The performance of South African Socially Responsible Investments: a comparative

analysis of listed equity

Davin Olën

2488595

A dissertation submitted in partial fulfilment of the requirements for the degree of Master of

Management in Finance and Investment

In the Faculty of Commerce, Law and Management,

Witwatersrand Business School

at the

University of the Witwatersrand,

Johannesburg

Supervised by

Professor Odongo Kodongo

Plagiarism Declaration

I, Davin Olën, a duly registered student at the University of the Witwatersrand’s Business
School, who is enrolled in the programme Master of Management in Finance and Investment
in 2021, and who is allocated student number 2488595, do hereby declare that:

I. I am aware of the definition of plagiarism as detailed within the Plagiarism Policy of
the University of the Witwatersrand and I acknowledge that the commission of the act
of plagiarism is not permitted for any academic activities at the University, including
the submission of a research dissertation.

II. I confirm that the research dissertation submitted herewith is solely of my own making,
with the exception of work referenced in accordance with the relevant referencing
styles.

III. I further confirm that I have utilised the correct conventions in making reference to
academic and other works within this research dissertation.

IV. I further also confirm that the University of the Witwatersrand may enact disciplinary
measures against myself should this research dissertation be found to be in
contravention of the Plagiarism Policy of the University of the Witwatersrand or any of
the University rules and regulations flowing from or related to the Plagiarism Policy.

_________________

Davin Olën

3 January 2022

Preface and Acknowledgements

To Masetle, for showing me how to care for others and Bab, for letting me practice.

iii

Key Terms

Socially/Sustainable (and) Responsible Investment (SRI); Environmental, Social and

Governance factors (ESG); COVID-19 pandemic; ESG Ratings, Johannesburg Stock

Exchange; Fama and French Three-Factor and Five-Factor asset pricing models.

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 long-

term 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

that both the asset pricing models considered fail to explain the excess returns of the

constructed portfolios at the 5% level of statistical significance.

Table of contents

Chapter One: Introduction ......................................................................................................... 7

1.1. Introduction ............................................................................................................................. 7

1.2. Research problem and purpose .............................................................................................. 17

1.3. Key research question ............................................................................................................ 19

1.4. Hypotheses ............................................................................................................................ 19

1.5. Research significance and study contribution ....................................................................... 20

1.6. Chapter division ..................................................................................................................... 21

Chapter Two: Literature review ............................................................................................... 22

2.1. Introduction ........................................................................................................................... 22

2.2. The theoretical underpinnings of SRI and financial performance ......................................... 22

2.2.1. Overview ....................................................................................................................... 23

2.2.2. Theories supporting the outperformance of highly rated ESG firms ............................ 25

2.2.3. Theories supporting the underperformance of highly rated ESG firms ........................ 28

2.3. The Socially Responsible Investment framework of South Africa ....................................... 29

2.3.1. Developments before the UN-PRI ................................................................................ 29

2.3.2. Subsequent developments following the introduction of the UN-PRI .......................... 34

2.4. ESG Factors, as applied in contemporary South Africa ........................................................ 38

2.5. Measures of ESG performance .............................................................................................. 43

2.6. Consideration of existing Socially Responsible Investment literature and the social

movements driving the approach’s growth ........................................................................... 48

2.6.1. Overview ....................................................................................................................... 48

2.6.2. COVID-19 and ESG factors ......................................................................................... 49

2.6.3. Further empirical evidence ............................................................................................ 51

2.7. Conclusion ............................................................................................................................. 54

Chapter Three: Methodology ................................................................................................... 56

3.1. Introduction ........................................................................................................................... 56

3.2. Measures of ESG performance .............................................................................................. 56

3.3. The selection of financial performance measures ................................................................. 60

3.3.1. The FF3 ......................................................................................................................... 61

3.3.2. The FF5 ......................................................................................................................... 63

3.4. Datasets.................................................................................................................................. 65

3.5. Portfolio formation and factor construction methodology .................................................... 68

3.5.1. Portfolio formation ........................................................................................................ 68

3.5.2. Factor construction methodology and factor accuracy ................................................. 71

3.6. Conclusion ............................................................................................................................. 75

Chapter Four: Data analysis and discussion ............................................................................ 76

4.1. Introduction ........................................................................................................................... 76

4.2. Descriptive statistics on portfolio ESG and excess returns ................................................... 76

4.3. ESG portfolio regressions ...................................................................................................... 87

4.4. Portfolio factor loadings ........................................................................................................ 90

4.5. Factor spanning tests ............................................................................................................. 94

4.6. Conclusion ............................................................................................................................. 99

Chapter Five: Conclusion ...................................................................................................... 100

5.1. Conclusion ........................................................................................................................... 100

5.2. Further research ................................................................................................................... 103

Bibliography .......................................................................................................................... 105

List of Abbreviations

B/M Book-to-market

Bloomberg Bloomberg Limited Partnership

BRICS Brazil, Russia, India, China, and South Africa

CRIII Committee on Responsible Investing by Institutional Investors in South Africa

CRISA Code for Responsible Investing in South Africa

CSR Corporate Social Responsibility

ESG Environmental, Social and Governance Factors

Eurosif European Sustainable Investment Forum

FF3 Fama and French (1993) Three-Factor Model

FF5 Fama and French (2015) Five-Factor Model

FSC Financial Sector Charter

FSCA South African Financial Services Conduct Authority

FTSE Financial Times Stock Exchange

GEPF South African Government Employees’ Pension Fund

GGA South African Good Governance Academy Non-Profit Organisation

GHG Greenhouse Gasses

GRS Gibbons, Ross and Shanken (1989)

HML High Minus Low

INV Investment

JSE Johannesburg Stock Exchange

JSE ALSI Johannesburg Stock Exchange All-Share Index

King I King report on Corporate Governance (King Committee on Corporate

Governance in South Africa, 1994)

King II King report on Corporate Governance (King Committee on Corporate

Governance in South Africa, 2002)

King III King report on Corporate Governance (King Committee on Corporate

Governance in South Africa, 2009)

King IV King report on Corporate Governance (King Committee on Corporate

Governance in South Africa, 2015)

KLD Kinder, Lydenberg, Domini & Co. ratings

LHS Left-Hand Side

MSCI Morgan Stanley Capital International

OLS Ordinary Least Squares

OP Operating Profitability

P1 Portfolio 1

P2 Portfolio 2

P3 Portfolio 3

P4 Portfolio 4

P5 Portfolio 5

P6 Portfolio 6

P7 Portfolio 7

P8 Portfolio 8

P9 Portfolio 9

UN-PRI United Nations’ Principles of Responsible Investment

RHS Right-Hand Side

RobecoSAM Robeco Sustainable Asset Management

SRI Socially Responsible Investment

SEC Securities and Exchange Commission of the United States of America

SMB Small Minus Big

SUR Seemingly Unrelated Regression

UNEP-FI United Nations Environment Programme – Finance Initiative

U.S.A. United States of America

USD United States Dollar

WML Winners Minus Losers

List of Equations

Equation 1 Sharpe ratio ............................................................................................................ 61

Equation 2 FF3 ......................................................................................................................... 62

Equation 3 Construction of the Small Minus Big FF3 Factor ................................................. 62

Equation 4 Construction of the High Minus Low Factor ........................................................ 63

Equation 5 FF5 ......................................................................................................................... 64

Equation 6 Construction of the Small Minus Big FF5 Factor ................................................. 64

Equation 7 Construction of the Robust Minus Weak Factor ................................................... 65

Equation 8 Construction of the Conservative Minus Aggressive Factor ................................. 65

Equation 9 Griffin’s average absolute alpha value .................................................................. 73

Equation 10 Construction of 𝐴𝑠2𝑎𝑖/𝐴𝑎𝑖2 ............................................................................... 74

Equation 11 GRS statistic ........................................................................................................ 74

List of Figures

Figure 1 Total signatories of the UN-PRI and USD assets under management ...................... 10

Figure 2 UN-PRI Signatories per assets under management and geographic area .................. 11

Figure 3 UN-PRI Signatories headquartered in South Africa ................................................. 12

Figure 4 BRICS UN-PRI signatories and excess returns ......................................................... 13

Figure 5 Bloomberg and Refinitiv ESG rated companies ....................................................... 58

Figure 6 Annual JSE companies with a Bloomberg ESG Disclosure Score and annual average

Bloomberg ESG Disclosure Score for rated companies .......................................................... 66

Figure 7 Average number of equities included per portfolio ................................................... 82

Figure 8 Cumulative returns of constructed portfolios ............................................................ 86

List of Tables

Table 1 Studies on South African ESG financial performance ............................................... 14

Table 2 Left-Hand Side portfolio characteristics ..................................................................... 70

Table 3 Factor variables’ definitions ....................................................................................... 72

Table 4 ESG scoring per annum .............................................................................................. 78

Table 5 Portfolio ESG scoring ................................................................................................. 79

Table 6 Portfolio excess returns ............................................................................................... 82

Table 7 Portfolio alpha results ................................................................................................. 87

Table 8 Factor loadings for the FF3 ......................................................................................... 91

Table 9 Factor loadings for the FF5 ......................................................................................... 93

Table 10 Factor spanning test results ....................................................................................... 97

Table 11 Summary statistics of regression intercepts .............................................................. 98

Chapter One: Introduction

1.1. Introduction

From the initial months of 2020,1 the way in which the world did business was severely

disrupted, and business practices were forced to change. As the latter months of 2020 ensued,

asset managers, investors, and businesses suffered the effects of volatile and erratic market

values globally, possibly most poignantly illustrated by the lowest oil prices in history during

March and April (IMF, 2020). Resulting economic projections saw the World Bank (2020)

estimate a global recession equivalent to that of the Second World War. Markets reacted in

concert and global investors faced the loss of billions of Dollars, Euros, Pounds, Rands, Yen,

and Yuan while global market prices plummeted (Löwen et al., 2021).

