Sustainable Investing (ESG) in the African Context

For decades, the investment mantra in South Africa was simple: “Show me the returns.” If a mining company was digging up gold or a retailer was selling clothes, we didn’t ask too many questions about how they did it. As long as the dividend check cleared and the share price went up, the board was doing its job.

But the winds in Sandton are shifting.

We are witnessing a fundamental change in how capital is allocated. It is no longer enough to just make a profit; investors are increasingly asking how that profit is made. This is the rise of Sustainable Investing (ESG).

There is a cynicism in our local market that dismisses ESG (Environmental, Social, and Governance) as “woke capitalism” or a luxury for wealthy Europeans. This is a dangerous misconception. In the African context, ESG is not about hugging trees; it is about risk management. It is about survival.

If a mine poisons the local water supply (Environment), the community will shut it down (Social). If a CEO cooks the books (Governance), the share price will crash to zero—just ask anyone who held Steinhoff shares.

In this deep dive, we will explore what Sustainable Investing (ESG) actually means for a South African investor. We will strip away the marketing buzzwords and look at the raw data. Does investing with a conscience cost you money, or is it actually the smartest way to protect your portfolio in a volatile emerging market?

To understand how this strategy fits into a broader wealth plan, I strongly recommend you read our foundational pillar: The Ultimate Guide to Investing in South Africa.

Defining the Acronym: It’s More Than Just Carbon

To master Sustainable Investing (ESG), you need to understand that the three letters carry different weights depending on where you are in the world. In Europe, the “E” (Environment) dominates. In South Africa, the “S” (Social) and “G” (Governance) are often the biggest drivers of risk and return.

E is for Environment (and Energy Security)

In the global north, this is about climate change and melting ice caps. In South Africa, it is far more immediate. It is about water scarcity and energy security.

• The Risk: Companies that rely heavily on the national grid or water supply are vulnerable.
• The Opportunity: Companies that are investing in their own solar capacity or water recycling are not just “green”—they are operationally resilient. When Eskom load sheds, the “Green” company keeps producing. The “Dirty” company stops. Therefore, the “Green” company is a better investment, purely on financial metrics.

S is for Social (The African Imperative)

This is the most critical factor in our context. South Africa is the most unequal society in the world.

• The Risk: A company that ignores its community, pays starvation wages, or has poor labor relations is sitting on a powder keg. Strikes, unrest, and boycotts destroy shareholder value overnight.
• The Opportunity: Companies with strong B-BBEE ratings, fair wage policies, and community development programs enjoy a “social license to operate.” They have a stable workforce and a loyal customer base.

G is for Governance (The Steinhoff Shield)

If you want to know why Governance matters, look at the JSE’s history of corporate scandals.

• The Risk: Lack of board independence, obscure auditing practices, and CEOs with too much power.
• The Reality: Sustainable Investing (ESG) puts a spotlight on the boardroom. It demands transparency. It asks: “Is the board diverse? Are the auditors independent? Is executive pay linked to reality?” Strong governance is your best defense against fraud.

The Myth of Lower Returns

The biggest barrier to entry for Sustainable Investing (ESG) is the belief that you have to sacrifice profit for principles. “Johan, I want to make money, not save the world.”

I hear this weekly. But the data suggests otherwise. Numerous studies, including data from the JSE’s own Responsible Investment Index, show that companies with high ESG scores often outperform their peers over the long term.

Why? Because ESG is a proxy for quality. A company that cares about its carbon footprint usually cares about its operational efficiency. A company that treats its staff well has lower turnover and higher productivity. A company with strict governance doesn’t get fined by regulators.

When you invest in “Sustainability,” you are often just investing in “Quality Management.” And quality management tends to produce superior shareholder returns.

The “Just Transition”: The African Nuance

We cannot copy-paste European ESG standards onto Africa. This is where the concept of the “Just Transition” becomes vital for anyone analyzing Sustainable Investing (ESG) in our market.

Europe can afford to ban coal tomorrow. South Africa cannot. Mpumalanga’s economy is built on coal mining. If we shut down the mines overnight to satisfy a “Green” index in London, we create mass unemployment and social collapse. That would score high on “E” but fail catastrophically on “S”.

The African Strategy: True ESG in Africa supports companies that are transitioning responsibly.

• We don’t necessarily divest from a mining company; we invest in the mining company that has a clear, funded plan to move towards renewables while retraining its workers.
• We support banks that are financing renewable energy projects, even if they still have some fossil fuel exposure on their books.

As an investor, you need to look for nuance. A blanket ban on “dirty” industries doesn’t work here. We need capital to help those industries clean up.

How to Invest: Practical Instruments on the JSE

So, how do you actually put money into Sustainable Investing (ESG)? You don’t have to read thousands of sustainability reports. The market has created vehicles for you.

