In a position paper on prescribed assets published in March, the Eskom Pension and Provident Fund (EPPF) cautions against shifting investment decision-making from the private sector into government hands.
This follows the ANC sketching in its election manifesto a plan to investigate the introduction of prescribed assets as a means of mobilising funds for housing, specific infrastructure projects and job creation.
In a carefully worded abridged version of the paper, the EPPF says it “would prefer to lean towards deepening the interventions already afoot in the market to complement the good intentions of prescribed assets, without compromising the quality of investments” and goes on to argue in favour of impact investing.
But what is impact investing?
Impact investments are regarded as those that can have a positive human impact – or, as the Global Steering Group for Impact Investment puts it, investing for a measurable financial and social or environmental return.
Malcolm Fair, managing director of RisCura, says there are already strong movements globally toward reporting not only the financial returns, but social as well as environmental returns when investing. Given the computing power available, it will only be a matter of time before this becomes mainstream.
South Africa continues to grapple with meagre economic growth, unemployment, poverty and income inequality – and interventions have not had the desired effect.
‘Hotbed for instability’
Elias Masilela, executive chair of DNA Economics, says given the imbalances South Africa is facing, one can only conclude that it is a hotbed for instability.
“We need a swift and innovative response to the problems we are faced with and I would like to propose that impact investing is that swift response. The nice thing with impact investing is that you don’t have to rely on governments to deliver on it. The private sector can take the lead without any support from the state and make things happen.”
Globally, over $230 billion in impact investments has already been recorded, mostly in the developed word. The move to impact investing has in part been fuelled by a belief that maximising returns for investors – in this case pension fund members – is of no use if the environment and social fabric in which they are living in, and ultimately retire into, is unstable (whether due to social, environmental or other factors).
Data from the Registrar of Pensions shows that in 2017, retirement funds registered under the Pension Funds Act had almost 42% of assets allocated towards insurance policies, 15.5% in public shares, 10.1% in collective investment schemes, 8.7% towards debt and less than 1% in private equity.
A paper on pension fund allocation published by the Bertha Centre for Social Innovation and Entrepreneurship at the UCT Graduate School of Business suggests that while responsible and impact investments are possible through various asset classes, including public and private equity and fixed income, private markets are by far the most commonly used instrument.
“The low domestic allocation to private equity is likely symptomatic of underinvestment,” it notes.
While there are good arguments for using retirement fund money to develop a country like South Africa on the social as well as economic front, questionable investments by the Public Investment Corporation have raised fears that advocating for more investments into the unlisted space could fuel mismanagement of pension fund members’ hard-earned money.
Heather Jackson, head of impact investing at Ashburton Investments, says collectively South Africans are suffering from a form of post-traumatic shock (given the revelations around state capture, and political and economic turbulence).
The country is facing major challenges, but there are solutions and the investment community holds significant power and resources to assist in creating the type of environment people want to retire into.
“It is not easy, but impact investing is a mechanism to seriously, seriously look into to help,” Jackson says.
While it is not by any means the whole solution given the complexity of the challenges the country is faced with, impact investing has a much more important and valuable role to play, she argues.
Jackson says there is often a conflation about risk when investing into poorer communities. One example is affordable housing, which is often considered too risky to invest in by mainstream commercial banks. Yet one of Ashburton’s investments – an organisation that supports contractors in refurbishing inner-city bank buildings as a way to create affordable housing in well-located areas – shows that the default rates are at least on par, if not better, than those experienced by most of the commercial banks.
Affordable options for the poor a good proposition
“We come across that again and again – that, in aggregate, [offering] affordable solutions to poor people is a very good investment proposition. It is often not a listed proposition; it is often unlisted or a real-economy investment, but it does offer [good opportunities].”
While the move towards impact investing is gaining traction, South Africa has already seen increased focus on responsible investing on the regulatory front. The preamble of Regulation 28 of the Pension Funds Act not only emphasises the fund’s fiduciary duty to act in the best interests of members, but also notes that appropriate consideration should be given to environmental, social and governance (ESG) factors.
The Draft Responsible Investment Directive released by the Pensions Regulator late in 2018 will in future require pension funds to reflect in their investment policy statement how their investment approach will ensure the sustainable long-term performance of their assets. Funds will also be required to include their policy on applying ESG factors to the assets they intend to acquire, as well as their active-ownership policy.
Fair says the regulatory environment is becoming much more serious about these concepts.
Against this background, the EPPF suggests that impact investing “may be one of the solutions for avoiding any unintended consequences of asset prescription”.
With policy uncertainty – particularly around property rights – a major concern and confidence levels already weak, their recommendation shouldn’t fall on deaf ears.