However, despite the hostile investment environment faced in 2020, there was an increase in

the demand for financial products with Socially Responsible Investment (SRI) approaches and

characteristics, or investment products that integrate Environmental, Social and Governance

(ESG) factors within their investment processes (Adams & Abhayawansa, 2021; Broadstock

et al., 2021; Jessop & Howcroft, 2021; Mans-Kemp & van Zyl, 2021; Mascotto, 2020).2

Globally, 2020 was a remarkable year for SRI-orientated assets and SRI assets headquartered

in the United States of America surpassed 35.3 trillion United States Dollars in 2020, a more

than 30% increase from 2016 (GSIA, 2021).3 Growth was not limited to the U.S.A. as SRI

assets saw growth across the majority of regions, with Canada experiencing the most growth

in assets during 2019 and 2020, totalling 48% (GSIA, 2021). Second to Canada, a 42% growth

in the ESG related assets was reported for the U.S.A., a 34% growth for Japan as well as a 25%

growth in the Australasia region (GSIA, 2021). Beyond the latest growth trend, Socially

Responsible Investment approaches have received growing amounts of investor attention

(Adams & Abhayawansa, 2021; Yan et al., 2018).

SRI includes a number of divergent investment approaches and the field is known for its erratic

terminology as no unified global definition exists (Richardson, 2008; Sherwood & Pollard,

1 COVID-19, or SARS-COV-2, was first recognised by the World Health Organisation during the final months
of 2019 (Engelhardt et al., 2021). Following the zoonotic virus’ discovery, it quickly spread globally and caused
considerable market instability in its wake (Engelhardt et al., 2021).
2 Hereinafter, Environmental, Social and Governance factors are also referred to by the commonly utilised
acronym “ESG” depending on the context of the piece. Socially Responsible Investments are hereinafter also
referred to according to its commonly utilised acronym “SRI” depending on the context of the piece. Both topics
are detailed in subchapter 2.2 of this research.
3 Hereinafter, the United States of America is referred to by the acronym “U.S.A.” and the United States Dollar
is referred to by the acronym “USD”.

2018). Nevertheless, as subchapter 2.4 unpacks, this research utilises of the South African and

European interpretation of SRI. Thereby, SRI refers to the incorporation of ESG factors within

investment approaches and is utilised as an instrument for SRI approaches (Eurosif, 2014;

Louche & Lydenberg, 2006).

The escalation in SRI investing has extended ESG Factors’ role in investing practices while

undoubtedly making the matter more commonplace during 2020 (Zhan & Santos-Paulino,

2021). This spectacle is further evidenced by the ESG integration trend of most of the largest

asset management funds (Madhavan et al., 2021; Soler-Domínguez et al., 2019). Some

examples of recent ESG factor integration include BlackRock Financial Management, the

Vanguard Group Incorporated, Amundi Group, AXA Group S.A., Credit Suisse Group AG,

and Fidelity Investments Incorporated (CFA Institute, 2020a).

SRI asset growth has continued into 2021, yet 2020 seems to have solidified the field within

mainstream investing and has established ESG investing attention globally (Mans-Kemp & van

Zyl, 2021; Quinsee, 2021; Ricketts, 2020). In contrast to the recent growth, ESG factors’

inclusion in mainstream investment approaches have been criticised widely before the

pandemic as an isolated phenomenon prompted by the U.S.A.’s bull market (Stevens, 2020).4

Equally, SRI have been critiqued for being a ‘feel-good’ investment that sacrifices returns and,

therefore, are contrary to fiduciary responsibilities (Payne, 2021). In the pandemic’s wake,

however, ESG factors seem to increasingly demonstrate a permanent alteration in investing

practice that may not necessarily detract from fund performance (Broadstock et al., 2021;

Stevens, 2020).

The existing growth in SRI follows a long-term trend evidenced by the U.S.A. and Europe,

which both saw significant increases in ESG assets under management, totalling 618 billion

USD from 2010 to 2019 (Zhan & Santos-Paulino, 2021). During this period, the amount of

global sustainability orientated funds also increased from 1304 to 2704 (Zhan & Santos-

Paulino, 2021). The U.S.A. had particularly noticeable increases in the number of funds with

an SRI focus increasing from 55 in 1995 to more than 333 in 2012 (Munoz et al., 2014).

However, 2020 magnified the prior trend as sustainable investment funds enjoyed a doubling

of inflows in 2020 in comparison to 2019, a ten-fold increase in comparison to 2018 in the

4 For an overview of the Islamic, Jewish, and Christian influences and origins on SRI, see Sherwood & Pollard
(2018). For an overview of later resurgences, including how SRI developed as part of the Quakers’
unwillingness to invest in so-called “sin stocks” see Heese (2005).

U.S.A’s markets (Hale, 2021). In total, sustainable investment inflows amounted to one-quarter

of net investment inflows in the U.S.A. during 2020 (Hale, 2021).

The recent surge in the variation of mainstream investment practice is particularly noteworthy

as it suggests a redirection of investment behaviour that is no longer determined solely by

investment risk and returns (Sherwood & Pollard, 2018). SRI achieves this extension by

broadening the considerations of investors to include non-financial criteria (Renneboog et al.,

2008). To evaluate the appropriate non-financial criteria, ESG factors are utilised to determine

the viability of an investment within an investor’s portfolio (Renneboog et al., 2008). Such

approaches have been termed widely and some expressions include Socially- or Sustainable

and Responsible Investing, Impact Investing, Social Investment, Social Finance, Ethical

Investing, Green Investing, and ESG Investing (Sherwood & Pollard, 2018; Viviers & Eccles,

2012). While there are some variations in the aforesaid approaches, South African studies most

commonly make reference to the term Socially Responsible Investing (Viviers & Eccles,

2012).5 In this context, SRI is characterised as an approach to investment that incorporates ESG

factors as part of the investment process (Viviers & Eccles, 2012).

Some proponents of SRI suggest that the abovementioned investment approaches can consider

factors beyond purely financial metrics in achieving investment objectives and without

sacrificing returns (Heese, 2005). Accordingly, ESG factors serve to measure the extent to

which firms can evaluate their investment choices, since SRI approaches are concerned with

the sustainability of investments and therewith the eligibility of a potential investment (Bhana,

2018; Bollen, 2007; Giamporcaro, 2011; Sherwood & Pollard, 2018).6 Supporters argue that

sustainable business practices are rewarded on the market because the accompanying costs and

business risks that sustainable organisations face are less, leading to more profitable returns

and lower levels of comparative volatility, all while investors still meet their requisite fiduciary

responsibilities (Broadstock et al., 2021; Mascotto, 2020; Payne, 2021; Schoenmaker &

Schramade, 2019).7 Beyond the growth of SRI in recent years, ESG practices are also argued

to intensify returns and minimise the overall risk of a managed portfolio (Adams &

Abhayawansa, 2021; Broadstock et al., 2021; Quinsee, 2021). However, despite the proposed

5 In the interest of clarity, the two terms “Socially Responsible Investment” and “Environmental, Social and
Governance Factors” are detailed further in subchapter 2.2 below.
6 Hereinafter, Socially Responsible Investment is also referred to by the acronym “SRI” alongside the full
reference.
7 An overview of the suggested benefits that SRI companies have in comparison to their alternatives is discussed
in subchapter 2.2 below.

benefits, there is not yet any consensus regarding the comparative performance of ESG-

orientated investment strategies, creating uncertainty for potential SRI investors. Moreover, the

Chartered Financial Analyst Institute (2020a)8 suggests that there exists “an active debate on

the performance of funds focussed on SRI/ESG investing” which is further developed below.

The global trend towards incorporating SRI can further be inferred from the increasing number

of signatories and total assets under management within the United Nations – Principles of

Responsible Investment or UN-PRI (PRI Association, 2021a).9 Established in 2006, the UN-

PRI includes six principles committing signatories to integrate ESG factors within their

investment practices (PRI Association, 2020). While the UN-PRI does not represent all global

SRI, it accounted for 80 trillion USD in SRI assets under management in 2019 (CFA Institute,

2020a). From Figure 1, the significant growth in both signatories and assets under management

can be recognised. 2020 is particularly notable as the UN-PRI experienced an increase of 29%

in signatories, while assets under the management of signatories increased by 21% to more

than 100 trillion USD in total. More recently, the association has confirmed its 4000th signatory

with 110 trillion in assets under management during June 2021 (Segal, 2021).

Figure 1 Total signatories of the UN-PRI and USD assets under management

The growth in ESG is also not limited exclusively to the West. In 2019, China reported a total

of seven billion USD in assets managed by 95 sustainability centred funds, most of which had

been launched less than five years prior (Zhan & Santos-Paulino, 2021). Figure 2 below

illustrates the division of assets and signatories to the UN-PRI by region. It illustrates that while

8 Hereinafter referred to as the CFA Institute.
9 Hereinafter, the United Nations Principles of Responsible Investment are also referred by its common acronym
“UN-PRI” or “PRI”. Further detail thereon is provided in subchapter 1.2 below.

500

1000

1500

2000

2500

3000

3500

100

120

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Number of Assets Number of Signatories

there has been growth in other regions, the UN-PRI signatories are more noticeable in Europe

and North America.

