The performance of South African Socially Responsible Investments: a comparative analysis of listed equity

Abstract

In recent years, Sustainable and Responsible Investments (SRI) have undergone significant advancements in terms of both assets under management and investor attention. Concomitantly, the metrics which inform SRI methods, Environmental, Social and Governance (ESG) factors, have increasingly been incorporated within global investment approaches. This shift in approach suggests a permanent alteration to investing practices for some authors and investment houses. For South Africa, however, there is not yet consensus regarding the longterm comparative financial performance of securities focussing on SRI, considering the purported benefits of SRI’s incorporation within dominant investment approaches. In an attempt to address this lacuna, the following research dissertation unpacks the South African understanding of SRI and evaluates the comparative performance of portfolios constructed from rated ESG securities on the Johannesburg Stock Exchange. This research piece commences with an overview of recent global SRI developments followed by an evaluation of SRI as applied within South Africa alongside the country’s legislative framework. Provided with the relevant background, this research dissertation constructs a set of nine portfolios of equities listed on the Johannesburg Stock Exchange, based on both the security’s Bloomberg ESG Disclosure score and market capitalisation. Utilising the Fama and French Three- and Five-Factor asset pricing models, this research dissertation then gauges the financial performance of the constructed portfolios from May 2009 until April 2021 in terms of portfolio alpha values. Finally, this research dissertation reports that portfolios constructed from highly rated ESG companies with small and medium market capitalisation provide statistically significant positive alpha values at the 5% limit. For highly rated ESG companies with a large market capitalisation, statistically significant positive alpha values are identified at the 10% limit while a portfolio of medium rated ESG securities with the same market capitalisation report positive alpha values with significance at the 5% limit. A number of factor tests are further undertaken in order to determine the pricing accuracy of the two models in consideration. It is concluded iv that both the asset pricing models considered fail to explain the excess returns of the constructed portfolios at the 5% level of statistical significance.