Each week Emerging Markets ESG publishes an interview entitled, “Five Questions about SRI.” The interview features a practitioner’s insights about SRI in emerging markets and through Emerging Markets ESG shares this expertise with a wide global audience. The goals of Five Questions about SRI are fourfold:
- To collect a catalogue of examples of SRI in practice in emerging markets;
- To raise awareness about SRI in emerging markets;
- To reflect on what SRI in emerging markets means to practitioners; and
- To enable SRI practitioners in emerging markets to network with peers around the world.
This week’s interview is with Madeleine Ronquest, Head of Environmental and Social Risk Management, Climate Change, Occupational Health and Safety, FirstRand Group Ltd., Sandton, South Africa.
FirstRand Group Ltd. is one of South Africa’s leading financial institutions and provides a range of banking, financial and investment products to retail, corporate and commercial markets. FirstRand’s vision is to be the African financial services group of choice, creating long-term franchise value and delivering superior and sustainable economic returns within acceptable levels of volatility whilst supporting the FirstRand philosophy and strategy for sustainable growth. Madeleine Ronquest has worked in the financial services sector for 11 years, and is the Head of Environmental and Social Risk and Climate Change for FirstRand and the chairperson of the United Nations Environment Program Finance Initiative (UNEP FI) Africa Task Force. She is also the co-chair of the National Advisory Committee on Climate Change through the National Business Initiative in South Africa. Madeleine is the author of the chapter entitled, “Why Environmental, Social and Governance Factors are material to financial institutions in South Africa” in the newly published book, The Business Case for Sustainable Finance.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Madeleine Ronquest: My experience is that there are two approaches to investment. The first is based on the business case and is used by investors who seek only short-term financial value and return. For these investors, ESG factors are considered if they potentially will have an impact on the overall performance of a company, and they make the investment decision based on their own interpretation of the materiality of that risk. The second approach is one that is slowly developing with emerging market investors and that is an approach that is more ethical in nature. These investors create portfolios that seek to create wealth while protecting and enhancing the social values of investors. In my opinion, the latter would be defined as socially responsible investment.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Madeleine Ronquest: Typically, current mainstream investment does not recognise the value of ecosystems and the cost of environmental damage. SRI drives the investor to think over the longer term, and to focus on the sustainability of the company/portfolio and their operations, and not concentrate on immediate returns. It creates market incentives that make the investment feasible over the longer term. In SRI, there is awareness that rising environmental and social issues contribute to economic and market risks of an investment and that these issues could well affect returns and values. I do not think that SRI enjoys the attention that it should, especially in South Africa and Africa, where our growing economies are confronted with significant social and environmental issues, and where a lot of focus is required on poverty eradication, job creation, social inequality and the extended pressure on natural resources as well as mitigating the effects of climate change.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in South Africa to manage?
Madeleine Ronquest: Very few companies report on how they use environmental, social and governance themes (ESG) as a means of reducing market volatility. Environmental costs for companies are becoming increasingly more material and costs related to carbon, water and energy is mostly difficult to quantify. The costs of addressing damage after it has occurred is usually higher than the costs of preventing pollution and using resources in a more sustainable way. Costs to replace ecosystem goods and services, expenditure on mitigation of climate change and monitoring ecosystems are expensive.
If companies fail to recognise significant ESG risks and to fully integrate them into financial planning and business decision-making, ESG, a core element of business, could have long-term consequences on business success.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in South African companies to analyze?
Madeleine Ronquest: Access to quantified information on macro-economic level with regard to ESG issues are probably the greatest challenge for investors in South Africa. These are large scale impacts on companies caused by ESG issues, legislation, or changes in the economy, that are difficult to quantify or predict. Having said that, South Africa is a strong leader in terms of integrated reporting and large publicly listed companies subscribe to various non-mandatory standards for reporting such as King III, GRI, The Johannesburg Stock Exchange SRI, The Code for Responsible Investment in South Africa (CRISA), and The Carbon Disclosure Project, to name a few. Using these standards for reporting on operational performance and key performance indicators provides investors with recognised and standardised disclosure of quantitative ESG data. It enables investors to compare between companies and sectors. Where none of these standards are applied and publicly reported, the investors have no standardised data to use in their analysis and comparisons.
Emerging Markets ESG: The title of the chapter you contributed to the recently-published book, The Business Case for Sustainable Finance, is interesting. Thus, Emerging Markets ESG would like to ask you: Why are environmental, social and governance factors material to financial institutions in South Africa?”
Madeleine Ronquest: I don’t believe that adequate attention is given to ESG factors as they do pose serious business risks. Investment decisions and the allocations of funds into sustainable portfolios are largely made on insistence of socially aware investors. However, with the global drive towards a green economy the scale will be tipping towards higher returns on greener investments. The challenge of sustainable development without compromising economic gain remains a key challenge for Africa.
As more companies understand their ESG risks and opportunities, they can apply controls or programmes to minimise their impact on natural capital and create awareness about ESG risks that need to be addressed over the longer term. Material externalities can be identified and managed to reduce exposure to environmental liabilities. Successful sustainable companies are companies who fully integrate their ESG knowledge into existing business processes fundamental to the success of the business.