Figure 2 UN-PRI Signatories per assets under management and geographic area

Despite many funds being western controlled, South Africa has not been isolated from the

trend. From the establishment of the UN-PRI in 2006, South Africa featured two signatories,

The South African Government Employees Pension Fund, and Momentum Metropolitan Life

Limited.10 Figure 2 illustrates the comparative growth in UN-PRI signatories in the South

African context (PRI Association, 2021b). As of June 2021, the UN-PRI has a total of 64

signatories headquartered in South Africa and, parallel to the global trend, there has been a

noticeable increase in signatories from 2018 onwards (PRI Association, 2021b). From 2018 to

2020, signatories of the UN-PRI which are headquartered in South Africa grew from 45 to 60

as illustrated in Figure 3 (PRI Association, 2021b). In addition to UN-PRI signatory growth,

South Africa has been a “pioneer in promoting corporate governance reform” in its own

capacity as well as the country’s history of economic exclusion provides specific urgency to

redress social inequalities, further pressing the need for the application of SRI (Ducastel &

Anseeuw, 2020; Solomon & Maroun, 2012).

10 The Government Employees Pension Fund would later contribute significantly to the establishment of South
African SRI, and the matter is further detailed in subsection 2.3.2 below. Hereinafter the fund is referenced
using the acronym “GEPF”.

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Assets under Management PRI Signatories

Europe North America Other Regions

Figure 3 UN-PRI Signatories headquartered in South Africa

As Figure 3 illustrates, the increase in South African SRI funds mirrors the global

developments evidenced by Figure 1. Further sources suggest that South Africa hosts 53 funds

with a ‘high’ sustainability rating according to Morningstar as South African funds incorporate

ESG factors into their investment practice. Examples include Coronation (2020), Ninety One

(2021), Old Mutual (2021b), Prudential Investment Managers (2021), and Stanlib (2021). Yet,

a smaller number of funds are specifically dedicated to ESG investing (Citywire, 2020). Some

specific funds include a Morgan Stanley Capital International, or MSCI, indexed fund

specialising in South Africa ESG Capital Leaders, as well as the Mergence (2021) SRI Fund,

and the Novare (2021) South Africa Impact Fund (Citywire, 2021; Du Plessis, 2019).11 Other

South African ESG oriented funds have also been introduced from the inception of the COVID-

19 pandemic, such as the Sygnia S&P Global 1200 ESG ETF and the Old Mutual ESG equity

fund (Madjarova, 2021; Old Mutual, 2021a).

In the context of BRICS,12 South Africa is also a notable UN-PRI signatory, particularly when

comparing the performance of UN-PRI funds in the BRICS environment (Tripathi & Kaur,

2020). While considering BRICS UN-PRI signatory performance from 1 September 2007 until

March 2019, Tripathi and Kaur (2020) find that South African signatories outperformed the

market to the greatest extent when measured by excess return alpha values. Among the BRICS

countries, South Africa also boasts some of the highest overall ESG performance and more

than three times that of China’s performance (Garcia et al., 2019). Figure 4 below illustrates

11 Hereinafter, Morgan Stanley Capital International is abbreviated as “MSCI”.
12 An emerging economies association, BRICS is a commonly used acronym for: “Brazil, Russia, India, China,
and South Africa” (Garcia et al., 2019, p. 298).

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

the BRICS UN-PRI signatories and the excess returns identified by Tripathi and Kaur (2020)

(PRI Association, 2021b).

Figure 4 BRICS UN-PRI signatories and excess returns

In addition to the UN-PRI, other asset managers increasingly pressure firm boards to consider

ESG factors. For example, Coronation Fund Managers distributed requests to 89 South African

listed firms to increase their consideration of ESG factors in board decisions, followed by

meetings regarding firm ESG performance (Buthelezi, 2021). The approach of putting pressure

on South African listed company boards to consider ESG factors in their business practices is

further sanctioned by an extensive legislative framework in South Africa (Kitsikopoulos et al.,

2018; Mans-Kemp & van Zyl, 2021). Mirroring the increasing investor affinity towards ESG

approaches, companies are internally integrating ESG aspects in business strategies (Raman et

al., 2020). Companies with sustainable business practices are also reported to enjoy increased

consumer spending, especially in the business-to-consumer sectors (Raman et al., 2020).

Despite the growing South African interest in SRI, findings regarding the impact of ESG

integration on risk-adjusted returns is less clear in the country, delaying possible further

investment. Principally, Schoenmaker and Scharamade (2019) posit that companies which

have sustainable and responsible business practices are less prone to financial volatility and

have higher levels of sales growth over the long term. Contrariwise, Renneboog, Ter Horst and

Zhang (2011) propose that portfolios with an SRI focus provide less volatile negative returns

with the same performance as conventional funds. Several international studies have also found

a positive correlation in the comparative ESG issuer’s impact on performance during the early

2000s, while other studies suggest that this impact has disappeared following the global

0,001

0,002

0,003

0,004

0,005

0,006

100

120

Brazil Russia India China South Africa

ESG signatories Excess returns

financial crisis of 2008 (Gerard, 2019). As of 30 November 2020, evidence from 1175 U.S.A.

large-cap strategies tend to propose alternative findings (Payne, 2021). Over a period of one

year and three years, the U.S.A.’s Large capitalisation, highly rated ESG companies have

outperformed their non-ESG counterparts while providing similar returns over the five year

period (Payne, 2021). Further, when considering the Sharpe (1994) ratios over the same

periods, ESG integrated funds outperformed all periods, indicating better risk-adjusted returns

(Payne, 2021).

Yet, these findings do not suggest consensus in academic literature, since wide disparities in

findings prevail regarding the performance of ESG related investments. In the global context,

a greater portion of research has proposed positive interactions for company financial- and ESG

performance, yet the matter is far from settled (Viviers & Eccles, 2012).

Meta-analyses of global ESG funds’ financial performance have been performed by Dixon-

Fowler et al.(2013) as well as Friede et al. (2015). Both findings suggest that the majority of

studies indicate SRI market outperformance. Contrariwise, a similar literature review by

Revelli and Viviani (2015) finds that SRI portfolios provide no comparative benefits or

detriments to ordinary investments. While still contested internationally, there exist numerous

studies considering the financial performance of ESG investments for developed markets

(Dixon-Fowler et al., 2013). Comparative studies on the performance of ESG investments in

the South African context, on the other hand, are particularly lacking (Chetty et al., 2015;

Johnson et al., 2019; Viviers & Eccles, 2012). The incongruent and insufficient findings

regarding ESG performance on the JSE introduce the purpose of this research. Of the studies

performed on South Africa, Table 1 indicates some of the varied findings regarding ESG and

financial performance.

Table 1 Studies on South African ESG financial performance

ESG Outperformance Inconclusive or ESG underperformance

Duncan (2018), Johnson et al. (2019),

Demetriades and Auret (2014), Mutezo

(2014, p. 210), and Tripathi and Kaur

(2020)

Chetty, Naidoo and Seetharam (2015),

Chawana (2014), Horn, de Klerk, and de

Villiers (2018), Hamilton, Jo and Statman

(1993), Gladysek and Chipeta (2012), and

Viviers et al. (2008)

As illustrated in Table 1, Johnson et al. (2019), Demetriades and Auret (2014), Duncan (2018),

Mutezo (2014), and Tripathi and Kaur (2020) find positive correlations between firm financial

and ESG rating performance. Equally, other studies like Horn, de Klerk and de Villiers (2018),

Chetty, Naidoo and Seetharam (2015), and Gladysek and Chipeta (2012) find no correlation.

Hamilton, Jo and Statman (1993) find that South African Sustainable and Responsible mutual

funds do not provide any statistical benefit to their conventional counterparts. Similarly, Du

Toit and Lekoloane (2018) find no relationship between the JSE SRI index and firm financial

performance while Chawana (2014) reports that the JSE SRI Index underperforms

conventional South African market indexes. Considering these divergences, Johnson et al.

(2019) suggest that research over periods that extend beyond six years may yield more

definitive results as the benefits of ESG-orientated approaches purportedly come to the fore

over lengthier periods.

Considering the lack of conclusive findings in the existing literature and the recent growth in

the field, a study that examines the comparative profitability of SRI is particularly relevant to

determine the viability of SRI, especially so following recent capital inflows and market

developments (Folger-Laronde et al., 2020). Examining periods of market crisis also tend to

uncover challenges that remain hidden during boom periods (Díaz et al., 2021; Herringer et al.,

2009). Subsequent to the initial influence of the COVID-19 pandemic, a revaluation of ESG

performance could explain whether ESG is posed to play an increased part in the future of

South African markets (Díaz et al., 2021).

While ESG performance has been subjected to numerous studies globally, a conclusive result

on such funds’ comparative performance in South Africa over the long term is still outstanding

and this research aims to fill this lacuna (Folger-Laronde et al., 2020; Friede et al., 2015). The

identified research gap provides newfound opportunities for analysis to consider the maturation

of the field, especially given the case in comparison to prior years’ research and recent

developments. As the role of ESG factors has provided mixed results regarding fund returns in

the past, this study is well poised to investigate developments following the capital inflows of

2020. The inclusion of 2020 within the period of evaluation may shed new light on the

performance of highly rated ESG stocks in the South African market, gauging the principles

underpinning their suggested returns (Madhavan et al., 2021). Accordingly, this research makes

use of an extended period of evaluation, consisting of 12 years from 2009 to 2021, to address

existing divergences in findings.

As implied above, the divergence of existing findings regarding the South African market

further motivates this study and, considering the context of recent market developments

following the impact of COVID-19, it provides a directive to consider market changes in the

study’s evaluation which are yet to be considered in an academic study. The lack of consensus

also pinpoints the absence of sufficient literature on the topic and motivates an overview of

performance.

The disparities in findings regarding existing South African literature further provides an

opportunity to address existing criticisms of prior studies.13 Specifically, this research is one of

the first in the South African context to consider the CFA Institute (2020a), Johnson et al.

