“Integrating ESG factors in investment decisions by mutual fund managers: a

case of selected Johannesburg Stock Exchange-listed companies”

Michael Bamidele Fakoya https://orcid.org/0000-0002-8763-0616

AUTHORS https://publons.com/researcher/2040164/michael-bamidele-mb-fakoya/
Segopotje Evonia Malatji

Michael Bamidele Fakoya and Segopotje Evonia Malatji (2020). Integrating ESG
factors in investment decisions by mutual fund managers: a case of selected
ARTICLE INFO
Johannesburg Stock Exchange-listed companies. Investment Management and
Financial Innovations, 17(4), 258-270. doi:10.21511/imfi.17(4).2020.23

DOI http://dx.doi.org/10.21511/imfi.17(4).2020.23

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Investment Management and Financial Innovations, Volume 17, Issue 4, 2020

Michael Bamidele Fakoya (South Africa), Segopotje Evonia Malatji (South Africa)

Integrating ESG factors

BUSINESS PERSPECTIVES in investment decisions
LLC “СPС “Business Perspectives”
Hryhorii Skovoroda lane, 10,
Sumy, 40022, Ukraine
by mutual fund managers:
www.businessperspectives.org
a case of selected
Johannesburg Stock
Exchange-listed companies
Abstract
This paper examines whether mutual fund managers incorporate environmental, so-
cial, and governance (ESG) factors when deciding which sector to invest on behalf of
their trustees. In doing this, the top 20 South African mutual fund companies (asset
managers) listed on the Johannesburg Stock Exchange (JSE) were selected. The paper
identified the top 30 JSE listed companies (in the large industrial, equipment, and ma-
chinery sectors, excluding unlisted and service-oriented companies) where trustees’
funds were invested (with a total of 28 companies between 2007 and 2017) from the
mutual fund companies’ Equity Fund Fact Sheets 2017 (representing recent invest-
ment focus). ESG data were collected from the integrated and sustainability reports
at the sampled companies’ websites, and financial data were sourced from the IRESS
database. This study adopted the panel data analysis. The results show an insignificant
Received on: 22nd of October, 2020 negative relationship between the ESG proxies (water usage, employee health and safe-
Accepted on: 24th of November. 2020 ty cost [number of work-related fatalities], percentage of women on corporate board)
Published on: 7th of December, 2020 and return on equity (ROE). This means that the sampled companies disregard the
United Nations Principle of Responsible Investment (UN PRI) guideline, suggesting
© Michael Bamidele Fakoya, Segopotje that asset managers focus on increasing returns on shareholders’ investment without
Evonia Malatji, 2020 considering ESG issues. The paper concludes that the disregard for responsible invest-
ment guidelines does not encourage companies to improve their unsustainable busi-
ness practices.
Michael Bamidele Fakoya, Ph.D.,
Research Manager, Management
and Law Faculty, Africa Centre
Keywords ESG factors, mutual funds, responsible investment,
for Sustainability Accounting and sustainable value creation, corporate governance, South
Management (ACSAM), School of Africa
Accountancy, University of Limpopo,
South Africa. (Corresponding author) JEL Classification Q51, Q56
Segopotje Evonia Malatji, Master
of Commerce, Senior Lecturer,
Management and Law Faculty, Africa
INTRODUCTION
Centre for Sustainability Accounting
and Management (ACSAM), School of In the face of the current global business climate, non-adherence to
Accountancy, University of Limpopo,
South Africa.
responsible investment practices could pose risks of both reputational
damage and consumer backlash, thereby exposing businesses to dis-
ruptions and spiraling costs. By integrating both financial and ESG
factors in investment decisions contribute to sustainable business
practices (Stankevičienė & Čepulytė, 2014). Companies seeking to
achieve sustainable business practices cannot succeed by focusing on
individual aspects of the ESG factors; instead, they need to integrate
This is an Open Access article, them to attain corporate strategic objectives (Korditabar, 2015; Escrig-
distributed under the terms of the Omedo et al., 2017). Likewise, companies seeking long-term sustain-
Creative Commons Attribution 4.0
International license, which permits ability should consider ways of integrating these non-financial (ESG
unrestricted re-use, distribution, and factors) into their core business decisions. By integrating ESG issues in
reproduction in any medium, provided
the original work is properly cited. investment decisions, companies are more conscious of the long-term
Conflict of interest statement: impact of their operations on the environment and society (Husted &
Author(s) reported no conflict of interest Milton de Sousa-Filho, 2017; Zulkafli et al., 2017). The principle of re-

