Mainstreaming environmental, social and governance integration in investment practices in South Africa: A proposed framework

Abstract

Orientation: Responsible investment (RI) is gaining prominence globally. As South African asset managers increasingly apply environmental, social and governance (ESG) criteria, they require improved guidance on the integration thereof in mainstream investment practices.Research purpose: A best-practice framework for ESG integration is proposed based on empirical results and international standards.Motivation for the study: The mainstreaming of ESG is examined in South Africa, a country where integrated disclosure by listed companies is well established and asset managers are challenged to meet international standards while facing emerging market realities.Research approach/design and method: Selected South African asset managers completed a questionnaire and semi-structured interviews were conducted with national and international asset managers to gauge their views on ESG integration best practices.Main findings: The findings highlight the limited local opportunity set and scope to increase client demand for RI in South Africa. Inconsistencies were noted in how the local asset managers incorporated material ESG information in their investment policies and practices.Practical/managerial implications: ESG integration should form part of the entire investment process. To effectively apply the proposed ESG framework, Investment managers should formalise and publish comprehensive RI policies and develop internal ESG data provision systems covering material subjects defined by international ESG disclosure standards. Invest managers are encouraged to conduct ongoing engagement with investee companies on key ESG issues.Contribution: While the need for ESG integration is recognised, local asset managers require improved guidance on the incorporation of complex ESG issues. A best-practice framework for ESG integration is hence proposed.