(2019) and Garcia, Mendes-Da-Silva and Orsato’s (2019) suggestion that ESG performance

studies make use of extended periods of evaluation. Schoenmaker and Scharamade (2019)

suggest that over the short run there is little variation in the comparative profits of ESG-

orientated businesses. As supported by Johnson et al. (2019), extending the period of

investigation may therefore unlock unrecognised benefits of ESG-orientated approaches as the

effects may manifest over longer periods, given the focus on long-term value creation of ESG-

orientated firms. The approach echoes the conclusions of Viviers et al. (2008) who compare

South African Responsible Investment fund performance to that of the market and find that

while local Responsible Investment funds underperformed, they demonstrate continually

increasing performance over the period examined. The finding is further advanced by Tripathi

and Kaur (2020), who suggest that positive results are yet to be uncovered in further studies,

given the recent growth in the field and the increasing availability of data. Correspondingly,

Akiniolire and Smit (2003) and Ortiz-de-Mandojana and Bansal (2016) further suggest that

longer periods of evaluation provide for more adequate measurements of ESG fund

performance as the benefits of long-term, value-orientated, approaches are only visible over

extended periods.

Accordingly, this research undertakes a comparative overview of listed firm ESG and financial

performance for the period 2009 to 2021. This period is primarily relevant due to the two

collective surges experienced in ESG investing in South Africa in late 2008 and 2020, as well

as the general trend in its growth during this period (Mans-Kemp & van Zyl, 2021). The first

surge in ESG investing followed after the global financial crisis of 2008 to 2009 followed by

the subsequent surge in 2020, which is discussed above (Adams & Abhayawansa, 2021; Payne,

13 An analysis of existing literature regarding South Africa’s SRI performance follows in Chapter Two.

2021). The inclusion of a significant period under evaluation starting also recognises the period

constraints of existing studies, as identified by the CFA Institute (2020a). This extended period

of evaluation therefore uniquely satisfies the research requests for longer periods of scrutiny

by Akiniolire and Smit (2003), Garcia et al. (2019), and Ortiz-de-Mandojana and Bansal

(2016).

An extended period of evaluation also poises the study to include the two most significant

periods of growth of SRI funds and the transition of SRI to more mainstream investment

practice, which is another consideration suggested by the CFA Institute (2020a). In the South

African context, having the portfolio formation date in 2009 is also particularly relevant. From

2009, the Johannesburg Stock Exchange14 required companies listed with the exchange to

adhere to the requirements of the King report on Corporate Governance which includes

integrated reporting, allowing for comprehensive ESG rating analysis (King Committee on

Corporate Governance in South Africa, 2009; Herringer et al., 2009).15 Additionally, the

suggested timeline for the research allows for historic comparisons into ESG research

performance in the South African market over the long term as the evaluation considers 12

years.

The outcome of the research contributes towards the ongoing debate regarding the financial

performance of portfolios constructed from highly rated ESG equities subsequent to the

introduction of the reporting requirements mandated within King III and their specific

performance during the market turmoil experienced during 2020. The findings of prior South

African studies and foreign ESG studies are utilised throughout the research piece to articulate

SRI conceptually and to deepen the logic behind its usage. Collectively, the inclusion of both

the extensive period under consideration, covering both the aftereffects of the financial crises

in 2009 and 2020, uniquely positions this research to contribute towards clarifying the existing

uncertainty regarding the contemporary financial performance of SRIs in South Africa.

1.2. Research problem and purpose

Subchapter 1.1 examines the growth which ESG-orientated investments have shown in recent

years and especially following the initial months of 2020, despite the continued uncertainties

regarding comparative performance. In light of the existing inconclusive literature on the topic,

14 Hereinafter the Johannesburg Stock Exchange is referred to as the “JSE”.
15 Hereinafter, the King reports on Corporate Governance are referenced in the order in which the reports are
published. The first King report on Corporate Governance is therefore referred as ‘King I’ while the remaining
reports are designated in the same order.

the motivation for the study flows from the consideration of the increase in SRI-orientated

assets under management globally and within South Africa.

The inconclusive findings of the existing literature are critiqued for several reasons. Some main

criticisms include the fact that contributing studies tend only to consider aspects of ESG or

consider ESG fully over brief periods, both of which undermine the possible benefits of SRI

(CFA Institute, 2020a; Garcia et al., 2019). For example, Chetty, Naidoo and Seetharam (2015)

consider Corporate Social Responsibility and firm performance while Demetriades and Auret

(2014) consider social performance and return on equity. In both studies, the Environmental

and Governance factors of ESG are excluded.

Insofar as it relates to risk-adjusted performance, South African ESG research tends to only

evaluate performance over a short duration on the JSE (Johnson et al., 2019). Duncan (2018)

and Mutenzo (2014), for example, both find ESG outperformance, but only consider 2013 until

2017 and 2004 until 2010 respectively. Johnson et al. (2019) find no outperformance of highly

rated ESG firms but also only consider 2011 to 2016. Existing literature is also yet to consider

the impact of the market developments experienced during 2020 on the performance of highly

rated ESG equities in South Africa. Additionally, existing studies are critiqued for not

accounting for firm size in ESG scoring. While larger firms tend to have higher ESG

performance in line with greater reporting resources, some studies on ESG and financial

performance have been criticised for not recognising this size bias (Boubaker et al., 2018;

Demetriades & Auret, 2014; Du Toit & Lekoloane, 2018).

Therefore, to address the existing lacuna, this study undertakes a long-term evaluation of

highly rated SRI equities’ performance, including both the aftereffects of the global financial

crisis and 2020 within its period of analysis. To address this gap, this study considers twelve

years from May 2009 until April 2021 within its analysis, totalling 144 months of evaluation.

It is suggested that the extended period of evaluation better allows for the long term benefits

of ESG to come to the fore, as purported by Akiniolire and Smit (2003), Ortiz-de-Mandojana

and Bansal (2016) and Schoenmaker and Schramade (2019). Further, the study also extends

the consideration of specific aspects of ESG to ESG scoring entirely, where many existing

studies merely consider one aspect of ESG scoring.

Bridging the knowledge gap, this research, therefore, transcends the evaluation of individual

ESG components and considers the matter more holistically, over a significantly lengthier

period which includes both the influence of COVID-19 and the aftereffects of the 2008 and

2009 global financial crisis. The study further also accounts for firm size in its portfolio

formation process.

Accordingly, this research’s purpose is to analyse the performance of JSE listed equities based

on their ESG scoring. In this research, the ESG scores of equities are measured according to

Bloomberg ESG Disclosure scores. Bloomberg ESG Disclosure scores are utilised for two

main reasons which are detailed in Chapter Three of this research. Briefly, the Bloomberg ESG

Disclosure score database is a commercially available scoring metric that has some of the most

extensive South African company data available for the entire period under review for this

study. Additionally, the Bloomberg (2020a) ESG Disclosure score makes use of publicly

available information, which ensures transparency in the findings of this research and allows

for this research to be compared with further research as the approach is determinable, unlike

privately utilised datasets.

Utilising the scoring provided by Bloomberg, this research investigates the comparative

performance of highly-rated South African ESG equities and their risk-based returns to that of

their lesser rated counterparts. The study further contributes towards existing literature by

including the market developments of 2020 on ESG funds in comparison to the market and

provides a long-term risk-adjusted evaluation that includes this impact. In evaluating the

outcome of the investigation, this study juxtaposes the validity of the reasoning of rated, ESG-

orientated equities in producing superior market performance. Therefore, this study uniquely

provides a long-term comparison of ESG-orientated equities’ financial performance in order to

appraise whether the investment approach provides any comparative financial benefits, as ESG

proponents suggest.

1.3. Key research question

This research’s key research question relates to the comparative performance of a set of

portfolios of highly rated ESG equities to that of non-highly rated ESG equity portfolios listed

on the JSE, and is detailed below:

How have South African highly rated ESG equities performed relative to non-highly rated ESG

equities on the JSE for the period 2009 to 2021, when accounting for firm size in terms of

market capitalisation?

1.4. Hypotheses

For statistical tests, the hypotheses make use of alpha values generated from the Fama and

French ([1993]2015) Three and Five-Factor models as discussed within Chapter Three

below.16Acknowledging the aforementioned, the hypotheses of this research are formulated as

follows:

HN: Highly rated ESG portfolios constructed from the considered JSE-listed companies

perform as well as medium and low rated ESG portfolios constructed for the period 2009 to

2021.

HA: Highly rated ESG portfolios constructed from the considered JSE-listed companies show

higher abnormal returns relative to medium and low rated ESG portfolios constructed for the

period 2009 to 2021.

1.5. Research significance and study contribution

An elaboration on the reasoning behind SRI investments alongside a combined evaluation of

SRI fund performance provides a necessary assessment of the merits of the field in light of

recent market developments. The study, therefore, provides fresh and current perspectives

regarding security ESG ratings and risk-adjusted returns for a period of 144 months. The

inconclusiveness of existing studies, coupled with the lack of sufficient literature on the topic

within the South African context, motivates this research analysis of ESG-fund performance,

especially so considering recent capital inflows following the initial months of the COVID-19

pandemic.

More specifically, this research contributes to the existing field in three distinctive aspects.

Firstly, this study furthers existing findings by including an analysis of recent market

developments faced during and subsequent to the initial impacts of the COVID-19 pandemic.

Secondly, this study subjects SRI assets to an extended period of evaluation as requested by

the CFA Institute (2020a), amongst other studies, to allow for the anticipated long-term benefits

of SRI-orientated companies to come to the fore (Akiniolire & Smit, 2003; Garcia et al., 2019;

Ortiz‐de‐Mandojana & Bansal, 2016). Finally, this study also accounts for firm size in its

portfolio formation process to recognise the possibility of size bias in evaluating firm ESG and

financial performance (Boubaker et al., 2018; Demetriades & Auret, 2014; Du Toit &

Lekoloane, 2018).