258 http://dx.doi.org/10.21511/imfi.17(4).2020.23
 Investment Management and Financial Innovations, Volume 17, Issue 4, 2020

sponsible investment advocates that companies aiming to be sustainable should focus beyond finan-
cial factors in making investment decisions. Responsible investment entails the inclusion of non-fi-
nancial factors (ESG) into the choice of investment opportunities (Stankevičienė & Čepulytė, 2014).
In being consistent with the triple bottom line (TBL) theory, the inclusion of ESG factors will pro-
mote sustainable business practices (Elkington, 1994; Korditabar, 2015). Likewise, Pilaj (2017) reiter-
ates that responsible investments explicitly contribute to companies’ sustainable business practices.
Disregarding the United Nations Principle of Responsible Investment (UN PRI) guideline suggests
that asset managers focus on increasing returns on shareholders’ investment without considering
ESG issues. However, most mutual fund managers do not consider environmental, social, and gov-
ernance (ESG) issues in making investment decisions. Regarding environmental issues, Korditabar
(2015) contends that companies should be committed to using water and other natural resources effi-
ciently and sustainably because unsustainable use of water might affect future generations’ ability to
meet their water needs. Likewise, companies adhering to sustainable business practices will attract
and keep good employees (Auer, 2016). When a company invests responsibly in employees’ health and
safety, such employees are likely to feel safe and secure at work. On the other hand, employees may
feel unsafe when management focuses less on improving sustainable business practices. Therefore,
it is vital to empirically examine the impact of conscious investments (Rao & Tilt, 2016) in employ-
ees’ health and safety costs and sustainable practices in board composition, such as the percentage
of women on corporate boards on the financial performance of companies. Therefore, it is crucial
to examine whether the profit motive drives mutual fund managers’ investment decisions over and
above social and environmental considerations. This study also measures companies’ financial per-
formance of investee companies using the return on equity (ROE).

Hence, this study examines whether mutual fund managers integrate ESG issues when making invest-
ment decisions on behalf of their trustees.

The study consists of the following sections: literature review, description of the study methodology, re-
sults and discussion, and conclusion.

1. LITERATURE REVIEW structures in companies (Bojan, 2007; O’Connor,

AND HYPOTHESES 2007; Ekins et al., 2008). Here, this study focus-
es on the composition of the board of directors
as part of companies’ legal structures regarding
1.1. The four-capital sustainability the percentage of females on corporate boards.
model Natural capital includes mainly environmental
factors such as water, timber, energy, and min-
The four-capital sustainability model consists eral resources (Bojan, 2007; O’Connor, 2007;
of manufactured, human, social, and natural Ekins et al., 2008). This study uses water as a
capital (Bojan, 2007; O’Connor, 2007; Ekins et proxy for environmental practices because of
al., 2008). The manufactured capital refers to its scarcity in South Africa. It is essential to ex-
using the company’s physical assets to generate amine whether companies where mutual fund
desired profits, also referred to as economic sus- managers invest trustee funds have measures to
tainability (Bojan, 2007; O’Connor, 2007; Ekins use water sustainably. The four-capital model
et al., 2008). Human capital entails the health encourages companies to integrate the manu-
and well-being of general society (Bojan, 2007; factured, human, social, and natural capital in
O’Connor, 2007; Ekins et al., 2008), with this their operations to ensure sustainable business
paper focusing on employees’ health and safety practices (Bojan, 2007; O’Connor, 2007; Ekins
issues in arriving at investment decisions. Social et al., 2008). Thus, the four-capital model is
capital includes human well-being, the social adopted in this study because it covers econom-
network that supports social, political, and legal ic, environmental, human, and social factors.

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Investment Management and Financial Innovations, Volume 17, Issue 4, 2020

