Our 2024 Stewardship Report marks the 10th edition that Allan Gray has published for our clients. However, we have had a strong focus on exercising our stewardship responsibilities on behalf of our clients since our inception in 1973. We have long held the view that a company that does not operate in a sustainable manner undermines its own profitability over time. This long-term mindset sits at the heart of our investment philosophy.
Our annual Stewardship Report was introduced to share our approach to environmental, social and governance (ESG) integration and shareholder action and provide examples of our activities and updates on year-on-year developments. We also use the opportunity to reflect on the broader context in which we operate and update clients on noteworthy changes and concerns.
The global context
More than 50% of the global population experienced an election year in 2024 – the highest percentage in a single year in modern history. In a tale as old as time, voter frustration over several years of high inflation and cost-of-living crises, accompanied by shifts in sentiment towards perceived political elites, was reflected in big upsets at the ballot box. Portfolio manager Thalia Petousis unpacked the great election year in her article aptly titled “The bonfire of the incumbents”. Most notably, Donald Trump’s recent return to the White House is likely to lead to a greater US-China power struggle and a pivot in US energy and climate policies (among other disruptions, some of which are already underway).
The growing dissatisfaction with inflation and cost-of-living increases poses an interesting conundrum. Over the past few years, sentiment towards green policies (particularly those that advance the energy transition) has been favourable in the developed world, which has had a ripple effect into the developing world – think of South Africa aiming to escalate our carbon tax, in large part due to the EU planning to implement its carbon border adjustment mechanism. While the long-term implications are debatable, many of these policies are inherently inflationary in the short term. This is because they price in the “negative externalities” of economic activities, particularly greenhouse gas emissions, that previously went unpriced. Taxes are invariably passed on to consumers, and consumers vote political parties in, or out. The EU saw months of farmer protests in 2024 over growing environmental regulations increasing the cost of business, among other grievances. Might voter sentiment shift further away from “green parties” as the rubber hits the road? As we have often said, the ESG pillars do not exist in silos; there are many moving parts, interrelationships and trade-offs – both real and perceived.
As social concerns climb back up the political agenda, artificial intelligence (AI) and the fundamental restructuring of our economies that it may bring about is the elephant in the room. In 2024, tens of thousands of US dockworkers went on strike, with a key grievance being that increasing automation at ports would lead to job losses. They were seeking contractual protections against this. The strike was the largest stoppage of its kind in nearly half a century, and we expect it may be a foreshadowing of significant labour unrest in other sectors as AI threatens to alter employment as we know it. Also worth noting is that Geoffrey Hinton – known as the “godfather of AI” and co-awarded the 2024 Nobel Prize in Physics for his foundational AI work – famously resigned from Google in 2023 so that he could share his concerns more freely about the risks posed by unconstrained AI development. AI is in many ways a positive breakthrough for society, but the waters are uncharted, and the risks are high, too. This highlights another key point – that a company or sector’s impact is seldom binary, i.e. “good” or “bad”. Usually, there are positive and negative impacts and mitigating factors to weigh up, and we try to evaluate these as holistically as possible, recognising that we live in an imperfect world.
For this reason, we have been vocal about oversimplifications in the ESG movement, including in the introduction to our 2022 Stewardship Report. For a long time, energy and defence stocks were labelled “bad” and ESG-labelled funds typically tilted towards technology stocks (often due to their low direct carbon footprint). But the latter sector is not without significant concerns: the debate over freedom of speech versus censorship, the spread of hate speech and extremism, the rapid proliferation of misinformation, antitrust issues, child exploitation risks, and the impact of the smartphone era on childhood. Social psychologist Jonathan Haidt sounds the alarm on the latter in his 2024 book, The Anxious Generation: How the Great Rewiring of Childhood Is Causing an Epidemic of Mental Illness, highlighting how smartphones have made children sedentary, anxious and depressed. On the other hand, in January 2025, a NATO senior official heavily criticised Western rating agencies and pension funds for being “stupid” in shunning defence investments, arguing that more holistic thinking is needed versus such binary stances in the wake of Russia’s invasion of Ukraine and heightening geopolitical tensions. Five to 10 years ago, nuclear power was considered a swear word in many regions. Today, sentiment has significantly changed to recognise its superiority as a baseload power source for a decarbonising world. The “conventional wisdoms” are certainly being challenged, as we expected they would be, given the complexity and fluidity of the issues we face.
In an ever-changing world, our investment philosophy, and within this, our approach towards ESG integration, remains steadfast (albeit striving towards improvements in our processes and the quality of research year-on-year). As we have discussed in prior stewardship reports, we have avoided the ESG fads and focused on the fundamentals – an approach that will endure in the face of ever-shifting sentiment. For example, we avoided joining a flurry of external collaborative ESG initiatives where we had concerns about value-add and potential changes in the commitments required over time. Subsequently, we have seen a number of asset managers backtracking on their memberships as challenges come to the fore.
The local context
Closer to home, we are concerned about some of the potentially stringent ESG and sustainability-related regulation on the table for South Africa. This is not because we are opposed to the goals; rather, we believe there are more constructive ways to work towards them. The experience playing out in the EU – deindustrialisation and regulatory burdens weighing on business – should serve as an example of the danger of poorly considered or excess regulation, particularly given South Africa’s stagnant economy over the last decade.
South Africa’s 29 May 2024 election outcome – which led to the formation of a government of national unity – ushered in a renewed sense of hope for South Africans after an exceptionally difficult few years. This was echoed by a sharp rally in “SA Inc” stocks. For the most part, the rally has been driven more by sentiment. For investment gains to endure, it is crucial that progress is made in addressing structural inhibitors to growth in the country. Allan Gray has contributed towards funding “Agenda 2024” of the Centre for Development and Enterprise, a respected policy think tank, which identifies urgent priority areas on which the new government should focus and makes practical, actionable recommendations within each. We hope this will make a positive contribution towards a better future for South Africans, and a better macroenvironment for South African-focused companies, which ultimately benefits shareholders, including our clients. That said, we continue to run a diversified portfolio for optimal risk management.
Our approach to ESG
Over time, our ESG analysts have supported the Investment team with thematic research into electric vehicles, renewable energy roll-out, nuclear energy, mining safety benchmarking, political donations by listed companies, and many more topics that provide useful context for, and may influence, our investment decisions. We continue to believe that this type of research, together with company-specific deep dives, will add more value for our clients over the long term than a tick-box or scorecard approach to ESG evaluation. We focus on factors that are most material to business sustainability and the investment case, and our engagements on actions that are likely to shift the needle on client outcomes.
Two thought pieces in this year’s report highlight recent examples of this research. Firstly, our governance analyst draws attention to the growing gap between financial statements and remuneration reports, given our ongoing focus on executive remuneration schemes as a key lever to align management’s interests with those of shareholders such as our clients. Secondly, our environmental and social analysts provide an overview of critical water risks in South Africa.
As I wrote in our 2023 Stewardship Report, responsible investing and being a responsible corporate citizen can mean different things to different people, but investment management is a business inherently built on trust. An asset manager needs to act and be seen to act with the highest integrity and standard of ethics. We are committed to this, not only in how we engage with the companies we invest in on our clients’ behalf, but also in how we conduct ourselves as a business. I believe Allan Gray can continue to make a positive contribution to our clients, our industry, the economy and broader society.
For more information about how we consider ESG factors as part of our investment process, please consult our latest Stewardship Report.