16 Hereinafter, the Fama and French ([1993] 2015) Three- and Five-Factor models are referred to as FF3 and
FF5 respectively.

1.6. Chapter division

This research is set out in a chapter format. The first chapter introduces the study and is

concluded within this subsection (1.7). Chapter Two furthers the introduction of Chapter One

by presenting SRI in South Africa. Chapter Two briefly develops SRI conceptually and situates

the matter within the market context. Further, Chapter Two considers the status quo of ESG in

South Africa, the South African position in comparison to global markets and the findings of

existing firm ESG and financial performance studies in South Africa. The subsequent chapter

(Chapter Three) develops and introduces the methodological approach that this research utilises

in evaluating ESG scoring and equity performance. Chapter Three then provides an overview

of the measures utilised within the study to evaluate the performance of a security in terms of

the security’s ESG rating and risk-adjusted returns. Thereafter, Chapter Three details the

application of the measures to the datasets and explains the portfolio formation process the

study utilises. Provided with the results gleaned from applying Chapter Three’s methodological

approach, the penultimate chapter (Chapter Four) examines the information flowing from the

methodology detailed in Chapter Three. Chapter Four provides a descriptive analysis of the

data introduced in Chapter Three followed by the results gleaned from the portfolio regressions.

Chapter Four also provides a set of factor spanning tests in evaluating the factor models’ ability

to price the portfolios. Finally, Chapter Five summarises the findings from the study and

concludes the research piece. Chapter Two follows directly below.

Chapter Two: Literature review

2.1. Introduction

Chapter Two broadly considers SRI’s development, the scope of its application and existing

literature on its comparative performance. Commencing with the theoretical considerations

which Chapter One introduced, the following subchapter (2.2) provides an overview of the

financial theories which support SRI, followed by an explication of the theoretical benefits and

detriments of ESG-orientated firms. The subsequent subchapter (2.3) develops South Africa’s

Sustainable and Responsible Investment background from the country’s context. Subchapter

2.3 focuses on the most notable regulatory documents applicable within the South African

context, as informed by their international counterparts in some instances. Subchapter 2.3

highlights the important role which the four King codes and the UN-PRI have in maturing the

South African SRI market (Viviers & Els, 2017). The subchapter (2.3) further contextualises

the role of sustainable development as one of South Africa’s SRI underpinnings as established

by the King reports (King IV, 2015; Locke, 2019).

Given the overarching framework, subchapter 2.4 then examines the South African

interpretation by determining the scope of SRI and unpacking four common approaches in its

application. The subchapter (2.4) then details the ratings utilised to determine ESG factor

company performance and current challenges regarding its application.

Provided with the nature of SRI in its application, subchapter 2.5 explains the ESG ratings

metrics and methods which can be employed to evaluate and integrate a security’s ESG

performance within investment approaches. Subchapter 2.6 then considers the recent

momentum SRI has been experiencing. Alongside the increase in SRI funds, a parallel increase

in the role of ESG in the financial market can also be observed (Escrig-Olmedo et al., 2019).

Therefore, subchapter 2.6 considers findings on SRI fund performance and literature thereon.

As introduced within Chapter One, it is established that although company ESG score and

company performance have been subjected to several studies from 1970, there still exists no

consensus on performance in South Africa (Friede et al., 2015; Jain et al., 2019). Collectively,

these subchapters lay the foundation for the empirical portion of the study which is introduced

with the methodology in Chapter Three of this research. Still, to adequately appreciate the

empirical findings of the following chapter, the following subchapters must first develop the

topic.

2.2. The theoretical underpinnings of SRI and financial performance

2.2.1. Overview

As Chapter One introduces, there are several different proposals and approaches which suggest

that firms with higher ESG ratings provide financial outperformance (Dixon-Fowler et al.,

2013). Duncan (2018) suggests that companies committed to ESG practices have

distinguishable characteristics and benefits, including better use of resources and lower staff

turnover levels, greater access to markets and lower costs of capital. Contrariwise, Becchetti et

al. (2015) posit that an increased role afforded to stakeholders in ESG companies lead to

inflexibilities when faced with negative productivity shocks, increasing stock return volatility

and divergence from market dynamics. Since SRI approaches are adaptable, individual

investors can tailor SRI approaches to suit a specific investment strategy. This flexible

approach would, in turn, also impact the possible benefits of SRI (Sherwood & Pollard, 2018).

Accordingly, this subchapter considers the theoretical underpinnings of SRI (Sherwood &

Pollard, 2018).

Sherwood and Pollard (2018) identify the impact of SRI approaches in four schools of thought:

the Shareholder and Stakeholder Theories, the Material Information Theory, and the Universal

Owner Theory. In what follows below, a brief overview of the role of ESG in these theories is

provided. Given the focus of this research, the theories are only developed insofar as they relate

to SRI practices broadly. Nevertheless, it is relevant to mention that there exists significant

variance among the individual theories which do not find specific attention within this research

(Dahlberg & Wiklund, 2018). Provided with the positioning of SRI approaches within existing

investment theories, an overview of the guiding framework and application follows in the next

two subchapters (2.3 and 2.4).

Possibly the most appropriate theories to consider first in this research would be the

Shareholder and Stakeholder Theories. Both theories have received significant attention in

financial and economic literature and corporate governance debates tend to be framed within

the ambit of either of the two theories (Tirole, 2006). In the context of SRI literature, the

theories have also been used widely as a theoretical departure point (Eccles et al., 2014).

The Shareholder Theory is often characterised in referencing Milton Friedman’s (2007) The

Social Responsibility of Business Is to Increase Its Profits. As the title suggests, a business’

social responsibility only extends to the business’ shareholders, or those holding a claim to the

ownership of the corporation (Friedman, 2007). Applied within the context of SRI, shareholder

theory would support the integration of SRI approaches should SRI ultimately yield an increase

in the value of a security (Dahlberg & Wiklund, 2018; Sherwood & Pollard, 2018).

Contrariwise, the Stakeholder Theory develops in antithesis (Freeman, 2008). The Stakeholder

Theory characterises ‘stakeholders’ as any entities which are impacted by the operations of a

firm (Dahlberg & Wiklund, 2018; Wijnberg, 2000). Fundamentally, the theory suggests that

corporations are best suited to consider all stakeholders in their operations and the approach

maximises the value of all stakeholders in the process, rather than benefiting shareholders

exclusively (Dahlberg & Wiklund, 2018; Freeman, 2008). For SRI, the Stakeholder Theory

supports the consideration of all stakeholders who are impacted by the decisions of a business,

regardless of the impact the decision may have on the share value (Sherwood & Pollard, 2018).

ESG approaches that consider wider objectives that benefit stakeholders, rather than

exclusively shareholders, would find support in this theory (Dahlberg & Wiklund, 2018).

Additionally, approaches that standardise the weigh-up of various stakeholders’ interests in

corporate action would also find support in the Stakeholder Theory (Sherwood & Pollard,

2018).

Another crucial theory that influences the adoption of ESG factors in investing is the Material

Information Theory (Sherwood & Pollard, 2018). Material information is regarded as any

information which could influence the value of an investment, a firm’s financial statements is

one example (Amel-Zadeh & Serafeim, 2018; Saad & Strauss, 2020). Since increasing numbers

of investors require disclosure regarding ESG factors in their investment processes, ESG factor

information is becoming progressively more material (Saad & Strauss, 2020; Sherwood &

Pollard, 2018). Typifying this development in the understanding of materiality is the U.S.A’s

Securities and Exchange Commission (Sherwood & Pollard, 2018).17 As ESG factors’

prominence in research and investment practice increased, so did the need for access to ESG

related information. In the U.S.A., this increase resulted in lobbyists prompting the SEC to

regulate the disclosure of ESG information as part of existing material information

requirements for investment decision making (Saad & Strauss, 2020). Accordingly, the SEC

(2010) published the “Commission Guidance Regarding Disclosure Related to Climate

Change”.

Three years following the SEC’s publication, the European Union enacted a similar disclosure

requirement: “Directive 2013/34/EU as regards disclosure of non-financial and diversity

17 Hereinafter referred to by the acronym ‘SEC’.

information by certain large undertakings and groups”. However, as subchapter 2.3 develops

below, South Africa’s mandated reporting framework had been established before both the

European Union and the U.S.A. during 2009.

The legislative recognition of the value of ESG factors by the European Union, South Africa

and the U.S.A. has a notable impact on today’s financial marketplaces. Sherwood and Pollard

(2018) recognise two key effects of non-financial company information disclosure. First

thereof is the benefit of the information in guiding investor choices (Sherwood & Pollard,

2018). Second, and as an effect of information disclosure, the policies requiring company

compliance also incentivise corporations to reconsider their approaches to ESG factors in their

business operations (Sherwood & Pollard, 2018).

The final theory which this research considers is the Universal Owner Theory. The Universal

Owner Theory is typified by a factual scenario in which sizeable investors find themselves

diversified to such an extent that the investors are incentivised to address systemic risks

(Hawley & Williams, 2007). Typically, large institutional investors hold highly diversified

portfolios in most asset classes, spanning sectors, markets and geographies (Hawley &

Williams, 2007). As such, some institutional investors, like Norges Bank Investment

Management, USS Investment Management Limited and Federated Hermes Investment

Management propose that investment performance becomes centred on the performance of the

economy at large (Hawley & Williams, 2007). In this environment, investors are tied to wide

arrays of social and environmental factors and are hard placed to diversify away from systemic

risks. Such investors would, therefore, be better placed to mitigate risk through changes to the

real economy (Hawley & Williams, 2007; Quigley, 2020). This is particularly relevant within

the context of SRI, as it suggests that SRI investment is economically driven through the

consideration of externalities (Quigley, 2020).