1.2. Earlier studies on board of directors and financial performance

has attracted researchers’ interest in recent years.
The influence of sustainable business practices on However, results are still contradictory and in-
financial performance has received growing atten- conclusive. Studies have found positive, nega-
tion in research, although the results are inconclu- tive, or even no relationship. Some studies found
sive. The study by Alshehhi, Nobanee, and Khare a positive relationship between women on the
(2018) confirmed the inconclusiveness of research board and financial performance (Jin, 2014; Liu et
results by reviewing 132 different journal articles al., 2014; Low et al., 2015; Mans-Kemp & Viviers,
published between 2002 and 2017 to determine 2015). Other studies found a negative relation-
the relationship between sustainability practices ship between women on the board and financial
and company financial performance. The results performance (Ahern & Dittmarr, 2012; Darmadi,
indicated that 78% of the 132 journal articles re- 2013). Lückerath-Rovers (2013) examined the rela-
ported a positive relationship, 7% reported no im- tionship between gender diversified boards and fi-
pact, 6% reported positive and negative relation- nancial performance, and the results thereof were
ships, 2% reported no impact, and 2% reported inconclusive. Previous studies were in countries
mixed results of positive, negative, and no impact. such as Asia (Low et al., 2015), Australia (Chapple
Earlier studies found a positive relationship be- & Humphrey, 2014), China (Liu et al., 2014),
tween environmental sustainability and financial Norway (Ahern & Dittmarr, 2012), and Indonesia
performance (Albertini, 2013; Baik et al., 2013; Lin (Darmadi, 2013). Few studies have been conduct-
et al., 2013; Singal, 2014; Edwards, 2015; Severo et ed in South Africa with a positive relationship
al., 2015). Other earlier studies found a negative between the percentage of female board mem-
relationship between environmental sustainabil- bers and financial performance (Mans-Kemp &
ity and financial performance (Song et al., 2017). Viviers, 2015). Firm size may be among the fac-
Employees’ health and safety are essential for suc- tors that influence the company’s financial perfor-
cessful business operations. Working conditions mance and is, therefore, included in this study as
can affect employees’ health and performance and, a control variable. In terms of the relationship be-
so, the company’s financial performance (Sobhani tween firm size and financial performance, earlier
et al., 2015). Companies that do not invest in em- studies have shown inconclusive evidence. A study
ployees’ health and safety may see a decline in em- conducted in the Nigerian manufacturing sector
ployees’ productivity and increased absenteeism, found a positive relationship between firm size and
and a decrease in financial performance (Loeppke profitability using both total assets and total sales
et al., 2015). Companies with better employees’ re- as measures (John & Adebayo, 2013). Likewise, a
lationships focus on improving employees’ health study conducted in the Croatian manufacturing
for increased efficiency and productivity (Fabius sector also found a positive relationship between
et al., 2013; Esteban-Sanchez et al., 2017). The ef- firm size and profitability (Pervan & Višić, 2012).
fect of employees’ health and safety on financial A study performed in Pakistan using companies
performance has attracted researchers’ interest. listed on the Karachi Stock Exchange also found
Earlier studies focused on countries such as the both weak and positive relationship between firm
USA (Fan & Lo, 2012), Spain (Abad et al., 2013), size and financial performance (Abbasi & Malik,
and Portugal (Santos et al., 2013). Earlier studies 2015). However, a study performed on listed man-
have found no relationship between improving ufacturing firms in Sri Lanka found no relation-
employees’ health and safety and financial per- ship between firm size and profitability (Niresh
formance (Fan & Lo, 2012; Auer & Schuhmacher, & Thirunavukkarasu, 2014). Thus, this paper con-
2016). Other studies found that employees’ health trolled for the effect of firm size on financial per-
and safety have a positive relationship with fi- formance. In terms of other ROE determinants,
nancial performance (Abad et al., 2013; Fabius factors identified include tax burden, interest cov-
et al., 2013; Santos et al., 2013; Sobhani et al., er, operating margin, asset turnover, financial lev-
2015; Haslam et al., 2016). Further studies found erage, price to earnings, the book to market, and
mixed results between health and safety measures current ratio (Kharatyan et al., 2017) as control
and financial performance (Barnett & Salomon, variables. Determinants such as tax burden, in-
2012). The relationship between gender diversity terest burden, operating margin, asset turnover,

260 http://dx.doi.org/10.21511/imfi.17(4).2020.23
 Investment Management and Financial Innovations, Volume 17, Issue 4, 2020

