Old Mutual Investment Group (OMIG) has launched the first MSCI equity ESG index fund in South Africa, the Old Mutual Responsible Investment Equity Index Fund.

The Fund, which applies the MSCI ESG Research methodology to the Fund’s index construction, invests in the FTSE/JSE Shareholder Weighted All Share Index universe (SWIX), with a tilt towards companies with strong sustainability profiles.

With ESG indexation investing gaining significant traction globally, South Africa has started to see the rise of this same trend locally, spearheaded by the recent launch of the JSE and S&P ESG indices in South Africa late last year.

The Old Mutual Responsible Investment Equity Index Fund is the first of its kind in SA to invest in a local universe with an MSCI ESG screening of the 118 stocks that are researched within the FTSE/JSE Shareholder Weighted All Share Index universe.

OMIG said that the Fund has been designed for investors who are seeking a predominately market capitalisation exposure, but with a sustainability tilt.

Jon Duncan, Head of Sustainability Research and Engagement at Old Mutual Investment Group, said that this innovation in investment indexation provides investors access to an index that integrates ESG (environmental, social and governance) considerations into their SA equity exposure.

“The application of ESG principles is important in assessing the long-term sustainability of companies in which to invest,” he said.

“Through this approach, we can offer a fully responsible investment option which seeks to avoid companies that may have long-term hidden ESG costs,” he added.

“More and more of our clients are starting to replace a ‘shareholder’ mind-set with that of a ‘stakeholder’ approach, when consider the future of their investments. This Fund aims to assist in the evolution of this kind of thinking as we go beyond just asking, ‘how much return?’ but rather ‘how sustainable is the return?’”

The Fund will be managed by Old Mutual Investment Group’s Customised Solutions boutique, the largest manager of index funds, with R70bn of passive assets under management, and will be seeded with capital from Momentum.

Grant Watson, Co-head of the Customised Solutions boutique, said that index-tracking investment managers have had limited scope to incorporate ESG factors into the investment process historically.

“This is because the investment universe is determined by the indices we track, which have generally been pure market capitalisation-weighted indices that capture broad market returns,” he said.

“Our Fund takes an existing local universe and applies the superior ESG screening methodology of the MSCI ESG Impact Monitor Screening Tool, which continuously monitors all companies and assesses whether they adhere to the internationally responsible investment norms,” he said.

“A breach of these norms or principles would typically exclude the company from the Index,” he added.

According to Johnson, the Fund also applies a forward looking assessment, the MSCI ESG Intangible Value Assessment Screening Tool, which identifies industry-specific ESG risks and opportunities and thematic changes in the company’s risk landscape.