A] Prelude*
* For more information about investments, feel free to visit our dedicated webpage:
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Focusing on tangible, positive impacts can drive significant environmental and social improvements. The rise of environmental, social and governance (ESG) criteria has sparked debate about whether achieving competitive returns while positively impacting communities and the world is possible at all.
Unfortunately, greenwashing – where companies make misleading claims about their environmental practices – has made many view ESG as a mere marketing ploy.
Globally, policymakers have started a serious crackdown on greenwashing. They are changing regulations and adapting legislation to combat the deceptive practice in what has proven to be a growth sector for investments. A recent study shows that the market for ESG-centric products has grown at a compound annual rate of 27% over the past six years.
Some institutional investors, however, believe it is possible to move beyond ESG and choose a more proactive approach that focuses on making tangible, positive impacts.
Fedgroup, a specialist investment and insurance company that has been operating for more than three decades, actively distances itself from ESG, for example. According to Warren Winchester, manager at Fedgroup, the company meticulously selects each investee partner in its two focus areas – food and energy security – for their ability to drive significant environmental and social improvements while delivering impressive financial returns.
B] People/Planet/Profit
The company stands firmly against traditional ESG frameworks due to issues like greenwashing and the norm of corporates offsetting negative impacts rather than creating genuine positive change. “We’re looking at tangible, measurable on-the-ground evidence of not only societal impact but also environmental impact around each of the investments that we do.”
For Fedgroup, it is about doing good instead of just less harm. The company’s investment philosophy focuses on its three Ps: People, Planet and Profit. Winchester underscores that profit should not be sidelined when considering impact investing, as taking care of people and the planet can elevate returns through various mechanisms.
He says the moral imperative in investing is particularly crucial in South Africa, where socio-economic challenges demand responsible capital allocation.
C] Real due diligence
Winchester argues that Fedgroup’s thorough due diligence process for choosing sustainable and impact investments sets it apart from traditional ESG approaches. “A lot of these frameworks have been custom-built to suit the needs of the policymakers who are writing these frameworks,” he says. “Following a tick-box exercise without truly understanding the underlying impact is one of the key weaknesses in terms of ESG.”
Fedgroup’s approach uses real-world impact measurements to track positive social and environmental impacts alongside financial returns rather than abstract metrics. Winchester explains: “We delve deep into having tangible evidence backing up these elements.
We perform all the financial due diligence but we also overlay constant stakeholder engagements, actually discussing it with the communities to validate some of the facts.”
Some of these metrics focus on increasing local employment, improving community infrastructure, and reducing environmental footprints. For instance, agriculture projects are evaluated on their ability to enhance biodiversity, reduce chemical use, and save resources like water and energy.
Fedgroup’s extensive experience in sustainable investing is backed by real evidence and continuous community engagement. For example, in Tzaneen, Limpopo, a macadamia farm supported by Fedgroup helps local community members through schooling, uplifting them to management positions and creating a model for community-driven success.
D] Not sacrificing profit
A common myth about sustainable investing is that it requires sacrificing financial returns.
Fedgroup’s experience proves otherwise. Winchester cites actual examples where the company’s investments have boosted profitability. In agriculture projects, Fedgroup has implemented biodiversity practices like housing bees on farms to increase pollination and reduce the need for chemical pest control.
This approach promotes natural flora and predators, lowering pest pressure. Additionally, planting diverse cover crops improves soil health, increasing water retention during droughts and absorption during floods. These practices reduce irrigation needs and mitigate flood risks, ultimately lowering costs and boosting farm productivity.
In Worcester in the Western Cape, Fedgroup supports a blueberry farm that has made a significant impact by hiring only women as pickers for the seasonal harvest. This initiative not only promotes gender equality and provides employment opportunities for local women but also enhances the quality of the produce.
Women are known to be more meticulous pickers, which results in better-quality blueberries. This approach not only improves the farm’s productivity and profitability but also fosters community development by empowering women and creating a model for gender-inclusive agricultural practices.
E] Ongoing commitment in projects
Fedgroup’s secret to success is its ongoing involvement with its projects. “Even after we have provided capital to them, my team is on the ground on those farms, understanding those assets and what is happening in the communities,” says Winchester. This continuous engagement ensures that the projects remain aligned with Fedgroup’s ethical and financial goals.
By consistently validating the metrics used to measure impact and profitability, Fedgroup maintains a high standard of accountability. This approach not only mitigates the risk of greenwashing but also strengthens the trust and reliability of its investments. Winchester believes investors have a significant role to play in driving societal change. By choosing to invest in projects that prioritize ethical practices, investors can influence businesses to adopt sustainable and socially responsible operations that are contagious.
“You find that it permeates all the way through into the communities, and it becomes a way of life for them,” he says. This positive impact spreads, encouraging more people and businesses to adopt sustainable practices.
In a world where the moral foundation of many businesses is often questioned, blending money and morals isn’t just beneficial – it’s essential. As Winchester aptly puts it: “Utilizing a moral compass to determine where your capital flows to and what you’re involved in is a critical element of how business should be done globally, not just in the South African context.”
F] EU’s ESG Investments Policy
ESG rating play an increasingly important role for investors and for fostering confidence in sustainable investments. So what is the EU doing and why?
Ratings on environmental, social and governance (ESG) factors provide information about the sustainability performance of a company or a financial instrument, by assessing its exposure to sustainability risks and/or its impact on people and the environment.
There are different terms used by ESG ratings providers like ratings, scores, valuations, opinions, etc. There are different type of ESG ratings/scores:
• A] Aggregated ratings of E, S and G factors, ratings of individual factors (e.g. environmental) or ratings of subfactors (e.g. climate risks);
• B] Ratings using double materiality perspective (assessing risk and impacts) or single materiality perspective (assessing only risks, or only impacts) or using international frameworks/standards (e.g. SDGs);
• C] Ratings involving the rating analysts or scores based purely on data analysis.
ESG ratings are mainly developed and distributed by specialized ESG rating providers. However, some financial institutions also develop their own ESG ratings. Like for example Morningstar.
ESG rating play an increasingly important role for investors and for fostering confidence in sustainable investments. Investors increasingly use it as part of their sustainable investment strategies to take into account risks and/or impacts linked to ESG issues. As for companies, they use it to look for and take account of operational risks and investment opportunities but also to see how they perform against ESG factors, compared to peers.
The EU agreed a new regulation on ESG rating activities that will ensure that investors and other stakeholders have access to reliable and comparable information about the ESG ratings objectives (what they assess) and methodologies (how they assess). Given the importance of ESG ratings in investment decisions, this in turn will contribute to enhancing the culture of transparency about the impact of companies on people and the environment. Which will reduce greenwashing and promote sustainable investments.
More in detail, the new rules will make ESG ratings and their underlying methodologies more transparent and strengthen the governance of ESG rating providers as well as their independence. The ESG Ratings Regulation introduces also amendments to Sustainable Finance Disclosure Regulation (SFDR), in order to ensure that if financial undertakings develop and disclose their own ESG ratings they disclose the same information as specialized ESG rating providers.
Furthermore, the regulation requires that ESG rating providers offering services to investors and companies in the EU are authorized and supervised by the European Securities and Markets Authority (ESMA). They will also help provide more clarity over the operations of ESG rating providers, in particular their prevention and mitigation of conflicts of interests.
G] Conclusion
The start with ESG investments back in the day was great. But only the first step. The increased focus on doing real good combined with mark 2 legislation will hopefully lead the way to real long term positive effect and impact!