and financial leverage ratios have a significant ef- managers invest between 2007 and 2017 using
fect on ROE (Kharatyan et al., 2017). In the same panel data analysis. Besides, the sampled compa-
study (Kharatyan et al., 2017), the effect of price nies’ operations are considered to affect both envi-
to earnings, book to market, and current ratio on ronment and society adversely. Although there is
ROE were found not to be significant. The study a stock of over 350 different companies listed on
by Kijewska (2016) supported the use of operating the JSE, the sample was narrowed to only the se-
profit margin, asset turnover, financial leverage, lected 28 manufacturing companies where mutual
and tax ratios as significant determinants of ROE. fund managers invest. This is because of their use
of a large volume of water in their production pro-
The above extant literature shows the inconclu- cesses and the industrial hazards posed to their
siveness of results from researchers. Besides, few- employees from consistent use of heavy equip-
er studies have attempted to combine the select- ment and machinery. Besides, this paper exclud-
ed proxies. This study examines the relationship ed unlisted companies for lack of data availabil-
between environmental sustainability (water us- ity and service-oriented companies because they
age), social sustainability (employees’ health and are considered to use less volume of water. This
safety cost) and governance issues (the percentage study used annual, integrated, and sustainability
of women on corporate boards), and the finan- reports by companies from the top 30 listed JSE
cial performance of selected JSE listed compa- companies where South African mutual funds
nies; which mutual fund managers have invested (investment fund managers) invest trustees’ funds.
trustees’ fund. Thus, this study contributes to the This was done to determine whether the mutual
debate on responsible investment and sustainable fund’s companies consider ESG factors in their in-
business practices by combining the effects of ESG vestment decisions in promoting sustainable busi-
factors on South African companies’ financial ness practices among JSE listed companies. The
performance where mutual fund managers invest mutual fund companies’ equity funds fact sheets
trustees’ funds. for the 2017 financial year-end (because it repre-
sents recent investments made) was used to select
Hence, this paper considered the following the mutual fund companies and the top 30 com-
hypotheses: panies in which they invested trustee funds. This
paper arrived at a sample of only 28 companies be-
H1: There is no correlation between environmen- cause our data search was narrowed to only those
tal sustainability investment (water usage) companies where mutual fund managers have
and ROE. consistently invested trustees’ funds in the period
of investigation. Besides, one excluded those JSE
H2: There is no correlation between social sus- listed companies with incomplete data set iden-
tainability investment (employee health and tified for this study. The sampled companies cut
safety cost) and ROE. across various industries that include basic mate-
rials, chemicals, consumer goods, general indus-
H3: There is no correlation between the percent- tries, health care, mining, tobacco, pharmaceuti-
age of female board members and ROE. cals, and properties. However, the sample exclud-
ed companies considered as having a less adverse
H4: There is no correlation between firm size impact on environmental sustainability such as
(market capitalization) and ROE. banks, financial services, insurance companies,
media, mobile telecommunications, technology,
H5: There is no correlation between ROE influ- and because they use a lower volume of water and
encers and ROE. are low on the use of heavy industrial equipment
and machinery. The choice of the limited sample
was because the intention was to examine whether
2. METHODOLOGY mutual fund managers consider ESG issues when
making investment decisions on behalf of trustees.
The paper analyzed the data collected from 28 This paper sampled only those companies in which
companies listed on the JSE where mutual fund mutual fund managers have consistently invested

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Investment Management and Financial Innovations, Volume 17, Issue 4, 2020

their trustees’ funds and so determine if these mu- substantial attention to ESG issues in making
tual fund managers consider investing responsibly investment decisions could expose such compa-
(that is, using ESG criteria as the motive for in- nies to business disruptions and spiraling costs.
vesting or are still investing to increase trustees’ Descriptive statistics are presented in Table 1.
returns on equity (ROE)). The study extracted
data for variables such as water usage as a proxy As shown in Table 1, the ROE has a mean of
for environmental performance; employee health 16.82% and a standard deviation of 33.5, mean-
and safety cost (investment to reduce employees’ ing that the data are slightly inconsistent and is
work-related hazards or injury) as a proxy for so- affected by outliers as the maximum observation
cial performance; and the percentage of women’s is 126.4%. Water usage has the highest mean of
representation on corporate boards as a proxy 274.226, showing that most of the companies that
for governance. Besides, the study used ROE as a mutual funds have invested in use water excessive-
proxy for companies’ financial performance. The ly. In terms of the number of work-related fatali-
ESG variables were extracted from sampled com- ties, the mean is 3.34 and a standard deviation of
panies’ integrated reports (annual reports and sus-7.02, which is consistent. Whereas, the percentage
tainability reports) on their websites. The ROE da-of women on the boards has a mean of 10.22%,
ta was sourced from the IRESS database. Hence, and the maximum observation representing the
the following study model was presented: percentage of women on the board of a particu-
lar company is 50%, implying that few companies
ROEit = α it + β1WRCit + β 2 EHSCit + are complying with gender equity requirements in
(1) their board structures. The regression analysis re-
+ β3GENDIVERSit + β 4 FIRMSIZEit + sult is in Table 2. The authors used the cross-sec-
+ β5 ROEINFLit + ε , tional time-series FGLS regression and the gener-
alized least squares coefficient where the variance
where ROEit = Return on equity; β1WRCit = of the residual term is heteroscedastic with no
Water reduction cost; β 2 EHSCit = Employee autocorrelation.
health and safety cost; β 3GENDIVERSit = per-
centage of female board members; β 4 FIRMSIZEit The results in Table 2 show no autocorrelation
=Firm size (Market capitalization); β 5 ROEINFLit between the variables. The results show that
= ROE influencers; α it = intercept, β = gradient/ prob>chi2 is significant (prob > chi2 = 0.0000) at
slope, ε = error. ROE is the dependent variable, less than p-value of 0.05. This shows that the var-
while water usage, employee health, and safety iables of this study are significant in interpreting
cost, and percentage of women’s representation on the results. The results show an insignificant neg-
corporate’ boards are the independent variables. ative (p > z =0.834) relationship between water us-
Control variables used in this study include firm age and ROE. This signifies that more water usage
size (market capitalization) and ROE influencers. results in a decrease in ROE and vice versa. The
results further indicate that there is a significant
(p > z =0.018) and negative relationship (coeffi-
3. RESULTS cient = –0.19291) between employee health and
safety (number of work-related fatalities) and ROE,
The risk of reputational damage to and consum- implying that more fatalities result in a decrease
er backlash against companies that fail to pay in ROE and vice versa. Moreover, there is an in-

Table 1. Descriptive statistics of study variables

Source: Authors’ result from the analysis.

