Issue: Mar/May 2011
Back to Basics 4


Your guide to your fund’s implementation of a socially-responsible investment policy. Kobus Hanekom, head of general consulting at Simeka Consultants & Actuaries, answers trustees’ frequently-asked questions.

Some colleagues and I are trustees of a retirement fund wanting to make responsible investments. How do we go about it? What must we insert into our investment policy statement and what must we include in the mandate to our asset manager? Please also advise us on how we’ll know whether we are responsibly invested, so that we and the asset manager understand one another. Is there a need for responsible investment to be defined, and is there a limit on the responsible investments we can make?

To start, let’s get our terminology right. Socially-responsible investment (SRI) is a term, often more confusing than helpful, to describe a wide range of investments. The term we prefer is the internationally-used responsible investing (RI). It does not represent a separate asset class and applies to the entire investment portfolio.

There’s also targeted investment, which is the “asset class” referred to in the Financial Sector Charter and by Minister Ebrahim Patel. It requires that funds invest a propotion of their assets in infrastructure development. We’ll discuss this on a future occasion.

For now, let me attempt to answer your questions under pertinent headings.

Do you have authority to invest the fund’s assets in responsible investments?

Rules of most funds are likely to be silent on this point. As a result, trustees need to consider the law and the industry practices that are developing. Having considered the developments noted below, it appears that it would be unnecessary for funds to include such a power in their rules to ensure that they have the authority.

In terms of King III, effective from March 2010, the code of governance for all SA entities (yet to be crystallised for retirement funds) requires that retirement funds invest their assets responsibly. They must protect, enhance and invest in the wellbeing of the economy, society and the environment. Responsible or sustainable investing is therefore understood to incorporate these ESG factors. They’re set out in the UN Principles for Responsible Investment to which many SA asset managers subscribe.


Hanekom . . . step by step

The second draft of the revised Regulation 28 was published for final comment by end-January. It will probably be issued in substantially the same form later this year. The draft requires the fund, its advisors and its trustees, at all times to apply principles of responsible investing in their decision making. To quote:

Prudent investment should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of their investments, including those of an environmental, social and governance character. This applies across all asset classes and should promote the vested interest of the fund in a stable and transparent environment.

The draft Code for Responsible Investing by Institutional Investors in SA relates essentially to asset managers and retirement funds. It requires them to:

  • Develop a policy detailing the process of assessing a listed company’s ESG fundamentals and ensure that this policy is implemented and monitored by the asset managers and complied with by the companies in which they invest;
  • Employ agreed mechanisms of intervention and engagement with companies that are not yet compliant, and agree the approach to voting at shareholder meetings (including the criteria to be used in reaching voting decisions and the publication of voting records);
  • Promote the code through collaboration;
  • Disclose to what extent the code has been applied and explain any adjusted practices to stakeholders.

What steps should trustees take to implement these principles?

For most funds, responsible investment is a novel concept. Legislative requirements are in a developmental stage. While some service providers are coming to terms with these developments, many are still in a wait-and-see mode. These aspects will require attention:

  • Amend the investment policy statement (IPS) adopted by the fund. In context, it would be best to allow for a phasing-in period, e.g. the fund commits itself to invest its assets in terms of RI principles and will require its asset managers to ensure compliance during a reasonable timeframe with a target of say 60% compliance in the coming 12 months and 80% in the following 12 months.
  • Amend the agreement with the investment consultant accordingly. Require him to assist the fund in revising its strategy, its mandates with the various asset managers or selection of portfolio managers, and monitor compliance;
  • Revise the mandate of the asset managers where applicable. They must invest the required percentage of the assets, over the phasing-in period, in companies that comply with the stated ESG principles.

On monitoring infrastructure: Asset managers contracted by the Public Investment Corporation (PIC) have been required to adopt the UN Principles. These managers would already have in place the infrastructure to monitor and comply.

On shareholder activism: It might from time to time not be desirable, or even easily possible, to disinvest from a non-compliant company. But there must be a process of engagement to ensure that change is being brought about. This needs to be documented and agreed with the asset manager.

On voting criteria: It will be necessary to agree on an approach to voting at shareholder meetings, especially on the criteria to be used in reaching voting decisions and the publication of voting records.

If applicable, put your portfolio managers on terms. Where funds invest in single or multimanager portfolios, they will have to communicate their policy and put pressure on the portfolio manager to comply as per the phasing-in schedule. Over time, competitive pressure should develop acceptable practices which will smooth out wrinkles in the system.

Funds that resolve to invest their assets in accordance with RI principles will only have to take a number of small steps. Most of the activities necessary to ensure compliance will be delegated to the asset managers, and to a lesser extent the portfolio managers. It will translate into the submission of quarterly reports that will have to be monitored and managed by the funds.