Issue: September/November 09
Come to the party
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:
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.