Variable Obs Mean Std. Dev. Min Max

ROE (%) 297 16.8201 33.52105 –422.65 126.4
Water usage 297 274226 2136925 0 2.6807
No. of work-related fatalities 297 3.341818 7.021731 0 73
Women on corporate board (%) 297 19.22101 10.83107 0 50
Market capitalization 297 10.22953 23.37689 –91.22 214.96

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 Investment Management and Financial Innovations, Volume 17, Issue 4, 2020

Table 2. Regression analysis results

Source: Authors’ result from the analysis.

Estimated covariances 27
Estimated autocorrelations No autocorrelations
Estimated coefficients 12

Number of jobs = 297

Number of groups = 27
Time periods = 11
Wald Chi2(11) = 1159.68
Prob> Chi2 = 0.0000

ROE Coef. Std. Err. Z p>z [95% conf. interval]

Water usage (megalitres) –0.000000052 0.000000249 –0.21 0.834 –0.00000054 0.000000436
E, H, and S (work-related fatalities) –0.19291 0.081531 –2.37 0.018 –0.35271 –0.03311
% of women on board –0.00905 0.046798 –0.19 0.847 –0.10077 0.082673
Market cap (total assets) –0.04764 0.028894 –1.65 0.099 –0.10427 0.008994
Book value/share –0.00026 0.000069 –3.75 0 –0.00039 –0.00012
Current ratio –4.42256 0.855636 –5.17 0 –6.09958 –2.74554
Interest cover 0.033922 0.024066 1.41 0.159 –0.01325 0.081091
Leverage factor 0.754592 0.093695 8.05 0 0.570954 0.938231
Operating profit margin 1.384349 0.057202 24.2 0 1.272236 1.496462
Price-earnings 0.028005 0.016085 1.74 0.082 –0.00352 0.05953
Total assets turnover 7.317292 0.759034 9.64 0 5.829613 8.804971
Cons –1.75181 1.452273 –1.21 0.228 –4.59821 1.094595

significant (p > z =0.847) negative relationship Table 3. Shapiro-Wilk W test for normality
(coefficient = –0.00905) between the percentage Source: Authors’ result from the analysis.
of women on the board and ROE. This suggests Variable Obs W V z Prob > z
that a greater women’s representation on corpo- EU 297 0.50401 104.732 10.913 0.0000
rate boards is negatively related to financial per-
formance, and a lower women’s presence results in Based on the information shown in Table 3, the
improved financial performance. study data is normally distributed, as indicated by
p-value (0.000). The regression of assumption re-
Furthermore, the results show a negative relation- lating to normality is not violated at all. Therefore,
ship between market capitalization (coefficient the statistical tests are not distorted; and this con-
= –0.04764), book value per share (coefficient = firms the validity and reliability of the results.
–0.00026), current ratio (coefficient = –4.42256),
and ROE indicated by a coefficient of variation. This In confirming whether multicollinearity exists be-
shows that when ROE increases, these variables de- tween the variables, variance inflation factor (VIF)
crease. Lastly, the results shows a positive relation- tests were conducted, as shown in Table 4.
ship between interest cover (coefficient = 0.033922),
leverage factor (coefficient = 0.754592), operating Table 4. Multicollinearity test
profit margin (coefficient = 1.384349), price-earn-
Source: Authors’ results from the analysis.
ings (coefficient = 0.028005), total asset turnover
(coefficient = 7.317292) and ROE. This shows that Variable VIF 1/VIF
ROE increases when these variables increase. Water usage 1.02 0.976668
Women on corporate board (%) 1.02 0.977414

Data used should be normally distributed in order No. of work-related fatalities 1.01 0.99477

to avoid distorting the assumptions that apply to Market capitalization 1 0.995151

regression analysis. If the data is not normally dis- Mean VIF 1.01

tributed, it can result in unreliable and invalid re-

search results. Hence, the study used the Shapiro- The mean VIF (1.01) shown in Table 4 indicates
Wilk W test to test for normality in Table 3. that the variables’ multicollinearity score is not

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Investment Management and Financial Innovations, Volume 17, Issue 4, 2020

Table 5. Random-effects model

Source: Authors’ result from the analysis.

