Ethical Investing: It’s Easy As E-S-G
Climate change and plastic pollution continues to dominate the headlines, prompting many of us to reassess the way we consume and act.
Major retailers have hit the headlines for their “go green” initiatives, banning plastic straws and selling wonky fruit and veg, and as we make changes to the way we shop, eat and travel, we can now also make changes to the way we invest our money thanks to a growing number of businesses placing greater priority on their environmental and social impact.
Ethical or sustainable investing is in no way a new thing, but its prominence and value is arguably increasing. A Global Investment Study undertaken by Schroders[1] found that more than four in five people (83%) aged between 18 and 44 felt sustainable investments are more important to them now than five years ago. Whilst it appears that it is the younger generations driving this trend (63% of people aged 55 and over felt sustainable investments were increasing in importance to them), there is clearly still a strong pool of people taking ethics and environment into consideration when deciding to invest. Of course, the investment proposition must still be good too, but it appears that value fundamentals and ethics can go hand in hand, and one can potentially fuel the other (pardon the pun), case in point being the rise of the electric vehicle. Technological changes, climate concerns, and government targets to cut emissions combined to make lithium stocks hot property, with the likes of Savannah Resources (AIM: SAV) and Kodal Minerals (AIM: KOD) gaining strong momentum in light of this.
Undoubtedly, it’s not just what you do, but also how you do it that’s important. And that couldn’t be truer for Dekel Agri-Vision (AIM: DKL), an established palm oil producer in Côte d’Ivoire. Palm oil has hit the headlines for being a major driver in deforestation, effecting the habitats of endangered species like the orangutan. Whilst there have been calls to boycott the vegetable oil, the fact remains that its demand is huge – it’s in close to 50% of the packaged products we find in supermarkets, everything from pizza and chocolate, to deodorant, toothpaste and lipstick. Furthermore, palm oil is an incredibly efficient crop, producing more oil per land area than any other equivalent vegetable oil crop. Globally, palm oil supplies 35% of the world’s vegetable oil demand on just 10% of the land. To produce the same amount of vegetable oil from alternative sources like soybean or coconut, you would need anything between 4 and 10 times more land, which would arguably just shift the problem.
It is therefore important to ensure that palm oil is produced responsibly and sustainably. Dekel is a member of the Roundtable of Sustainable Palm Oil or RSPO, which was formed in 2004 to ensure just that. The RSPO has a production standard that ensures sustainable growth, while encouraging investment and support of smallholder programmes and sustainable landscape initiatives. Testament to this, Dekel works with over 5,000 local smallholders and cooperatives who supply fruit grown on their land for processing at Dekel’s state of the art mill. Dekel also has the rights to develop palm oil using brownfield land, primarily old cocoa and oil palm land, meaning zero deforestation. Additionally, it has recently partnered with an established renewable energy company to develop an initial 35-36MW hybrid power project, utilising solar power and biomass from empty fruit branches. This green initiative feeds into government initiatives to increase clean energy generation; Cote d’Ivoire is aiming to produce at least 42% of its power from renewable energy sources by 2030. Underpinning Dekel’s green commitment, the company counts AgDevCo, a UK government-backed social impact investor in Africa’s agriculture sector, as a supportive investor.
It appears that more and more operators are taking the same approach as Dekel and finding ways to make their operations “greener”. Potash producer Emmerson is working with internationally integrated renewable energy developer Voltalia to examine ways in which renewable energy can be used to power its project. In support of this, Moroccan legislation provides an attractive and practical framework to incentivise energy developers and industrial companies to develop renewable sources of electricity. This demonstrates the vital role that government legislation and incentives play in improving sustainability.
Taking a slightly different approach, South African based metals recovery business Jubilee Metals Group (AIM: JLP) has made an environmental problem the basis for its business by recovering value metals from mining waste, so ensuring a positive effect on the environment with a zero-effluent policy. Working with members of the local community, Jubilee’s newest project in Kabwe, Zambia is a shining example of how an investment can be financially, socially and environmentally beneficial.
Aside from its primary ESG value, the decision to act more responsibly appears to be a wise one from an investment perspective. Hermes Global Equity[2] found that companies with good or improving social characteristics have tended to outperform their lower-ranked peers on average by 15bps per month – so that’s a win win for ethical investors! What’s more, in the past 20 years, the number of asset managers offering ESG strategies has grown by more than 400%. That’s according to the Global Impact Investing Network (GIIN). Ethical investing therefore looks set to not only be a mainstay of the investment world but a key consideration.
[1] https://www.schroders.com/en/sysglobalassets/digital/insights/2018/pdf/global-investor-study/sustainability/global_investor_study_2018_sustainable_investment_report_final.pdf
[2] https://www.hermes-investment.com/ukw/wp-content/uploads/2019/01/hermes-equitorial-h1-2019-1.pdf