SRI-Connect has identified 21 SRI strategies, but those listed below are the most important general strategies in the sub-Saharan market.
SRI has its roots in negative screening, which means using ESG criteria to exclude from a portfolio investments in companies that operate in a certain country or region, or in a particular sector. As this approach often uses moral or religious grounds as the basis for exclusion it is also termed “ethical investing”.
Examples of negative screening include the campaigns to divest from apartheid South Africa or, more recently, Sudan, on the basis of human rights concerns. Some funds will also screen against investments in products deemed harmful or socially unacceptable such as tobacco, alcohol, gambling, pornography, nuclear power or weapons.
Shari’ah funds (which exclude companies involved in production and sale of alcohol, pork products, tobacco; gambling; and pornography) use negative screening when constituting their portfolios and are often included under the SRI umbrella as a result.
Positive screening involves investing in companies whose goal is to provide certain environmental or social benefits. This might follow a theme such as tackling climate change, resource efficiency, water provision, health or education.
“Best-in-class” is a form of positive screening that invests in the leaders in various sectors with respect to sustainability management of ESG issues. This approach is intended to drive improved performance.
Engagement and “active ownership”
Active ownership involves shareholders voting of rights vested in shares and engaging with the management of companies on ESG issues to support progress or achieve a certain change in behaviour or outcome.
Integration involves assessing the ESG risks and opportunities, in addition to the financial prospects, of a particular investment when undertaking investment analysis. The integration of ESG factors into investment valuations is now one of the most popular strategies and seen by some as the ‘holy grail’ of responsible investing, as it allows SRI to become a mainstream investment strategy. However, it is difficult to assess how an investment manager is integrating ESG factors, and whether this integration is in fact having a particular impact on a company’s behaviour or attitude to sustainable development.
Green Bonds fund projects that have positive environmental impacts. They include climate bonds, which fund solutions to climate change.
The first South African Green Bond was launched for institutional investors in 2012. In 2014, the Johannesburg Stock Exchange listed a R1.46 billion Green Bond for the City of Johannesburg to fund green projects. Nedbank has also issued a retail Green Savings Bond, which earmarks the capital for renewable energy projects.