Number of obs = 297

Number of groups = 27
Obs per group:
Min = 11
Avg = 11.0
Max = 11
Wla chi2 (11) = 227.18
Prob > chi2 = 0.0000

Random-effects GLS regression

Group variable: cocode
R-sq:
Within = 0.4207
Between = 0.6701
Overall = 0.4595
Corr (u_i, Xb) = 0 (assumed)

ROE Coef. Std. Err. z p>z [95% conf. interval]

Water usage (megalitres) –0.000000127 0.00000071 –0.18 0.858 –0.00000152 0.00000126
H and S (No. of work-related fatalities) –0.16857 0.229315 –0.74 0.462 –0.61802 0.280876
% of women on board –0.09862 0.160086 –0.62 0.538 –0.41238 0.215143
Market cap (total assets) –0.17831 0.066456 –2.68 0.007 –0.30857 –0.04806
Book value/share –0.00037 0.000213 –1.73 0.083 –0.00078 0.0000483
Current ratio –3.15919 2.388933 –1.32 0.186 –7.84141 1.523034
Interest cover –0.05862 0.050747 –1.16 0.248 –0.15808 0.040841
Leverage factor 0.544261 0.149315 3.65 0.000 0.25161 0.836912
Operating profit margin 1.763178 0.130848 13.48 0.000 1.506721 2.019634
Price-earnings 0.035856 0.037145 0.97 0.334 –0.03695 0.108659
Total assets turnover 9.388851 2.412933 3.89 0.000 4.65959 14.11811
Cons –6.93511 4.987659 –1.39 0.164 –16.7108 2.840518
sigma_u 5.885598
sigma_e 23.68252
(fraction of
Rho 0.05817 variance due
to u_i)

statistically significant to distort the results as the ative relationship between market capitalization
population coefficient can be precisely predicted. and ROE. Moreover, the results show an insignif-
Therefore, the study results are acceptable. icant negative relationship between book value
per share, current ratio, interest cover, price-earn-
Results were interpreted applying the random-ef- ings, and ROE. Lastly, the results show a signifi-
fects model (see Table 5) after a Hausman test (see cant positive relationship between leverage factor,
Table 6) was conducted to determine an appropri- operating profit margin, total assets turnover, and
ate model between fixed-effects and random-ef- ROE. The discussion is based on the random-ef-
fects models. The latter proved to be appropriate. fects model analysis, as shown by the Hausman
test results.
Table 5 shows a significant p-value (prob > chi2 =
0.000), which is less than the significance p-val- The study accepts the null hypothesis based on
ue of 0.05. Likewise, the results show an insignif- the Hausman test that showed that the random-ef-
icant negative relationship between water usage, fects model is appropriate, while the study rejects
the number of work-related fatalities, the percent- the alternative hypothesis, the fixed-effects mod-
age of women on the corporate board, and ROE. el, in interpreting the result. The significant p-val-
Furthermore, the results show a significant neg- ue is at 0.05. If the Hausman test results are less

264 http://dx.doi.org/10.21511/imfi.17(4).2020.23
 Investment Management and Financial Innovations, Volume 17, Issue 4, 2020

Table 6. Hausman test results

Source: Authors’ results from the analysis.

Coefficients
Variables (b) (B) (b-B) sqrt(diag(V_b-V_B))
Fixed Random Difference SE.
Water usage (megalitres) –0.000000407 –0.000000127 –0.00000028 0.000000257
H and S (work-related fatalities) –0.37741 –0.16857 –0.20884 0.144454
No. of women on board –0.19351 –0.09862 –0.09489 0.152849
Market cap (total assets) –0.18939 –0.17831 –0.01107 0.013299
Book value/share –0.00059 –0.00037 –0.00022 0.00016
Current ratio –7.30735 –3.15919 –4.14816 2.729087
Interest cover –0.17451 –0.05862 –0.11589 0.027939
Leverage factor 0.518789 0.544261 –0.02547
Operating profit margin 2.246315 1.763178 0.483137 0.117777
Price-earnings 0.041778 0.035856 0.005922 0.011661
Total assets turnover 6.331919 9.388851 –3.05693 4.205873

Note: b = consistent under Ho and Ha; obtained from xtreg, B = inconsistent under Ha, efficient under Ho; obtained from xtreg,
Test: Ho: difference in coefficients not systematic, chi2(9) = (b-B)’[(V_b-V_B)^(-1)](b-B) = 12.42, Prob > chi2 = 0.1908.

