Hendrik du Toit and Therese Niklasson tell Nina Röhrbein about ESG integration at Investec
When the crisis struck, some asset managers felt that environmental, social and governance (ESG) teams added no value and disbanded them. Others took the opposite view and added to their ESG credentials.
One of these is Investec Asset Management, the Cape Town and London-based asset manager. As 60% of its €80bn-plus assets under management are related to emerging markets, particularly Africa, it gives the firm a different global perspective.
“As a firm rooted in southern Africa, we have grown up in markets where a broad range of ESG issues have been relevant to our clients,” says Therese Niklasson, head of ESG research at Investec Asset Management. “A relatively mature approach to governance has evolved over the years, while the country has a history in mining, for example, which is a complex business in terms of its relationship with communities, the environment and employees.
“Further afield, there is some way to go in terms of developing an investment landscape that places a large emphasis on ESG, but we have seen encouraging developments over the past few years. Collective engagement efforts are on the rise and we have seen an increase in interest and questions from the local client base.”
Niklasson says ESG poses unique challenges for a business focused on emerging and frontier markets but also a lot of “low hanging fruit”.
“As our business and client base has matured and grown, there was a need for a rigorous in-house framework which would facilitate the growing knowledge base around the issues and interaction with our investments,“ she says.
“ESG is not a separate product but a filter to ultimately capture value,” adds Hendrik du Toit, CEO of Investec. “Our ESG people are internal missionaries who promote ESG thinking right through our investment business and make sure it is embedded in the decision making. They are investment professionals here to help traditional mainstream investors think about ESG issues and understand its language and its purpose.”
The ESG team, for example, poses important resource and community questions – such as water-related issues or local participation, for instance concerning mining companies that risk losing their operating licence or even face re-nationalisation if they do not address these issues. “We also want to behave in line with the requirements of our major clients, some of which have very serious ESG policies,” says du Toit. “Ultimately, ESG limits the liability of a firm.”
Du Toit says the growth in Investec’s ESG team has helped its message reach all of the asset manager’s investment professionals. According to the CEO, Investec never hires teams – instead it hires individuals and integrates them into the business.
The ESG team consists of five people. Its time is split between Cape Town and London and it undertakes all ESG-related activities from proxy voting, one of the more basic ways of expressing active ownership according to Niklasson, to integrating strategies for the different capabilities in the various investment teams.
Investec has seven investment teams, of which five are equity related. Each has its own investment process, in which ESG is embedded.
“Asset classes and even styles within asset classes are different, which is why the processes of the various investment teams also differ, while resting on a common set of principles,” says Niklasson. “Therefore, it was incredibly important that our investment teams were involved in developing this process, together with the ESG team, and coming up with the formula for how ESG adds value to their processes.”
Niklasson stresses that Investec has no intention of building a large ESG team because that would undermine the long-term intent of ensuring teams ‘own’ their specific ESG issues. “We are an across-process investment and research resource ensuring we get the right research into the house,” she says. “The ultimate ownership definitely lies with the investment teams.”
The first part of Investec’s ESG strategy was to develop a framework including stewardship and ownership policies.
The firm also set up an investment governance committee made up of the CEO, CIO and other internal business leaders. The committee meets quarterly to discuss controversial engagements, ESG themes and regulatory changes. The topics vary but bring together people from different parts of the business, allowing discussions on issues that could impact client assets.
“We have done a lot of work on mining in particular, partly because we have a large exposure to the sector in our portfolios and partly because we are a South African firm,” says Niklasson. “We already started our engagement programme prior to the Marikana events because we felt that the engagement we had done as part of mainstream meetings was not enough, particularly as mining in South Africa comes with complex socio-political issues. We were worried that post-Marikana discussions seemed monolined and could have included investors, many of whom represent worker capital.
“Having a committee allows us to have that continuous dialogue with Investec’s leaders, meaning ESG does not become an ad-hoc consideration within the business and instead follows a transparent and rigorous process.”
Investec is still grappling with a lack of ESG data overall and its reliability for some markets.
“Transparency can become tricky because we cannot report to our clients on everything,” she says. “Many of the really good engagements happen behind closed doors and we never know what is going to be the big issue next year. Something might happen, an accident like BP’s Gulf of Mexico spill which may change the course of events.”
Investec makes use of external ESG service providers, which helps tailor its portfolios to its clients that want to screen out different issues.
“But in the long term there is a need to move capabilities in-house in order to conduct more proprietary research on ESG,” says Niklasson. “Due to the consolidation within the ESG service provider space, few providers exist and their research has been similar. Sometimes we disagree with it and feel the weightings are incorrect, which is why we are investing in our own proprietary research toolkit.”
Rather than imposing a cookie-cutter view of corporate governance or corporate behaviour on the world, du Toit says Investec wants to establish itself in sustainability.
“Integrating ESG is the only way to manage the regulatory avalanche coming at us because ultimately regulators will sit back if they see businesses behaving properly,” he says. “So there is a huge incentive, not just for asset managers but for business as a whole to embrace this.”
Most inflows have been in Investec’s emerging market or global equities products and high-quality income products. The evolution of the credit market is another big development, says du Toit.
“We look at the long term, so our world view has not changed, despite the growing concerns about emerging markets [in 2013],” he says. “Because we have a balanced business and are not built around cyclical sentiment, we can continue to run our business the way we have already been doing. We believe emerging markets and their movement into the mainstream will be a crucial part of the investment landscape.”
Du Toit predicts a localisation of the asset management industry, in other words the investment of local money from various regions without constraints rather than simply investing developed-market capital according to traditional fixed benchmarks. That will lead to a deviation of capital and challenge the monopoly of traditional financial centres.
“Because we came from an emerging market, it sends us back to the future,” says du Toit.
True to its emerging market core, Investec is now looking to add a third investment professional in Singapore. “It is important to strengthen our regional investments efforts in Asia, because the region is going to be a massive story,” he says.