22 July 2021
Recently Elon Musk retracted Tesla’s commitment to accept Bitcoin as a transaction currency for purchasing one of their electric vehicles. He cited the enormous power requirement for the mining of Bitcoin, and the fact that clean energy wasn’t being used in this process, stating that once Bitcoin energy use was cleaner, Tesla would re-introduce the currency.
This is but one example of investors and consumers taking on stance on matters beyond just the financial results achieved. Increasingly we’re hearing about ESG criteria being adopted. Investors globally, are increasingly demanding that Environmental, Social and Corporate governance be applied to their portfolios, and measured against this.
The last eighteen months have brought changes to the sustainable fund industry. Market commentators claim that incorporating ESG factors makes funds more resilient, and the rapid rise in flows to ESG funds and proliferation of new products supports this. Globally, with South Africa following this trend, there is an ever increasing ground swell of investors requiring that their funds be used responsibly by the managers they appoint.
It is not a simple or brief exercise to try and determine the levels of compliance that a company has implemented towards complying with ESG principles. In order to standardise the measurement of compliance, rating agencies and advisory groups have come up with objective scorecards on which to rate a company. This score can be used by fund investors to compile an appropriate investment universe.
What is an ESG rating or score?
An ESG score measures a company’s performance in adhering to best practices in upholding environmental, social, and corporate governance business attributes. When selecting funds or businesses to include in a portfolio, a fund manager, wishing to include an ESG rating will ensure that these companies undertake ESG practices which are sustainable and appropriate.
Driven by growing evidence of the efficacy of ESG analysis and interest among institutional investors, most companies now have an ESG policy in place. Especially in the wake of Covid-19, there is heightened focus on ESG matters such as how companies treat their employees, manage their supply chains, plan for business continuity, secure their data and manage their governance. GTC believes that the manner in which companies behave and respond to social and environmental issues points to their behaviour and responsibility to their investors too. The long-term implications of ESG, for employees, customers and investors will be a key differentiator into the future.
As a starting point, we at GTC believe that ESG factors should be considered, not as an add-on or screening mechanism for portfolios, but as a core element of the due diligence process in engagements with portfolio companies to add value. As a general proposition, we believe that assessing ESG factors that are likely to be financially material is a good starting point, with the recognition that a broader focus on sustainability can have positive cascading effects on companies’ reputations and long-term performance.
Keeping pace with this growing maturity and sophistication in the ESG investment market, we are committed to bringing an array of best-in- class funds that incorporate ESG as a fundamental underpin to the portfolios managed by GTC.
So, well done Elon Musk on demanding that Bitcoin miners use clean electricity. We trust Tesla’s are similarly measured…