than the significance value, the study rejects the (Baik et al., 2013; Albertini, 2013; Edwards,
null hypothesis while accepting the alternative hy- 2015; Severo et al., 2015; Alshehhi et al., 2018).
pothesis. However, with a Prob > chi2 = 0.1908 in However, the result contradicts that of Song
Table 6, which is more than the significant p-value et al. (2017) that environmental sustainability
of 0.05, the null hypothesis is accepted, and the measures do not improve companies’ financial
random-effects model (REM) was applied to in- performance.
terpret the results.
The results show that mutual fund companies
overlook sustainable business practices like ef-
4. DISCUSSION ficient water usage in selecting investment op-
portunities. This implies that mutual fund man-
The result relied on the random-effects model agers do not sufficiently consider environmental
analysis as the appropriate model based on the issues when making investment decisions but
Hausman test in Table 6 for the discussion. The focus more on the returns accruable to trustees
results in Table 5 show an insignificant negative (Manzhynski et al., 2015). Besides, the four-capi-
relationship between water usage, the number of tal model postulates that companies should inte-
work-related fatalities, the percentage of women grate financial performance measures with social
on corporate boards, and ROE. Further discussion and environmental factors to achieve sustaina-
on the results was based on the hypotheses. ble business practices (Bojan, 2007; O’Connor,
2007; Ekins et al., 2008; Ali, 2017). Likewise, the
H1: There is no correlation between environmen- stakeholder theory encourages companies to
tal sustainability investment (water usage) satisfy the needs of different stakeholders, such
and ROE. as ensuring improved environmental perfor-
mance (Freeman, 1984; Harrison & Wicks, 2013;
A negative relationship exists between water us- Harrison et al., 2015). Earlier studies have found
age and ROE. This shows that the selected com- that focusing on a few stakeholders will result in
panies use water inefficiently or unsustainably, less value over time (Freeman, 1984; Harrison &
thereby impacting ROE negatively. A large vol- Wicks, 2013; Harrison et al., 2015; Jo et al., 2016).
ume of water consumption is associated with a However, the result is consistent with earlier
higher cost, which negatively affects profit and studies whereby companies prefer the profitabil-
ROE. The result is similar to earlier studies with ity objective over meeting the needs of the differ-
a positive relationship between environmental ent stakeholders (Friedman, 1970; Shim, 2014).
sustainability measures and firm performance This indicates that mutual fund managers follow

http://dx.doi.org/10.21511/imfi.17(4).2020.23 265
Investment Management and Financial Innovations, Volume 17, Issue 4, 2020

the traditional investment approach that focuses H3: There is no correlation between gender diver-
on a higher rate of returns to shareholders at the sity (percentage of female representations on
detriment of satisfying the needs of other stake- corporate boards) and ROE.
holders. Thus, this paper rejects the null hypoth-
esis and accepts the alternative hypothesis. An insignificant negative relationship exists
between women on corporate boards and ROE.
H2: There is no correlation between social sus- The result is similar to earlier studies, which
tainability investment (employee health and found that the percentage of women on corpo-
safety cost) and ROE. rate board is negatively related to financial per-
formance (Ahern & Dittmarr, 2012; Darmadi,
There is a negative and insignificant correlation 2013; Mans-Kemp & Viviers, 2015). In contrast,
between work-related fatalities and ROE. This other earlier studies found a positive relation-
indicates that companies where mutual fund ship between women on board structures and
managers invest do not invest adequately in em- financial performance (Liu et al., 2014; Levi et
ployees’ health and safety, resulting in increased al., 2014; Low et al., 2015). This result shows that
fatalities, which affect companies’ operations women are still under-represented on corporate
negatively. The result support earlier studies boards, which are still male-dominated (Nekhili
that investing in social sustainability such as & Gatfaoui, 2013; Şener & Karaye, 2014), where-
employees’ health and safety improves compa- as adequate women’s representation is associat-
nies’ financial performance (Barnett et al., 2012; ed with good corporate governance (Handajani
Santos et al., 2013; Haslam et al., 2016). However, et al., 2014; Nekhili et al., 2017). Similarly, wom-
it contradicts earlier studies that investing in so- en are believed to be more cautious and pay at-
cial sustainability does not improve companies’ tention to societal issues when making invest-
financial performance (Fan & Lo, 2012; Fabius ment decisions (Huang & Kisgen, 2013; Arun et
et al., 2013). This indicates that most companies al., 2015). It appears that the choice of invest-
where mutual fund managers invest their trus- ments by selected mutual fund managers focus-
tees’ funds do not prioritize investment in em- es on higher returns without consideration for
ployees’ health and safety, resulting in increased socially and environmentally friendly factors.
fatalities consistent with the previous studies Thus, this study rejects the null hypothesis and
(Haslam et al., 2016; Pagalung, 2016; Probst et accepts the alternative hypothesis.
al., 2016). Likewise, the result contradicts the
four-capital model that companies should prior- H4: There is no correlation between firm size
itize social issues like sustainable work environ- (market capitalization) and ROE.
ment (Bojan, 2007; O’Connor, 2007; Ekins et al.,
2008) because companies’ financial performance The result shows a significant negative correlation
decreases with increased employees’ fatalities. between firm size (market capitalization) and
This is common among companies’ managers ROE. Furthermore, it contradicts earlier stud-
who approach investment by traditionally fo- ies, which found a positive relationship between
cusing on an increased rate of returns, thereby firm size and financial performance (Pervan &
neglecting social issues like employees’ safety Višić, 2012; John & Adebayo, 2013; Abbasi &
(Shkura, 2017). The result negates the stakehold- Malik, 2015) but do not support that there is no
er theory, which suggests that companies need correlation between firm size and financial per-
to address the needs of different stakeholders formance (Niresh & Thirunavukkarasu, 2014).
(Friedman, 1970; Shim, 2014) instead of focus- The generation of insufficient returns may result
ing on profitability (Pagalung, 2016). By neglect- in unsustainable business practices and the in-
ing employees’ health and safety, companies face ability to satisfy other stakeholders. The gener-
enormous challenges such as bad reputation, lit- al expectation is that large companies generate
igations, strikes, and forceful closure that affect more returns than smaller companies because
future operations and financial performance. large companies can quickly gain access to cap-
Thus, this paper rejects the null hypothesis and ital markets (John & Adebayo, 2013; Abbasi
accepts the alternative hypothesis. & Malik, 2015). This result contradicts the