1. The JSE Responsible Investment Index

Launched in 2015, this index tracks companies that meet specific ESG criteria. It filters out the noise. While you cannot buy the index directly, many fund managers use it as a benchmark.

2. Satrix Inclusion and Diversity ETF (STXID)

This is a fascinating product for the “S” and “G” factors.

• The Strategy: It ranks the top 100 companies on the JSE based on four pillars of diversity and inclusion (Gender, Race, Physical Ability, and Board Independence).
• The Logic: Diverse teams make better decisions. Companies that embrace transformation are better aligned with the South African consumer base.
• Performance: Historically, this ETF has competed strongly with the traditional Top 40, proving that diversity is a competitive advantage.

3. Satrix Infrastructure ETF (STXINF)

While not labeled purely “ESG,” infrastructure is the backbone of social development.

• The Impact: Investing in water, logistics, and renewable energy projects. This addresses the critical infrastructure gap in South Africa.

4. Green Bonds

For the more advanced investor or those in Unit Trusts, “Green Bonds” are debt instruments issued specifically to fund environmental projects.

• Example: A bank issues a Green Bond to raise capital to build a solar farm. As an investor, you lend them the money, earn interest, and know exactly where your capital is going.

The Danger of Greenwashing

As Sustainable Investing (ESG) becomes popular, marketing departments are working overtime. This leads to “Greenwashing”—companies pretending to be sustainable when they are not.

How to spot Greenwashing:

1. Vague Buzzwords: If a company report is full of words like “eco-friendly” and “green future” but contains no data, be suspicious.
2. The “Future” Trap: Watch out for companies that promise “Net Zero by 2050” but have no targets for 2025 or 2030. It is easy to make promises for 30 years from now when the current CEO will be retired.
3. The Single Issue Highlight: A company might highlight that they stopped using plastic straws in the canteen, while ignoring that their factory is dumping toxic sludge into the Vaal River. Look at the whole picture.

Governance Failures: The Cost of Ignoring ESG

Let’s look at a painful history lesson to prove the value of the “G” in Sustainable Investing (ESG).

Steinhoff International was a darling of the JSE. It was a “must-have” in every pension fund. But if you looked through an ESG lens, the red flags were there.

• Governance: The board was comprised of cronies close to the CEO. There were complex, opaque tax structures.
• The Result: The biggest corporate collapse in South African history. Billions of Rands in pension money evaporated.

Investors who filtered for Governance would have been underweight or zero-weight Steinhoff. They didn’t avoid the crash because they were psychic; they avoided it because they recognized that bad governance is a ticking time bomb.

The Future: ESG as the New Normal

We are moving toward a world where Sustainable Investing (ESG) won’t be a separate category. It will just be “Investing.”

Regulators are tightening the screws.

• The FSCA: Is drafting stricter rules on how funds label themselves “Sustainability” funds to prevent greenwashing.
• Regulation 28: Now explicitly requires pension fund trustees to consider ESG factors when making asset allocation decisions.

This means that the massive flows of institutional capital (your pension money) are being forced to look for ESG-compliant assets. As an individual investor, buying these assets now puts you ahead of that wave of capital.

A Balanced Portfolio Approach

I am not suggesting you sell everything and only buy wind farms. Diversification remains the golden rule.

Johan’s Recommended Approach:

1. Core Portfolio: Keep your broad market exposure (like the Satrix Top 40 or MSCI World). These indices naturally include many high-ESG companies because big companies are under the most scrutiny.
2. The ESG Tilt: Allocate 10% to 20% of your portfolio specifically to high-impact funds like the Satrix Inclusion and Diversity ETF or specific renewable energy stocks.
3. Active Ownership: If you own shares directly, vote. As a shareholder, you have a right to vote at AGMs. Vote against excessive executive pay. Vote for climate resolutions.

Voting with Your Wallet

Every time you buy a share, you are casting a vote for the type of economy you want.

In South Africa, where we face profound challenges—unemployment, inequality, and an energy crisis—capital has the power to destroy or to heal. Sustainable Investing (ESG) is simply the realization that capital thrives best in a healthy society.

You do not have to choose between your retirement and your conscience. In the modern African economy, they are on the same side of the table. By filtering for Environmental resilience, Social stability, and Good Governance, you are building a portfolio that is robust enough to survive the next 20 years.

The “conscience” premium is a myth. The “risk” discount is real. Invest accordingly.

Your Next Step: Log into your brokerage account and look at the “Satrix Inclusion and Diversity ETF” (STXID). Compare its 5-year performance chart against the Top 40. The results might surprise you and offer a perfect entry point for your ESG journey.