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Asset managers must invest responsibly, do yours?

ESG investing is pension fund law after all.

JOHANNESBURG – Extreme weather events, water crises, rapid and massive spread of infectious diseases, failure of climate-change adaptation, high structural unemployment and state collapse or failure of national governance – often linked to the others – represent seven of the ten top risks by likelihood and impact in the World Economic Forum’s 2015 Global Risks report.

Responsible investing is not an option. It’s an obligation.

Not convinced? The startling graph below is one of many that reveal planet earth’s fragile state of affairs. 

Screen Shot 2015-06-18 at 3.39.13 PM 

Source: United Nations Environment Programme (UNEP)

And if you think melting the glaciers that hold 70% of the world’s freshwater allowance could help us solve this problem, think again. According to Will Day, fellow at the Cambridge Institute for Sustainability Leadership, doing so will cause a 70-metre sea-level rise.

Day, who last week spoke at Old Mutual Investment Group’s first responsible investment conference, notes that Earth Overshoot Day – the day on which we had used up more resources than the planet could produce in a year and began to erode natural capital – occurred on August 19 last year and will likely come a little earlier this year.

He also mentioned predictions that almost all of Africa will be facing physical or economic water scarcity by 2025.

Fortunately, a growing number of asset managers, pension funds, life offices, as well as institutional and retail investors are advocating responsible investing.

Responsible investing as law

The Association for Savings and Investment South Africa (Asisa), whose members include the majority of the country’s life insurers and asset managers, defines responsible investment and ownership practices as those that build wealth sustainably in order to preserve long-term value, align investor objectives with broader societal needs and enhance long-term returns while reducing down-side risk.

Responsible investing, or investing that takes into account environmental, social and governance (ESG) impact is in fact a part of pension fund law.

In the preamble to Regulation 28 of the Pension Funds Act, pension funds are said to have a fiduciary duty that adopts a prudent investment approach, which considers factors, including those of an ESG nature, that materially impact the sustainability of long-term returns on a fund’s assets.

“It’s more difficult to enforce a preamble,” acknowledges Sunette Mulder, a senior policy adviser at Asisa. “The new Regulation 28 is very much a mixture between rules and principles. We’re in a new area where we’ve never been [before],” she says.

Richard Foster, technical facilitator and previous chairman at the Institute of Directors in Southern Africa (IoDSA), adds that a lack of clarity around definitions of sustainability and ESG investing is a challenge, as is the need to balance short- and long-term investment considerations.

He describes as “one of the biggest stumbling blocks” a lack of accurate measurement of how companies are performing on sustainability metrics.

Foster regards positively the JSE’s recently announced partnership with global ESG index provider FTSE Russell, which will align the bourse’s ESG disclosure indicators and data collection methodology with more evolved global standards. This new approach will replace the JSE’s Social Responsibility Index (SRI), which came into effect in 2004.

Asset owners hold the power

But the real power to effect change lies with asset owners, according to Mulder, and this is where much work remains to be done. “Asset managers don’t own assets. They only act under mandates on behalf of their clients,” Mulder explains. “Insofar as trustees put in their investment mandates that ESG principles are binding, they can hold their asset managers accountable for investing in an ESG fashion,” she says.

Large life offices are also significant asset owners. Encouragingly, about 50 of South Africa’s pension funds, life insurers and asset managers are signatories of the United Nation’s Principles for Responsible Investment (UN PRI), which represents $58 trillion (R706 trillion) of assets under management worldwide and promotes sustainable investing.

Locally, Asisa and its members have endorsed the Code for Responsible Investing in South Africa (CRISA). A member of the CRISA committee, Foster notes that CRISA’s most recent survey suggests that the ESG investing approach is improving, but admits that this is not consistent among industry players.

“The first King code [on corporate governance] came out 23 years ago and we still face issues around that. CRISA was effective in 2011. We are a couple of years down the track but have not yet got to maturity,” he says.

Not black and white

To add to the challenge, measuring ESG impact is not black and white. For example, while Sasol may be one of the country’s worst polluters (although significantly below Eskom, based on CO2 emissions as reported by the Carbon Disclosure Project), it is also one of the country’s most prolific taxpayers and employers, employing some 32 500 permanent and non-permanent staff at December 2014.

Karlien de Bruin, senior investment analyst at Gray Swan Investments, believes it is important to adopt a balanced view when it comes to ESG investing. “We don’t have to be aggressive and exclude companies, but should rather engage with management in those companies to ensure companies are managed well. It is a balancing act,” she says.

Asisa’s Mulder similarly promotes shareholder activism. In this vein, there are moves globally towards promoting responsible asset ownership. For example, US-based Generation Foundation identifies “loyalty-driven securities” as a potential tool to promoting sustainable capitalism.

The concept is a share structure that provides additional rights or rewards (such as extra dividends or voting rights) to shareholders based on the length of time that they hold a company’s securities.

That much of the investment world rewards short-term financial performance, while company executives are also often remunerated for relatively short-term, purely financial gains should also be reassessed if we’re serious about promoting sustainable investing.

Whether South African investors, asset owners like you and me, understand the issues and want to get involved remains to be seen. “Clients are prepared to pay a premium for good governance, but selling the social and environmental part of it to them might be more difficult,” says Foster.

Fortunately, a growing body of research suggests that ESG funds perform at least as well or better than their non-ESG peers, which will certainly help to promote the concept among the investing public. Why not invest in stocks that are better for the planet if you’re going to get the same return?

Old Mutual Investment Group CEO, Diane Radley believes there is significant value to be derived from “delivering decent returns decently”. “In order to ensure returns for customers, it is critical to understand how sustainability impacts a business’s long-term ability to succeed,” Radley says.



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