Sustainability by stealth
Investec Asset Management has a strong SRI overlay for its equity and balanced portfolios. According to fund manager Malcolm Grey, the process seeks to generate equity alpha through contrarian investment opportunities which have distinctive environmental, social or governance drivers and compelling valuation gaps. “It isbased on our own understanding that the market is not interpreting ESG info, because many mainstream fund managers still dismiss the whole concept.”
The Investec process and investment philosophy was built in South Africa and has been put into practice with several funds and projects across Africa. Investec is a very large player in South Africa and is therefore able to drive meaningful levels of engagement.
Grey says, “Our philosophical view is to mobilize capital flows to areas that are under-capitalised. We have lengthy discussions about this internally. We follow key thematic drivers rather than a sectoral approach and we adopt a frontier emerging markets type way of allocating investments. Asia is a good fit for that, in that our methodology can easily be applied.”
Sustainability is the overarching thematic, with urbanisation as a focus and the consequences of that, in terms of resource scarcity and access to transportation and micro-lending. The managers are looking to support efficient infrastructure development, including mass transit for growing urbanised populations. Grey says, “Asia is well-placed for the growth of SRI as defined in that way. There is scope for these countries to benefit from initiatives in water treatment and clean energy.
It’s less about getting hung up on the definitions and just understanding the thematic ideas and what is possible. It’s important for trustees to see that SRI isn’t some sort of fringe activity. It’s a very mainstream activity that has moved beyond PRI defined constructs. There is now a much astrobngfer answer to the question of why you would put a dollar into a project, because it generates a return and that return is sustainable.
The mindset of investors and institutions is shifting, and so is the way these investments are presented. There will always be specialists SRI managers, the likes of Innovest, Asset 4 and SAM, but the larger players will have as great an influence in moving to SRI by adopting the principles without the labels.
Gray says, “There has always been a significant proportion of the investor market that questions the idea of responsible investment. That has served to limit it to specific parts of the asset management business. That is not the way to gain mainstream acceptance.”
I used to think there must be a way of attributing the SRI-ness of an alpha decision. Experience has taught me that traditional attribution analysis is flawed anyway, but the only way of looking at a portfolio decision is whether, in your judgment, it will generate alpha. The question then is, if it appears to generate alpha, how was it generated. The decision made may have an SRI characteristic to it. But simply applying an SRI screen doesn’t in it’s simplicity provide alpha. It’s a factor that allows you to make the alpha decision.
Ultimately the value of the SRI input to the fund manager is the content of the research, the confluence of all the data. And the only thing the client is interested in is whether it is a sustainable alpha strategy.”
Investec’s core SRI portfolios are run for institutional clients, but Grey says the manager is chosen not for its responsible investment capabilities, but because it generates excess return. “That is what I am proposing to the client. Clients are skeptical of RI anyway, so there’s no point trying to sell it that way. And we have no fixed methodology at present for measuring the RI character of our portfolios. Once they have seen how the strategy performs, then we might explain how it has this RI overlay. Over time, I hope we won’t have to explain it. Mainstreaming of SRI is what will have the greatest impact.”