In addition to the theories supporting ESG factors, there are several proposed benefits and

challenges in terms of individual SRI orientated assets. The following two subsections unpack

the theoretical outperformance provided by ESG-orientated firms, followed by the theoretical

underperformance of ESG-orientated firms thereafter. Subchapter 2.3 then unpacks the South

African application of SRI.

2.2.2. Theories supporting the outperformance of highly rated ESG firms

There exist a few proposals which suggest that firms with higher ESG ratings should have

financial benefits in comparison to their alternatives. Dixon-Fowler et al. (2013), condenses

the alleged benefits into four common arguments, each of which then supports companies’

adherence to ESG principles. The four main arguments relate to green innovation, value

generation, social legitimacy, and stakeholder groups. In the remainder of this subchapter, these

benefits and detriments are unpacked, followed by the South African application thereof in the

ensuing subchapter (2.3).

Innovation is widely recognised as a distinctive factor in enabling a firm to gain a competitive

advantage within a market and increase its profitability (Bain & Kleinknecht, 2016; Klomp &

Van Leeuwen, 2001). As a first proposition, Dixon-Fowler et al. (2013) argue that companies

exhibiting positive environmental strategies and performance tend to display greater levels of

innovation and operational efficiency. Essentially, as pollution is considered a waste of

potential resources, greater levels of pollution translate into greater costs to firms, therefore,

firms with greater levels of innovation tend to utilise resources more efficiently and thereby

decrease operational costs and pollution (Christmann, 2000).

Examples of innovation that consider ESG factors include energy consumption improvements,

more efficient waste recycling and more environmentally friendly product design and

packaging (Chouaibi & Chouaibi, 2021). Each of these examples contributes towards the

reduction of a corporation’s environmental pollution or make more efficient use of production

resources (Porter & Van der Linde, 1995). The increased efficiency of resource use and the

innovation which led to its development, in turn, provides a corporation with a competitive and

financial advantage (Chouaibi & Chouaibi, 2021; Dangelico, 2016).

The second point raised by Dixon-Fowler et al. (2013) considers how a company’s focus on

ESG factors may serve as an indicator of a long-term orientation towards value generation,

organisational risk mitigation and strategic leadership (Hart, 1995; Sharma, 2000; Sharma &

Vredenburg, 1998). Schoenmaker and Schramade (2019), from a converse perspective, suggest

that ESG factors assist investors to consider company prospects, pivoting away from short-

term metrics and towards sustainable value creation. Equally, the reasoning of both Dixon-

Fowler et al. (2013) and Schoenmaker and Schramade (2019) suggest that an emphasis on ESG

factors indicate that a firm enjoys managerial focus on organisational risk management, which

translates into a long-term perspective in company management and more effective firm

leadership. Aragón-Correa (1998) evaluates this reasoning when considering the strategic

proactivity of 105 firms insofar as it relates to environmental factors. The outcome of the study

suggests that firms with strong organisational and management capabilities tend to exhibit a

strategic, proactive focus on environmental factors and enjoy competitive advantages in

organisational structure and characteristics (Aragón-Correa, 1998).

Thirdly, firms that integrate ESG factors may enjoy higher levels of social legitimacy and

benefits to their reputation (Dixon-Fowler et al., 2013; Hart, 1995). In a broad sense, ethical

corporate behaviour increases firm reputation for both investors and the public, this position

similarly holds for ESG-factors (Maung et al., 2020). Gregory et al. (2014) evaluates firm

Corporate Social Responsibility or CSR activity, and find a positive relationship with firm

reputation, in concert with the findings of Brammer et al. (2006) as well as others, including

Antunovich et al. (2000).18 Reputational benefits and social legitimacy, in turn, may lead to

competitive advantages for a corporation. Three notable advantages which this research

considers are the lower cost of obtaining capital, increased firm attractiveness to potential

employees, and higher firm sales (Russo & Fouts, 1997; Turban & Greening, 1997; Zhang et

al., 2020).

Although considered indirectly in most studies, explicit evaluations of the cost of capital and a

firm’s reputation have documented notable results (Maung et al., 2020). One recent evaluation

is performed by Cao et al. (2015) whereby large firm reputation in the U.S.A. is positively

related to a company’s cost of equity. Gregory et al. (2014) similarly find that improved CSR

performance leads to better growth prospects over the long term and decreased cost of capital.

Cheng et al. (2014) find that both social and environmental factor disclosure contributes

towards reducing capital access limitations.

The established social legitimacy of a firm also affords it the benefit of attracting more quality

employees and higher employee retention (Cao et al., 2015; Turban & Greening, 1997).

Greening and Turban (2000) consider the phenomenon in light of Social Identity Theory. The

theory posits that the social alignments of a person, including employment, influences a

person’s concept of self (Dutton et al., 1994). Regarding ESG factor considerations,

organisational approaches to social and environmental matters can particularly influence a

corporation’s image and the attractiveness of the corporation to potential applicants (Turban &

Greening, 1997). In turn, the perception of the norms and values that a corporation espouses

affect an organisation’s attractiveness for potential employees and influence potential

18 Some additional studies which support the finding include Bear et al. (2010) as well as Zhu et al. (2014).
Hereinafter Corporate Social Responsibility is referred to by the acronym “CSR”.

employees to be proportionally more likely to search for employment opportunities at socially

responsible firms (Turban & Greening, 1997).

The third significant impact of social legitimisation which this research considers is increased

firm sales (Dixon-Fowler et al., 2013; Hart, 1995). Literature on the topic suggests that firms

with better reputations regarding ESG performance tend to enjoy greater consumer support

(Russo & Fouts, 1997). However, more recent findings suggest that beyond additional

consumer support, firms with high ESG performance tend to enjoy less volatility in sales (Patel

et al., 2021).

The last point raised by Dixon-Fowler et al. (2013) regarding ESG-orientated firm benefits also

relates to greater consumer support. While bearing in mind Instrumental Stakeholder Theory,

the consideration of ESG factors allows corporations to recognise and address the requests of

wider stakeholder groups more directly (Jones et al., 2018). Thereby including wider

stakeholder groups and increasing levels of trust and further performance benefits (Jones et al.,

2018).

As the theoretical benefits of ESG-orientated firms have been developed in this subsection, the

following subsection considers the theoretical detractors to ESG firm financial performance,

whereafter subchapter 2.2 concludes.

2.2.3. Theories supporting the underperformance of highly rated ESG firms

In contrast to the above subsection (2.2.2), there are also challenges raised to proponents of

ESG-orientated firms relating to financial performance. Contests regarding the benefits above

relate firstly to the expense of incorporating environmental and social externalities onto firm

balance sheets (Dixon-Fowler et al., 2013). In such instances, incorporating environmental and

social externalities are either higher than its purported benefit or the action internalises negative

externalities, harming a firm’s balance sheet (Haigh, 2012; Todaro & Smith, 2011).

Additionally, ESG-orientated firms are critiqued for being vulnerable to negative production

shocks, which increase stock return volatility because increased stakeholder orientation by

management limits management’s responses to production shocks (Becchetti et al., 2015).

Others suggest that SRI orientated fund results are linked to specific sectors and that returns

tend to be sector-specific rather than related to ESG factor performance (Soler-Domínguez et

al., 2019). Still, further literature suggests that ESG factor interpretation is connected to specific

cultural and social considerations which attenuate ESG factors’ indications, or the capabilities

of SRI portfolio managers rather than ESG fund outperformance (Rehman et al., 2016; Silva

et al., 2018).

Contrariwise, Payne (2021) argues that ESG-focused firms are considered to be more adaptable

to business shifts and that this perception motivated ESG fund inflows during 2020.

Collectively these disparities in the existing literature on SRI mandate the evaluation of SRI in

practice and give rise to the foundational motivation of this research.

Chapter Three of this research develops an approach that empirically evaluates the potential

financial benefits of ESG integration. However, to test the validity of the theories mentioned

above, the application of SRI must first be surveyed. South Africa has developed an advanced

framework for ESG investing with the implementation of the Code for Responsible Investing

in South Africa and the existing King reports (King IV, 2015; Locke, 2019; Mans-Kemp & van

Zyl, 2021; Viviers & Els, 2017).19 The King III report is particularly relevant for the

development of SRI in South Africa as its requirements are mandated by the JSE, necessitating

listed companies to issue annual integrated reports which detail companies’ ESG factors

(Solomon & Maroun, 2012). These legislative pieces underscore the South African approach

to SRI and are introduced in the following subchapter (2.3). Provided with the relevant

legislative framework, the subchapter thereafter (2.4) considers SRI’s application.

2.3. The Socially Responsible Investment framework of South Africa

2.3.1. Developments before the UN-PRI

Before further unpacking the contemporary South African approach to SRI, it is crucial to

briefly develop the concept from its historic origins. Accordingly, subsection 2.3.1 develops a

chronological synopsis of some of the most relevant global and local developments which

shaped South Africa’s understanding of SRI. As such, this subsection (2.3.1) commences with

an analysis of the Sullivan Principles, followed by the King codes and the relevant legislative

and other provisions applicable to the South African investment environment.20 The pieces

considered in this subchapter (2.3) collectively shape the South African understanding of SRI

and form the foundation for SRI’s application. Provided with this subchapter’s (2.3) overview,

19 Hereinafter, the Code for Responsible Investing in South Africa will also be referred to as “CRISA”. The
code is introduced and unpacked within subsection 2.3.2 below.
20 While it is commonplace to refer to each of the King Committee reports on Corporate Governance in South
Africa simply as the “King codes”, for this research each of the relevant codes are referenced by full name on
their introduction and within the List of Abbreviations, followed by the shortened name thereafter (King IV,
2015).

the following subchapter (2.4) plots temporal trends in South African SRI and details its

application. Thereafter, subchapter 2.4 motivates the reasoning for the study before subchapter

2.5 provides an overview of ESG performance measures. Subchapter 2.6 considers recent

developments following 2020 and Chapter Three sets out this research’s methodology

thereafter.

