ESG indicators highlight non-financial risks. These are not the only indicators of risk, but they form part of a holistic credit process. The purpose of integrating ESG factors into the investment process is to improve the analysis of all potential investments, promote better standards of practice, and assist in mitigating against any ESG risks to potential or existing loans or investments.
The application of ESG analysis and screening is defined by our clients’ expressed preferences. Where no preference is expressed, we exercise judgement and integrate ESG issues into the investment analysis and decision-making process with the aim of mitigating overall portfolio risk. At all times the particular fund’s asset allocation or investment strategy must prevail to ensure that risk-adjusted returns are achieved. Principles of sound portfolio management should not be compromised in the RI or ESG screening process.
Futuregrowth endorses the Code for Responsible Investment in South Africa (CRISA) and is a signatory to the UN Principles for Responsible Investment (PRI).
Our Approach to Climate Risk
In accord with the requirements of regulation 28 and our fiduciary responsibility, Futuregrowth seeks to assess all risks, including ESG and climate-related risks, as part of our fundamental investment process, and to integrate these considerations into a risk:return framework. Further, we have taken the position that global warming is a material factor that affects investments (risks and returns) and the sustainability of the country (and the world). Thus, our RI philosophy includes the goal of reducing carbon-emitting investments.
As a PRI signatory, we are aware of the mandatory PRI reporting requirements of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), and are committed to reporting on the TCFD principles as part of our overall RI strategy.
The South African government recognises the negative impact of climate change on natural resources (e.g. water and agriculture) as well its threat to long-term human development. Being a significant contributor to greenhouse gas emissions and one of the top 20 largest carbon emitters in the world, South Africa signed the Paris Agreement on Climate Change during November 2016, thereby making a public commitment to this global agreement on climate change. Futuregrowth recognises the importance of the global and local commitment towards achieving the targets outlined in the Paris Agreement. Through our internal risk-mitigation strategy and efforts, we are committed to reducing our exposure to carbon-emitting investments in an effort to limit global warming.
Physical and Transitional Climate-Related Risks
We have identified physical and transitional climate-related risks and factored them into our fundamental investment process as part of our ESG risk analysis. In cases where we identify a material risk, this would affect the rating of the underlying issuers/investee companies and the pricing of the transaction.
As part of our decision to transition our client portfolios to a low-carbon economy, we have identified the following opportunities:
We engage issuers/investee companies in carbon intensive industries (or sectors that have inherent exposure to climate related risks) to determine their efforts to identify the risk, their strategy to mitigate this and their ability to report on progress in these areas on a regular basis.
We have invested a total of R8 billion in the renewable energy sector in South Africa. Our exposure is across a variety of wind, solar, CSP and hydro projects located throughout South Africa.
Futuregrowth's Climate Position Statement July 2023
Futuregrowth believes that engagement with investee companies on matters of ESG is appropriate to ensure long-term sustainability for all stakeholders. We believe in collaboration with investee companies and engaging with management to encourage these companies to think about their approach to integrating, disclosing and reporting on ESG issues.
We believe that our role within the investment community is to encourage companies to aspire to responsible ways of doing business. Together, we can change the landscape of the investment community for the better and become more responsible corporate citizens.
Incorporating ESG into an Investment Process
Futuregrowth’s ESG framework integrates ESG issues into the investment analysis and decision process with the view of mitigating overall portfolio risk.
The ESG framework seeks to achieve the following outcomes:
Investments are screened using ESG factors as part of the due diligence process.
ESG risks are evaluated.
The ESG activities of investee companies are monitored.
Improvements over time are measured.
Active engagement with companies takes place when risks are identified.
Reports are provided to stakeholders on ESG issues in a transparent and accountable manner.
Active Ownership & Engagement
Futuregrowth uses an active ownership approach to engage with investee company management, with the purpose of effecting positive change and challenging them on the sustainability of their organisations' activities.
Where possible, we engage on various matters that affect the triple bottom line (taking into consideration economic, social and environmental issues which could affect the profitability of the company), including filing shareholder resolutions; attending annual general meetings, debt-holder meetings and other relevant meetings; and engaging in negotiating debt-related terms, proxy voting and lender-related issues. Through this process of active ownership, we encourage transparency and accountability in our investee companies.
The King III report on corporate governance strongly recommends that shareholders become actively involved in the way companies are governed. There is also a rising trend worldwide towards increased shareholder activism. Share ownership rights, which include voting rights in person or by proxy, are financial assets. They must be managed with the same care and diligence as any other investment asset, because the integrity and value of shares may be affected by the outcomes of voting proposals. Shareholders have the power through voting rights to influence the management of a company. Actively exercising these rights is an effective way of enhancing portfolio value. Consequently, Futuregrowth views seriously its responsibility to exercise voting authority over securities that form part of its clients’ portfolios.