Issue: September/November 09


Come to the party

Jackson...OECD way ahead

Jackson...OECD way ahead

SA retirement funds should be embracing responsible investment policies, but they don’t. HEATHER JACKSON of Cadiz argues why they should.

With a pension savings endowment of over R1 trillion, a funding source mooted for transformation is to prescribe that a certain percentage of these assets be earmarked for socially desirable investments (TT March-May ’09). Prescription should be a wholly unnecessary inducement to make responsible investment (RI) choices.

RI across environmental, social and corporate governance (ESG) issues has been shown to make commercial and investment sense. Moreover, the credit crisis has highlighted the vulnerability of investments to systemic issues -- and reinforced the need to approach investing more holistically by incorporating a full cost-benefit analysis related to long-term asset and liability matching.

The investment community has been effective in critiquing the dangers of reintroducing prescribed assets. However, most efforts stop there. RI makes up no more than 1% of total SA pension fund assets, and that number has been static for a long time.

If we are to avoid the risk of prescription, why is there reluctance to embrace RI?

There are probably five traditional investor arguments against ESG integration into investment decision making:

  • The guiding principle of funds is diversification across uncorrelated asset classes to enhance riskadjusted return. This argument ignores the potential diversification benefits of a positive ESG screen;
  • The sole fiduciary responsibility of trustees is to maximize investment performance. This notion has been discredited by, amongst others, a Freshfields-UN study. It found that “integrating ESG considerations into an investment analysis, so as to more reliably predict financial performance, is clearly permissible and is arguably required in all jurisdictions”;
  • RI is unavoidably subjective. This is sometimes true for ethically-based funds, but in general RI themes respond to broad societal concerns;
  • Businesses should stick to their knitting. But this ignores the broader benefits to the company and the wider society of conforming to acceptable practices and naively assumes that compliance will happen without encouragement;
  • Some trustees contend that there is insufficient information around RI, making it too difficult to implement. A recent study by Unisa’s Centre for Corporate Citizenship found a need to combat the uncertainty and misunderstanding of how, why and where to invest responsibly. Such uncertainty translates into avoidance, leading to lack of demand for products and, in turn, to a shortage of appropriate product.

So what can be done? In the absence of a Damascus experience for pension fund trustees, international experience offers pointers. The trend towards mainstream acceptance of ESGrelated investment is significant. It’s borne out by, for instance, the UN Principles for Responsible Investment, the Carbon Disclosure Project, Enhanced Analytics Initiative and the Investor Group for Climate Change. In most OECD countries, RI exhibits 10%-15% of total fund investments.

Perhaps the greatest influence driving RI in OECD markets is a regulatory requirement for ESG disclosure from pension funds. The UK led the way in 2000 with a regulation requiring that trustees disclose in their funds’ Statement of Investment Principles the extent to which (if at all) social, environmental or ethical considerations are taken into account in their investment strategies.

Many countries have followed. Belgium, Germany, France, Sweden, Spain, Austria, Italy and Australia have promulgated similar disclosure requirements. SA appears to lag, somewhat paradoxically given its imperatives for compliance with transformation goals.

The disclosure requirements have been adopted abroad without any threat of prescription. Rather, they’ve elicited an examination of the criteria that should be used to assess retirement funds’ RI practices. It’s revealed the value of incorporating ESG factors, eventually translating into sizable investments.

Of course, there are inevitable lessons. One is the criticism that regulators have fallen short of providing guidance on definitions around the policies, implementation and transparency of ESG integration.

Nevertheless, the global picture points to results which could be larger and encompass more goodwill towards RI than any move to prescribed assets might hope to achieve. With this in mind, SA has the means and opportunity to make effective investment decisions that will help build a better future for all.