This subsection (2.3.1) approaches South Africa’s interpretation of SRI by unpacking the main

regulatory documents forming South Africa’s SRI framework. The subsection (2.3.1)

commences with South Africa’s initial influence on SRI globally, followed by the King reports

on Corporate Governance in South Africa (King IV, 2015). Particular focus is provided to the

King III report on Corporate Governance in South Africa and the CRISA since these measures

are recognised as being the most significant contributions in developing SRI in the country

(Viviers & Els, 2017).

The significant impact of the King reports is chiefly because the reports developed South

Africa’s corporate social responsibility environment, which includes sustainable governance

(Kloppers, 2018). The King Committee on Corporate Governance in South Africa (2015),

which is the body that created the King codes, suggests that there are three fundamental

consequences from the King reports which have reorientated South African corporate thinking.

Firstly, the King reports reinforce a drive towards shareholder orientated, inclusive capitalism,

which focuses on “holistic value creation” (King IV, 2015). Secondly, the reports promote

integrated reporting and collective value creation, a concept founded in ESG reporting (King

IV, 2015). Thirdly, and in support of the first two outcomes, the reports mandated a change of

direction towards the creation of long-term sustainable value in capital markets (King IV,

2015). Nonetheless, the impact of the reports becomes clear as the development of SRI in South

Africa is unpacked.

Insofar as South Africa is particularly relevant to the development of Sustainable and

Responsible Investing, an adequate introduction would be the Sullivan Principles (Coffey &

Fryxell, 1991; Kloppers, 2018; Sherwood & Pollard, 2018). As signalled above, South Africa

played a notable role in developing Sustainable and Responsible Investment practices

internationally (Giamporcaro & Viviers, 2014; Kloppers, 2018). Particularly so in the U.S.A.

following the introduction of the Sullivan Principles of 1977 (Heese, 2005; Sherwood &

Pollard, 2018).21 The Sullivan Principles developed as a collection of six principles which

companies and banks in the U.S.A. were encouraged to recognise, should they have business

operations in South Africa (Sullivan, 1984). The principles were aimed at pressuring South

Africa’s apartheid government to implement just and equitable racial policies within the

country’s economy (Sullivan, 1984). Funds that committed to the principles were required to

divest from South African institutions which did not adhere to the Sullivan Principles’

requirements for fair and equal treatment of all employees, amongst other requirements

(Grossman & Sharpe, 1986; Sherwood & Pollard, 2018). The Sullivan Principles had

significant application in the U.S.A. and had a global impact since several companies from the

United Kingdom and Scandinavia also withdrew business from South Africa (Giamporcaro &

Viviers, 2014). In total, more than 100 Multinational Corporations divested from the South

African market until after apartheid (Alexis, 2010; Coffey & Fryxell, 1991; Giamporcaro &

Viviers, 2014).

The implementation of the Sullivan Principles also accounts for one of the first instances of

negative screening in an investment portfolio (Sherwood & Pollard, 2018). From the inception

of the practice, negative screening has been recognised as limiting the integration of stocks in

a portfolio and the accompanying benefits of diversification, both of which are a clear

restriction to portfolio optimisation for investors, considering the advice of Markowitz (1952)

(Grossman & Sharpe, 1986). While negative screening is considered in detail in the following

subchapter (2.4), it is noteworthy to recognise at this stage that the comparison of investment

performance would shortly follow the introduction of the Sullivan Principles. Lashgari and

Gant (1989), for example, find that Sullivan groups of investments outperformed the Dow

Jones Industrial average over the period 1977 to 1983. Interestingly, research regarding the

measurement of SRI fund comparative performance seems to be approximately as old as some

of the funds themselves.

Shortly after South Africa’s first democratic elections during April 1994, the first King report

was issued and titled the King report on Corporate Governance22, or King I (1994). The first

King report served as South Africa’s preliminary domestic report on companies’ non-financial

21 Taking their cue from the United Nations’ Universal Declaration of Human Rights, the Global Sullivan
Principles further developed SRI’s background in 1999 (Alexis, 2010). The principles aimed at directing
multinational companies to subscribe to socially responsible business practices on the global market (Alexis,
2010).
22 The “King report on Corporate Governance” is commonly termed “King I” and is referred to as such in what
follows below (King Committee on Corporate Governance in South Africa, 1994).

and regulatory practices (Foster, 2020; King I, 1994). King I established the acceptable

governance standards for listed companies on the JSE, as well as for South African banks, and

some parastatals (Viviers & Els, 2017). The most significant contribution of King I, for this

research, is that it emphasised that good governance required an integrated approach with wide

considerations, including both social and environmental factors (Foster, 2020, p. 147).

Subsequently, the Reconstruction and Development Programme categorised a framework of

socio-economic policies in response to apartheid (Parliament of the Republic of South Africa,

1994). Collectively, the King I report and the Reconstruction and Development Programme

provide investors with the first set of criteria to consider in their investment analyses which are

not related to financial information (Viviers & Els, 2017).

The South African SRI framework matured further in 2002 with a follow-up King Report, or

King II, and the country hosting a World Summit on Sustainable Development (King II, 2002;

United Nations, 2002). As the name suggests, the summit highlighted the role of sustainable

companies and resolved to develop investment policies to increase and incentivise investments

in cleaner production programmes with greater environmental efficiency (United Nations,

2002). The King II (2002) report included provisions regarding risk management and company

sustainability by linking corporate social responsibility to good governance (Kloppers, 2018).

The King II (2002) report further introduced the triple bottom line concept to corporate

governance by incorporating both environmental and social factors into company

measurements, alongside existing financial metrics (King II, 2002). Insofar as the matter relates

to this research, the King II report focuses on an inclusive reporting approach for business

activities, extending beyond financial performance to environmental and social aspects (King

II, 2002; Kloppers, 2018). King II would become the de facto benchmark for South African

corporate governance and would form part of the listing requirements of companies on the JSE

(Eccles et al., 2008). A number of the requirements set out in King II (2002) are further codified

in the Companies Act, 71 of 2008 (Kloppers, 2018; Viviers & Els, 2017).

Shortly after the introduction of King II, the publication of the Broad-Based Black Economic

Empowerment Act, 53 of 2003 would take place and the Act is also considered a contributing

piece of legislation regarding SRI (Eccles et al., 2008). Act 53 of 2003’s contribution is not

aimed particularly towards Responsible Investment practice, yet the Act provides guidelines to

investors on promoting South African economic empowerment and socio-economic

development (Eccles et al., 2008; Viviers & Els, 2017). Act 53 of 2003 also catalysed the

development of the Financial Sector Charter, which has a noteworthy influence on South

African Responsible Investment (Moyo & Rohan, 2006). The charter provides investors with

guidance on transformation targets in the financial services sector, concerning corporate social

investment, as well as black ownership, procurement and human resources (Moyo & Rohan,

2006; Viviers & Els, 2017).

Later, during May 2004, the JSE introduced the Sustainable and Responsible Investment Index

to serve as a measure for investors to identify companies that had integrated Sustainable and

Responsible Investment principles into their business practices (Heese, 2005). The basis of the

qualifying criteria for the index was modelled on the triple bottom line requirements of King

II and provided a comparative benchmark between socially responsible companies and their

alternatives (Gladysek & Chipeta, 2012; King II, 2002; Viviers & Els, 2017). The availability

of the published information also assisted analysts in considering integrated reports (Herringer

et al., 2009). The greater ESG information on the South African market and the comparative

decrease in its cost had contributed significantly to the factors’ inclusion in investment analysis

and the development of the South African approach to SRI (Viviers et al., 2008).

The fact that the JSE (2021) itself established the index is also particularly notable. In

comparison, the majority of markets have their indexes managed and their listed firms rated by

rating agencies (Sonnenberg & Hamann, 2006). The JSE SRI Index, on the other hand, assesses

participating companies’ performance itself, primarily by using the companies’ sustainability

and integrated reports (Sonnenberg & Hamann, 2006). Given the longstanding bond between

the JSE and the Financial Times Stock Exchange, or FTSE, the JSE SRI Index was an

adaptation of the FTSE4Good Index to the South African market (Sonnenberg & Hamann,

2006).23 However, the JSE SRI Index did not exclude any sectors from its eligibility criteria

and was guided by an advisory committee that revised and directed its methodology for

constituent companies (Sonnenberg & Hamann, 2006). The non-exclusionary approach was

intended to motivate participation in the index (Sonnenberg & Hamann, 2006). Therefore, to

form part of the JSE SRI Index, companies were requested to comply with a list of criteria

based on different ESG related factors, should a company meet the minimum requirements of

each field, then the company would be ranked among other constituents (Du Toit & Lekoloane,

2018). Utilising the FTSE Russel ESG rating methodology, the FTSE/JSE Responsible

Investment Index replaced the JSE SRI Index in 2015 (JSE, 2021). The revised index instituted

23 Hereinafter the Financial Times Stock Exchange is referred to by the acronym “FTSE”.

a set of minimum requirements for listing which were revised in 2018 to form the current JSE

Responsible Investment Index (JSE, 2021).

