Great investing is about asking better questions. Beyond profits and share prices, how does a company manage risk, look after its people, or prepare for the future? That's the thinking behind ESG, and why it's become an increasingly important part of investing. More from Robin Bolton.

What is ESG?

Environmental, Social, and Governance (ESG) provides a framework for understanding and managing an organisation’s approach to sustainability, risk management, and long-term resilience.

• Environmental (E): This dimension covers the impact an organisation has on the planet, including its carbon footprint, use of renewable energy, water consumption, effects on nature, and waste management practices, as well as planetary changes and how it impacts a business.
• Social (S) The social aspect focuses on people and communities, encompassing employee wellbeing, diversity and inclusion, customer safety, and engagements with local communities.
• Governance (G) Governance relates to how an organisation is directed and controlled. It includes board independence, executive compensation, shareholder rights, transparency, policies and frameworks and measures to prevent corruption.

Why does ESG matter?

ESG considerations are increasingly central to an organisation.

• Risk Management: Strong ESG practices help uncover hidden vulnerabilities—such as exposure to climate change (storm intensity), reliance on fragile ecosystems (pollination), reputational risks, employee wellbeing and productivity challenges, governance gaps, or potential regulatory penalties.
• Opportunities: ESG opens doors to growth in areas like clean energy, sustainable agriculture, and inclusive finance, while also driving operational efficiencies.
• Valuations & Cost of Capital: Companies with robust ESG frameworks often carry lower risk profiles, earning higher valuations from investors. This can reduce the cost of capital, and insurers increasingly factor ESG performance into underwriting decisions.
• Investor Demand: Institutional investors increasingly expect ESG integration, driving demand for companies that meet these standards.
• Regulatory expectations and disclosure requirements are also evolving rapidly, increasing the focus on transparency, consistency, and accountability in how organisations approach ESG.
• Stakeholder Expectations: Customers, employees, and communities are pushing for more responsible business practices, making ESG alignment essential for trust and reputation.
• Resilience: Organisations that embed ESG into their strategy in many cases demonstrate stronger long-term performance and adaptability.

ESG and Investing

When it comes to investing, ESG can be approached from two distinct perspectives: 

1. How well ESG is integrated into an organisation: Integration of ESG involves evaluating companies not only on their financial performance but also on how effectively they manage ESG factors. This is measured by examining how organisations identify material issues relevant to their business and the extent to which they have embedded processes to manage these factors within their operations and strategy.
   
   
2. Impact investing:

Impact investing refers to the allocation of capital to businesses that deliver products or services directly contributing to sustainable development. Typical areas include renewable energy, access to electricity or water, carbon removal initiatives, sustainable agriculture, health care facilities, eco-friendly manufacturing, recycling, green building, and social enterprises.

Unlike ESG integration, which embeds sustainability within the organisation, impact investing is more targeted on the outcomes. It focuses investment on companies whose core operations actively advance environmental sustainability or social good.

Listed funds also provide access to impact investing for retail investors.

• In South Africa, the Satrix Inclusion and Diversity ETF (STXID) is designed to promote social impact by tracking companies with strong diversity and inclusion practices.
  

• The Satrix MSCI Emerging Markets ESG Enhanced ETF (STXEME) tracks the MSCI EM ESG Enhanced Focus CTB Index, which is designed to tilt exposure to positive environmental, social and governance (ESG) metrics[1].

How to gauge a company’s ESG integration to inform your investment choice

1. Check ESG Ratings

Look for companies rated by agencies like MSCI, Sustainalytics, or FTSE Russell. Higher scores reflect stronger ESG practices, although ratings can vary noticeably across providers due to differing methodologies.

2. Review company disclosures

Read sustainability reports or integrated annual reports published on the company’s website.

3. Avoid green / social “washing”

Be cautious of companies making vague sustainability claims without measurable targets. Look for verified commitments like Science-Based Targets or independent assurance of key metrics, consistency between narrative disclosures and reported data, progress against stated targets, and check if they have not been exposed by NPO’s or activists advocating for responsible practices or investments.

4. Compare sector risks

Different industries face different ESG challenges, for example:

• Energy: Carbon intensity, transition to renewables.
• Agriculture: Water use, biodiversity loss/impact, carbon footprint, and carbon taxes.
• Finance: Responsible lending practices

5. Align with your values and question

Consider which ESG factors matter most to you by understanding the sector the company operates in and their offering. Raise relevant questions directly with the company or at their AGM to gauge their approach to ESG.

Model organisations

There are many companies rising to the ESG call, each at different stages of maturity. While in certain cases, these E, S and G aspects may only be resulting in positive internal returns, such as a safer and more inclusive workplace, stronger stakeholder engagements, reduced risk exposure, lower environmental impact, or tighter governance processes, they may not yet be translating into measurable business or financial performance. Over time, however, long-term value creation and financial returns may well be realised.

Those companies which, in my opinion, stand out for their ESG and sustainability efforts here in South Africa, and which I have been fortunately close to, include FirstRand and Nedbank in the financial sector who have implemented effective policies, frameworks, and initiatives to drive ESG, alongside creating sustainable-linked investment opportunities. In the mining industry, despite its inherently extractive and impactful nature, AngloAmerican Platinum and AngloGold Ashanti are noteworthy for advancing responsible practices. On the retail side, Woolworths has made significant strides in sourcing sustainably farmed products and reducing waste.

Parting note

ESG ratings vary slightly across agencies but overall, they give a good indication of a company’s ESG performance. Data gaps do exist, especially in emerging markets, which need to be factored in.

Dedicated resources and formal governance structures signal that a company is actively addressing ESG considerations. From an investment standpoint, ESG analysts play a key role in identifying gaps and risks, while sustainability managers guide organizations through the increasing demands of the ESG agenda.

By Robin Bolton

Robin is a Sustainability professional with a particular interest in ESG strategies and systems, and is the founder of Elements Stewardship Consulting 

[1] While ESG ETFs improve exposure to better-performing companies, they may not necessarily meet strict definitions of impact investing

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