no specific regulations that force investors, Fund Manager and company integrate ESG as part of their fiduciary duties of care, values to drive sustainability and responsible investors/business.
Unlike in Europe where ESG reporting is standardised and regulated, in Africa, ESG integration remains voluntary and only mandated by Investors mainly Institutional Investors who are at the forefront. In South Africa, there is a revised Regulation 28 of the Pension Fund act that became effective on 1 July 2011 which guides trustees on how to formulate appropriate investment strategies on how to strengthen the decision-making process of trustees and improve transparency and accountability.
There is also the number of Investors and Fund Managers who are members of the Principle for Responsible Investment (PRI) of which Aequalitas is also a member.
The challenge remains globally, that the industry does not have standardised codes adopted to assess the ESG factors within the investment process. Currently, the widely adopted codes are IFC Performance Standards, Equator Principles, World Bank Group’s Environmental, Health and Safety Guidelines (WBG EHS), International Labour Organization’s Core Labour Standards, and Taskforce for Carbon Related Disclosures (TFCD).
When it comes to Governance most firms are relying mainly on their respective country legislation that governs the companies and in South Africa, we have King IV Corporate governance principles governance which has been widely adopted. The CDC Business Integrity toolkit/IFC IFC’s Corporate Governance Methodology guides firms to mitigate compliance, reputational, and operational risks, and protect companies.
Q: We find that there is an ongoing debate on using financial markets as a tool to foster corporate social sustainability. One such movement is by integrating ESG into mainstream investment decision making. What do you think is the role of financial markets in delivering sustainable outcomes? Can private equity funds foster corporate social sustainability?
The concept of social sustainability was widely adopted in the ’60s and with investors excluding stocks or entire industries from their portfolios based on business activities.
The financial market like any other investors had moved from the view of just fostering corporate social sustainability to a more meaningful approach that drives sustainability across all business spheres.
In 2005, the United Nations Environment Programme Finance Initiative commissioned a report named “Who Care Wins” from the international law firm Freshfields Bruckhaus Deringer on the interpretation of the law concerning investors and ESG issues. Based on the recommendation of the study there was a consensus that ESG factors play an important role in the context of longer-term investment strategies and that the financial industry must improve their consideration in research and investment processes.
It has become clear that effective management of ESG factors improves the fundamental analysis undertaken during investment assessment. This is through the greater inclusion of relevant information, essential for investment decision making.
Considering material ESG factors already today falls within the fiduciary responsibility of investors which include the financial markets. The Private equity fund needs to adopt the concept of ESG integration which is a broader and more effective strategy to drive value and manage risk rather than Corporate social sustainability.
Q: According to you, what are the strategies investors can use to integrate ESG issues into mainstream investment decision making? How can we measure ESG credentials and performance?
ESG integration into the investment process and decision making is an effective approach that requires practical experience and contextual expertise in the industry. Proper integration of material ESG factors in businesses leads to long term sustainability. The Concept of ESG integration should be adopted from strategy development, throughout the investment decision making process until exit. In each step of the process, proper ESG consideration will drive compliance, manage risk and create value on the investment.
Proper integration of material ESG factors in businesses leads to long term sustainability which includes viable financial performance. The concept of materiality is elaborated more by SASB.
Q: According to you, what are some of the challenges involved in integrating ESG investing strategies into mainstream investment decision making?
Already immense momentum towards required as Investors are increasingly calling for mandatory meaningful inclusion of ESG into the investment process across all asset classes. ESG has become the bedrock of institutionalised accountable organisations. Core areas to focus on are regulatory and legal compliance, risk management and value creation.
Q: Do you think sustainable investing is a short-term investment practice or a long-term investment practice? Do you think an ESG view of a company is essential for an accurate long-term view?
For an investor to realise the long-term value of their investment there should be a willingness to adopt long-term investment practices. The responsible investors are willing to forego the short-term commercial gratification at the expense of the environment and people.
Q: Impact investing is believed to be a big step towards a better world. Do you think such a focus on sustainable investment also imply that the industry has been operating in an unsustainable way before this?
Is it sustainable to prioritise profit at the expense of humans and the planet? The fact that the world is still behind in achieving the SDG goal and we are still dealing with the issues of climate change, child labour, exploitation and unfair treatment of employees, modern-day slavery shows that there has been a time where the investor’s focus was more on the return than driving sustainability.
Q: What are your final thoughts on future trends that investors should be thinking about? Is ESG investing a priority for you?
ESG is stepping off point towards developing a more complex long term investment strategy focus on delivering the triple bottom line (People, Planet and Profits). ESG integration into the investment process is definitely a priority to me and Aequalitas Capital.
Vhahangwele (Hangwi) Manavhela is an executive with 20+ years of experience in ESG and Social Impact across Africa.
Hangwi leads the ESG practice at Aequalitas Capital Partners. She works with asset managers, companies and development organisations to integrate ESG, drive compliance, provide training and capacity building in ESG. She established and ran ESG and Impact at Africa’s largest asset manager, the PIC, across its diversified investment portfolio (Real estate, private equity and impact investing).
Hangwi previously worked at Tshikululu Social investment management, Care International, and Thohoyandou Victim Empowerment Programme (gender-based violence support). She has served on advisory committees of the Principles for Responsible Investment (PRI), the Sustainability Accounting Standards Board and CFA institute.
Hangwi regularly speaks on ESG panels at conferences globally. She is an Eisenhower Fellow.
Masters in Sociology (social Impact assessment) at the University of Johannesburg, BA (Hons) in Psychology at University of Venda and University of the North (Limpopo).
Disclaimer: Hangwi’s views are her own and do not represent the views of her employer.**
Thank you for joining us!
(WIFIN Q&A sessions 2021)