After getting a blast last week over his Sasol comments from an environmental activist, David Shapiro spent time investigating the hot new trend among investors called ESG – Environmental, Social, and Governance. He concludes that the business of business is no longer just business. This has significant implications for investible assets as Shapiro explains in this fascinating contribution to the latest episode of Rational Radio. – Alec Hogg
Let’s get rational radio off today on an environmental, social and governance start, this whole ESG story – the two of us have been sharing e-mails about various things, various changes – big changes in the world. ESG is one of them.
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It is. I think over the next decade or so you’re going to find it’s more of an issue when it comes to investing and more and more companies are going to have to adhere to standards, or certain standards if they are going to attract investment. So in simple form – it’s so difficult to actually define what ESG means and what it means for companies – but it’s a shift away from shareholder value. In the past, companies would only have concentrated on creating value for shareholders, now the demands are far greater – as you said – societal. In other words, you have to run a clean company and you also have to be aware of, not only the environment, but the people that you serve – the society – as well. If companies do not adhere to these standards, they’re going to find it very difficult to attract capital and they’re also going to come under scrutiny from – not only the community – but from government as well. So that’s what we’re in for and there’s nothing wrong with it. It’s a move in the right direction.
The business of business is no longer just business.
No. Of course you still have to provide the providers of capital a decent return, but there’s got to be other considerations that you take into account when you run a business.
Hendrik du Toit from Investec is quite big on this Dave. It’s interesting to see him in the news this week with the old Investec Asset Management which he started on his own in 1991, changing its name – which is interesting in itself – but that he’s now pulling it out of Investec. He never had any shares to start with, he says maybe he should have asked for equity, but has the best time not gone for asset management companies?
I think so. I think the 90’s were the best when there was transformation here. You weren’t competing with what we see today – high frequency trading, index hugging – it’s much more difficult now to attract investments and also to beat the market. I’m not saying you can’t beat the market but it’s not as easy as it used to be. I think more flexible smaller funds are much easier than larger funds. From Hendrick’s point of view, they attract assets – but performance is not a massive outperformance of what you can get – by merely buying an index. If you look at Coronation, you can see the issues that they are going through.
In those results last week, they were pretty ordinary.
Very ordinary and the reason is that they are so big and with a leaning towards the South African market, it’s very hard for them to find places where they can outperform the rest of the market. People are particular – they give you a quarter – if you’re not performing, they switch somewhere else. So it’s not as easy as it used to be in those years. And information flows. The markets that I was brought up in the 1970’s, where we used to cut out the newspaper and establish files on each company, that was our reference point. Today, at the click of a button, you have so much information at your disposal and private clients, who never had it before, also have it through the Internet as well as in programs like this. I’ve always said you were one of the first to bring business radio to the public – that was in the mid or early 90’s – before that there wasn’t any information like this. All of that is mounting up to make it a lot more competitive.
Getting back to ESG, last week we were talking about Sasol. Have you had a chance to have a look at Sasol with a fresh pair of eyes? The issues have to be around – we’re going to talk about this later in the program as well – but have to be around the carbon emissions.
And wow, they came out with a trading statement today – which funnily enough the market has just brushed aside – results are going to be down for the half year, down about more than 20%. But I think to a large extent, this is being discounted because of the issues, but there is absolutely no doubt that they will come under pressure because of carbon emissions – at their mines here – and at their other operations and they are aware of it. I know they were aware of it and they need to address it. Where they’ve been lucky, is that there hasn’t been much of an outcry against Sasol. I think the response has been pretty muted. There’s been talk of their carbon emissions – and these are really bad – but there’s been no real reaction, so they haven’t felt the pressure yet.
But it’s coming Dave. They’ve got an AGM on Wednesday and they’re going to be talking to people who are going to be giving a little bit of a rev.
Absolutely. And it’s going to apply to any mining company today where you disturb the environment. The frackers have come under immense pressure – globally – for what they’ve been doing, whether it’s polluting the land or polluting the water by the way that they rupture the geology, which can lead to the escape of poisonous gases etc. So I think it’s not going to be an easy time. Alec, we’ve seen it with companies like Glencore – in another way – where they’ve gone into areas where other people fear to tread and management have come under pressure because of the way that they behave. So that’s another element of this ESG.
You’ve got to be seen to be doing good. David would you then stay far away from Sasol shares and indeed other shares that are exposed to environmental risks?
It will happen. At the moment I’m not in Sasol, so I can’t really comment on it, but there’s no doubt that we will start to move away from companies that are not behaving properly and where it’s obvious. Sasol’s factories have been around for a long time but I think there’s going to be pressure on them and they know what they have to do. It’s going to be a big subject in the future.
David, I was just going to ask you quickly about what happened on Friday with the results from Naspers and Prosus, because they’re so important on the JSE and in retirement funds, one needs to pay attention to them.
They’ve been OK. I think there was nothing dramatic there that would have changed the course of both of those shares. It’s new. We’ve now got to start digesting them as new companies, but I think overall the market’s been fairly satisfied with what they’ve seen. You need to go through them in much greater detail to come to some kind of conclusion but share prices have been holding up pretty well.
So no problem there and the business in the UK as well?
I think it’s expensive to be honest, but you’ve got to go with Bob van Dijk and you’ve got to believe that he knows what he’s doing. I love tech and I follow tech very closely, I’m not an Uber fan in the sense of buying it, I haven’t bought Tesla, but I watched these characters and I watch what they are doing and how they’re disrupting industries. But you like to go in when you’re sure that they’re going to start generating cash – that there’s some future – and why I say that, is because you could have hung around in Tencent for many years before you actually started to make money. But we are watching carefully to see if Bob Van Dijk can make a difference and whether the purchase of Just Eat is going to change the course of the company. I’m still a little skeptical, buying into delivery bikes, I don’t know.
David Shapiro is the deputy chairman of Sasfin and I’ll give you the other side of the story. Have a look around here in Johannesburg, all I see are delivery bikes. I speak to the owner of my favourite restaurant and she tells me that a high percentage of her sales are now being done to deliveries – home deliveries – and in fact in the shopping centre where she operates from, there is a shop that doesn’t have a storefront, a guy who has got three chefs who are doing sushi and just for the delivery market. There’s been a fundamental shift in the environment and Bob van Dijk has been one of those he’s actually picked up on it.