266 http://dx.doi.org/10.21511/imfi.17(4).2020.23
 Investment Management and Financial Innovations, Volume 17, Issue 4, 2020

four-capital model, which suggests that man- Theoretically, the more the company uses the
ufactured, human, social, and environmental assets, the more the book value is expected to
should be integrated into investment decisions. decrease, and consequently, ROE increases. The
The result does not support the stakeholder the- negative relationship regarding the current ra-
ory suggesting that investment fund managers tio, interest cover, and ROE does not make log-
are motivated by profitability objectives at the ical sense. One would expect companies with
expense of other stakeholders. Thus, this paper high-interest cover and current ratio to make
rejects the null hypothesis and accepts the alter- high ROE. On the other hand, the results show
native hypothesis. a significant and positive relationship between
leverage factor, operating profit margin, total
H5: There is no correlation between ROE influ- asset turnover, and ROE. Likewise, the positive
encers and ROE. relationship between price-earnings and ROE is
insignificant. This result supports other earli-
The result shows an insignificant negative re- er studies that a positive relationship between
lationship between book value per share, cur- these ROE ‘influencers’ and ROE (Kijewska,
rent ratio, interest cover, and ROE. This result 2016; Kharatyan et al., 2017). This implies that
contradicts Kharatyan et al. (2017) who found some of the selected companies with high assets
a positive relationship between the influencers turnover and operating profit margin are like-
and ROE. The negative relationship between ly to have a high ROE. Thus, this paper rejects
the book value per share and ROE implies that the null hypothesis and accepts the alternative
companies generate lower returns from assets. hypothesis.

CONCLUSION
This study examined whether South African mutual fund companies considered selected ESG fac-
tors in investment decisions and the effect of the selected factors on financial performance. This
study found that in making investment decisions, the selected mutual fund companies did not con-
sider ESG factors. The proxied ESG factors have an insignificant negative relationship with firm
performance. This is a sign that careful consideration of these factors can result in improvement in
financial performance. Investment fund managers should consider educating the trustees, especially
on the African continent, about the importance of incorporating ESG issues in investment decisions
and of the benefits that emanate from such investments. If investors are at the forefront of sustain-
able business practices, it may force the investees to start taking ESG issues seriously by becoming
aware of losing investments if they do not. Future studies could consider incorporating ESG indi-
cators other than the proxies used in this study to examine responsible investment patterns among
mutual fund managers.

AUTHOR CONTRIBUTIONS
Conceptualization: Michael Bamidele Fakoya, Segopotje Evonia Malatji.
Data curation: Michael Bamidele Fakoya, Segopotje Evonia Malatji.
Formal analysis: Michael Bamidele Fakoya, Segopotje Evonia Malatji.
Investigation: Segopotje Evonia Malatji.
Methodology: Michael Bamidele Fakoya.
Project administration: Michael Bamidele Fakoya.
Validation: Michael Bamidele Fakoya.
Writing – original draft: Segopotje Evonia Malatji.
Writing – review & editing: Michael Bamidele Fakoya.

http://dx.doi.org/10.21511/imfi.17(4).2020.23 267
Investment Management and Financial Innovations, Volume 17, Issue 4, 2020

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