Globally, the United Nations launched the Environmental Programme Finance Initiative

Report in 2004, which defined the phrase “Environmental, Social, Corporate Governance

analysis” (Gilbert, 2010; UNEP-FI, 2004). Shortly thereafter in April 2006, the United Nations’

Environmental Programme Finance Initiative, or UNEP-FI, and Global Compact collectively

established the UN-PRI (Gilbert, 2010; PRI Association, 2020; UNEP-FI, 2020). As discussed

briefly in the first chapter, the six principles of the UN-PRI were developed by investor groups,

governmental organisations, and representatives of civil society following the United Nations’

Secretary-General’s call for the creation of a sustainable financial system (PRI Association,

2020). Institutions that become signatories of the UN-PRI are required to adopt ESG issues

into their investment approaches and support sustainable finance (PRI Association, 2020). The

PRI’s contribution is particularly significant as it developed a global foundation and forum for

initial consensus on best practice, collaborative action and institutional engagement (Louche et

al., 2015). The UN-PRI acted as a consolidating force towards a standardised definition of

Responsible Investment and crucially assisted investors by regularising ESG characteristics in

investment analysis (Louche et al., 2015; PRI Association, 2020). The UN-PRI is further

detailed in the following subsection (2.3.2) followed by the subsequent King reports.

Subchapter 2.4 then considers the application of ESG factors in contemporary investment

practice.

2.3.2. Subsequent developments following the introduction of the UN-PRI

South Africa’s GEPF (2010) was one of the first 60 UN-PRI (2020) signatories in 2006. In

contrast, the total number of signatory funds extended beyond 3000 in 2020 (PRI Association,

2020). For South Africa, the GEPF’s support is particularly important as it is the largest

institutional investor on the African continent (Giamporcaro & Viviers, 2014; Wildsmith,

2006).24 After becoming a signatory, the GEPF (2010) also established the South African PRI

network. The South African PRI network promoted the PRI regionally and contributed towards

the creation of uniform ESG policies in the South African investment environment – most

notably thereof the CRISA (GEPF, 2010; Locke, 2019). Given the GEPF’s significant

holdings, the fund weighed in to have reforms within the investment environment (Locke,

24 A number of other South African Pension Funds have followed the lead of the GEPF and require asset
managers to be PRI signatories before allowing any engagement (Locke, 2019). During the first half of 2020,
global PRI signatories increased by 28% (CFA Institute, 2020, p. 3).

2019; Viviers & Els, 2017). The efforts led to 19 South African investment managers becoming

signatories of the PRI in 2006 and numbers have more than tripled subsequently to 60 South

African signatories at the beginning of the second quarter of 2021 (Giamporcaro, 2011; PRI

Association, 2021b).

Viviers and Els (2017) posit that alongside the King reports, the PRI has had the most

significant impact on the South African SRI environment. The PRI has had similar international

success and more than 500 signatories notably joined the PRI during 2018 (Rust, 2019). The

King III report, or the 2009 King Report on Corporate Governance for South Africa, is the

successor and necessary development from the second report’s recommendations (King III,

2009; Kloppers, 2018). As with components of the second report, the JSE mandated that listed

companies comply with recommendations of the third King (2009) report, among them the

publishing of detailed ESG factors as part of a company’s integrated reporting requirements

(Solomon & Maroun, 2012). The requirements led to significant increases in the value and

amount of reporting on ESG related matters of JSE listed companies (Solomon & Maroun,

2012). The greater availability of SRI information also assisted investors by decreasing the

challenge of sourcing ESG information from companies, laying a foundation for more uniform

and understandable ESG reporting (Herringer et al., 2009). Therefore, 2009 forms the year of

commencement for this study’s empirical portion due to the contributions of additional listing

requirements by the JSE in standardising ESG reporting, and the increased availability of ESG

data. The provision ensures that adequate data on available funds are incorporated from the

commencement of this research’s analysis and onwards.

The third King (2009) report further led to the development of the Code for Responsible

Investing in South Africa, or CRISA, which is aimed at assisting investors in analysing

investments that promote sustainable development (Foster, 2020; Giamporcaro & Viviers,

2014; King III, 2009; Locke, 2019).25 The CRISA is modelled on the UN-PRI and is also

backed by the GEPF (CRIII, 2011; Giamporcaro & Viviers, 2014; Locke, 2019; Moikwatlhai

et al., 2019). At the time of the CRISA’s launch, 30 other South African institutions were

already signatories of the PRI (Locke, 2019).

The CRISA would support investors by detailing how to analyse investment strategies that

promoted ESG factors (Foster, 2020). The CRISA is founded on a set of five principles which

are articulated further into 17 practical recommendations (CRIII, 2011). Expressing ESG factor

25 For an analysis of each of the CRISA Principles, see Locke (2019).

importance, the foremost principle requires that an “institutional investor should incorporate

sustainability considerations, including ESG, into its investment analysis and investment

activities” (CRIII, 2011, p. 10). Collectively, the principles attempt to shift investor attention

away from short-term profit-seeking and increase the role of ESG in investment analysis

(Foster, 2020; Locke, 2019). Even so, the inclusion of ESG factors within investment analysis

does not imply a shift away from returns towards a philanthropic role, but rather a movement

“From short-term capital markets to long-term, sustainable capital markets” (Eccles et al.,

2008; King IV, 2015).

While the CRISA parallels the approach of King III, CRISA is non-binding and does not form

part of the reporting requirements mandated by the JSE’s application of the King III report

(Foster, 2020, p. 150). The CRISA does nonetheless impact South African investment law,

possibly the most notable amendment is to Section 28 the Pension Funds Act, 24 of 1956.26

Section 28(2)(c)(ix) of the Pension Funds Act has been amended to require a fund’s board to

“consider any factor which may materially affect the sustainable long-term performance of the

asset including but not limited to, those of an environmental, social and governance nature”.

Mutatis mutandis, the recognition of ESG factors within the Pension Funds Act reflects the

requirements set out in principle one of the CRISA (Foster, 2020; Moikwatlhai et al., 2019).

Additional calls for further legislation encouraging the use of SRI by investment funds also

persists, yet no further legislative guidance has been published at the time of this research

(Herringer et al., 2009). Nevertheless, by the inclusions made to Section 28 of the Pension

Funds Act, South Africa’s retirement fund regulation remains at the forefront of encouraging

ESG investing (Geral, 2019). The weight of the requirement set out within Section 28 of the

Pension Funds Act has also recently been increased as the South African Financial Services

Conduct Authority, or FSCA (2019), which has published a guidance note requiring pension

funds that do not apply ESG factors to either rectify their approach or provide reasons for the

lack of ESG factors’ inclusion.

The King IV (2015) report, or the fourth King report on Corporate Governance in South Africa

also necessitated a noteworthy approach towards compliance. The fourth report extends the

scope of King III and incorporates more recent international developments (King IV, 2015).

While King III focuses formally on for-profit companies, King IV (2015) harmonises the

principles of King III and extends the principles’ application to non-profit seeking companies

26 Hereinafter, the Pension Funds Act, 24 of 1956 is referred to as the “Pension Funds Act”.

(Esser & Delport, 2018). The streamlined approach of King IV, in turn, also supports a shift

towards an “apply and explain” approach, further promoting a movement away from mere

formal compliance. King IV is designed to complement the CRISA and makes direct reference

to the CRISA’s principles to ensure a cohesive framework for institutional investors (King IV,

2015). For Pension Funds, King IV further provides sector-specific guidance in concert with

the Pension Funds Act (King IV, 2015).

However, despite the extensive global and local frameworks that this research has discussed

above, SRI has some theoretical and conceptual concerns which remain unanswered (Capelle‐

Blancard & Monjon, 2012). Cadman (2011), for example, identifies three key conceptual

challenges facing SRI globally. Firstly, there exists a lack of an overall analytical framework

to evaluate institutional quality, leading to divergence in approaches and ratings (Cadman,

2011). Secondly, the lack of a standardised approach from which stakeholders can contribute

towards company governance further complicates comparative rating allocations (Cadman,

2011). Finally, a divergence exists between internal and external interest groups’ participation

in SRI decision-making and their weigh-up is yet to be formalised (Cadman, 2011).

For South Africa, initial challenges in incorporating ESG criteria include the affordability of

ratings, the lack of relevant SRI skills in the country and fewer SRI asset classes and funds

(Heese, 2005; Herringer et al., 2009; Viviers, 2007). Collectively these challenges give rise to

lesser opportunities in SRI within the country and inhibit the potential growth of SRI

approaches (Heese, 2005; Herringer et al., 2009; Viviers, 2007). Further, Herringer (2009)

recognises similar challenges in South Africa to that of its global counterparts including the

lack of an overarching definition of SRI or an adequate benchmark for its measurement. These

challenges are further developed in the following subchapter (2.4). As a result of inadequate

benchmarks, Giamporcaro (2011) suggests that institutions are unwilling to commodify

environmental aspects into the local investment market. Additionally, short-term performance

benchmarks have been identified as inadequately recognising ESG aspects and undermining

long-term financial performance (Moikwatlhai et al., 2019). Empirically, the unwillingness of

shareholders to invest long-term in highly rated ESG companies is observed by Moikwatlhai

et al. (2019), who suggests that the outcomes of the PRI and the CRISA are yet to be fully

realised.

In summary, this subchapter (2.3) develops the South African approach to SRI led by the King

Reports on Corporate Governance in South Africa, the CRISA and the UN-PRI (King IV, 2015,

p. 33; Viviers & Els, 2017). Following the fall of Apartheid, the first King report sets the

foundation for corporate governance which King II develops by introducing the triple bottom

line and integrated reporting (Esser & Delport, 2018; King I, 1994; King II, 2002).

Subsequently, King III refines the work of King II and sets out the ESG reporting requirements

of South African companies (King III, 2009; Solomon & Maroun, 2012). Due to King III’s

importance in establishing ESG reporting, i