The Intellidex report on impact investing has been published not a minute too soon. Examining the 2020 portfolio strategies of SA pension funds, the research was funded by Ashburton Investments. It deserves credit for having brought this pre-Covid analysis into the public domain just as the heat intensifies on possible amendments to Regulation 28 for pension funds to support infrastructure development as the purported “flywheel” for economic growth.
In a webinar on release of the report, Stuart Theobald of Intellidex expressed satisfaction that the 49 funds which participated in the study were adequately representative of the industry. Amidst the heat, Heather Jackson of Ashburton intended that the study would “add quality to the narrative” of investing for impact.
It does so in that it quantifies approaches of larger and smaller funds in response to particular questions. A useful follow-up would be a more qualitative examination of the gap – and there is one – between pronouncement and practice. One size fits all for the virtue-signalling of compliance with the regulator’s directives for socially-responsible investment (SRI), but not so the relative enthusiasm from one fund to the next.
On the face of it, as the report encapsulates, SA looks incredibly good on the global continuum. Reg 28 of the Pension Funds Act, it says, is an “exemplary piece of legislation giving clear guidance that ESG (environmental, social and governance) factors are considered, and responsible investment is linked to the fiduciary duty of pension fund trustees”.
“Yup,” say trustees. “We’ve ‘considered’ so let’s move on.” More often than not, it’s for consultants to do the considering and asset managers to do the implementing. Where there are trustees to whom SRI is comprehensible through its myriad definitions, they’re usually amongst the larger where the requisite professionalism is found at board level. In effect, Reg 28 merely binds trustees as conduits to their service providers.
One key finding is the report by investors that they “actively engage investee companies through shareholder resolutions”. Who are the most active of these investors? With what frequency do they engage and find their resolutions accepted?
Another is that “almost all respondents expect sustainable investing to become more important in the next five years”. Do they now? So what will they be doing about it?
The report recommends that Reg 28 be updated so that pension funds are encouraged to include in their policy statements the impact investments as defined by the Global Sustainable Investment Alliance. Yes, it should be updated in this respect and much else besides.
For far too long, and most urgently now, is there need for Reg 28 revision. The prudential limits for investment in the various asset classes haven’t been reconsidered in years.
Most notable is the dismissiveness of unlisted investments, pretty insignificant on the drafting of Reg 28 a decade ago but hugely significant today when it comes to investment in SA infrastructure. Indicative is the 2.5% of assets allowed in the category of “other”.
By contrast, the way Reg 28 now stands, pension funds may invest 100% of their assets in bonds guaranteed by the SA government. That amendment to Reg 28 seems imminent, specifically to accommodate infrastructure as if it were an asset class, implies that in the envisioned public-private-pensions partnership these investments will not be supported by government guarantees.
If they were, the amendment would be unnecessary. Since they won’t, it may be asked what the contribution of government will be in correlating the risk-reward ratio. Or even whether a contribution from government, which has little money of its own, will be offered at all.
For instance, the way things stand, large asset managers such as Old Mutual Alternative Investments and Futuregrowth have proven success at identifying and financing infrastructure that they themselves develop.
Whether it be houses or hospitals, pension funds can make allocations to the managers so long as they stick within the Reg 28 limit for unlisted investments. There’s no obvious reason that, for investment by pension funds, state-identified projects be prioritised over those in the private sector.
Much as SA looks good on paper internationally, it is unique in important respects.
Most obviously, in assessment of ESG, the legislated requirements for black economic empowerment dominate the SRI criteria. To some extent, it may crowd out others such as climate change and education programmes.
On governance, there’s a craziness. Pension funds have no choice than to be in Naspers which dominates the JSE. Yet it passes muster despite a two-tier structure for shareholder votes, allowing the majority of investors to be ignored in their opposition to resolutions proposed by the directors, and its major subsidiary totally alien to the SA economy.
Similar anti-ESG anomalies apply to BAT (tobacco) and Sasol (fossil fuels). Both have nonetheless been must-haves in fund portfolios because, prior to the recent travails of Sasol, their rand-hedge and liquidity attractions overrode all else.
It underlines the paucity of JSE-listed companies available for investment by pension funds. Reg 28 allows for a maximum 75% of a pension fund’s assets to be in JSE equities. This is problematic in numerous respects.
First, a 75% ceiling is too low for younger fund members with extended investment horizons. Second, the paucity of shares is exacerbated by delistings and smaller caps unsuited for pension funds. Third, because of such limited choice, the prices of those which are suited can be unrealistically inflated.
Redrafters of Reg 28 face an unenviable task. From a policy perspective, they’re likely also to be torn on whether the present allowance for offshore investment should remain, reduce or increase.
Uppermost should be stimulation of the SA economy, right down to increasing investment in renewable energy at the expense of Eskom, and at the same time not to force a compromise in the integrity of the pensions system by directing funds to investments of government’s selection.
The Intellidex study lays a foundation for much of the debate to come, and later for getting to the nitty-gritty of measurement and disclosure. As a whole, the report is a most worthwhile read for trustees simply to extend their knowledge of SRI in its numerous facets.
The entire concept of “sustainability”, however defined, relates to the long term. In present-day SA, the long term is a long shot. For the short term in SA, most likely, strategies for sustainability will be overshadowed by tactics for survival.
In the process, ESG might lose some of its lustre. At the same time, the exigencies of impact investing won’t.
This article was published with the permission of Today’s Trustee, the original publication can be viewed here.