Issue: June/August 2008


Good business

Words, words, words. SRI is all the rage, shooting from green issues to governance standards. It must have a practical meaning for practical application by companies and retirement funds.

Such are the warm and fuzzy feelings induced by the term “socially responsible investment” (SRI) that none dare call it claptrap. But unless it is reduced to a widely understood and workable definition – for which National Treasury has called, with little apparent response, in its 2007 discussion document on retirement fund reform – at a polar extreme SRI dishevels as a feel-good factor in the spin of corporate marketing.

At the opposite extreme, it’s basic business sense in need of no special label. The evidence is overwhelming that companies which don’t care for stakeholders ultimately lose stakeholders to care for them. From staff to shareowners, to suppliers and customers in the broader community, profit pursuits that integrate with governance standards and social values have been shown to enhance business viability.

Confusion and complexity arise because the real world operates at variations between these extremes. They’re compounded by the conversational interchangability of SRI with corporate social responsibility (CSR), corporate social investment (CSI) and “sustainability”, the latter classically defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. The SRI cliché is “doing well by doing good”, a platitude if ever there was.

Into this real world intrude retirement funds, significant shareholders in equity markets across the globe. And no less in South Africa where asset managers, who hold shares on behalf of retirement funds, are scurrying to follow the Government Employees Pension Fund in signing the UN Principles for Responsible Investment (see box). After the false start of the King code, which embraces similar principles, it might be better to withhold judgment on whether this dedication to the UN Principles will have the practical effect it promises. If it does, the principles can launch an SRI momentum previously lacking.

So it should, for it is underpinned by the Financial Sector Charter and National Treasury’s reform proposals. Both espouse commitments to SRI; both are vague as to its meaning. Asset managers representing retirement funds are central to implementation because of the influence they can assert on corporate behaviour.

The welter of words is exacerbated by the moving of goalposts. In the huge industry SRI has spawned, offering any manner of indices and monitoring agencies, choices are virtually unlimited. One year the favourite flavour is for screening out companies in “unethical” industries such as armaments, tobacco, liquor and gambling; the next it’s corruption and abuse of human rights; then it’s carbon emissions and climate change, notwithstanding the energy and food crises that now afflict the world economy. Try explaining SRI to people who’re freezing and starving that fossil fuels are bad for them.

There are also double standards. For Zimbabwe to head the UN Commission on Sustainable Development is strange but true. When politics rear, principles subside. For China to be the most coveted investment destination belies its pollution, sweatshops and intolerance of dissent. Even CalPers, the icon of ethical retirement funds, has been unable to resist the pull of China. When there’s money to be made, try explaining that SRI doesn’t falter.

Compromise diminishes credibility. For instance, earlier this year Hitachi-sponsored research of 750 top US executives found that 73% believed corporate citizenship should be a priority for business. Yet only 39% include it in their business planning and fewer, at 28%, actually have written policies.

A similar report last year, by McKinsey for the UN Principles, noted that merely half the chief executives surveyed thought their companies were actually practising corporate responsibility in their daily operations. As alarmingly, IBM research found that 76% of business leaders surveyed admitted to not understanding well their customers’ CSR expectations.


In summary, institutional investors commit themselves on signature to:

  • Incorporate environmental, social and corporate governance (ESG) issues into investment analysis and decision-making processes;

  • Be active owners, including an ownership policy consistent with the principles and developing a capability to engage with companies;

  • Seek appropriate disclosure on ESG issues by entities in which they invest;

  • Promote acceptance and implementation of the principles within the investment industry;

  • Work together, so that effectiveness in implementing the principles is enhanced

  • Report on progress in implementing the principles, which includes adoption of the “comply or explain” approach and raising awareness among broader groups of stakeholders.

At the same time, Goldman Sachs calculated internationally that companies with ESG (environmental, social and governance) policies in place had outperformed “the general stock market” by 25% over the previous two years and that 72% of them had outperformed their competitors.

Back home, the JSE battles on gallantly with its SRI index. With the best intentions supported by a R5m grant from an agency of the British government, it has hardly succeeded in firing the public imagination. Companies appear to enjoy no special status in being on it, and no particular shame in being kicked off.

Whatever the reasons – and the index proponents are trying hard, having elicited the assistance of FTSE4Good and Ethical Investment Research of the UK – it’s a little presumptuous for the JSE to say that it’s “disappointed by the slow uptake of responsible investing”. Slow uptake of the index can’t be held to reflect slow uptake of responsible investing.

If anything, the opposite holds. JSE-listed corporates annually spend fortunes on production of sustainability reports, to complement their financials, which deserve a scrutiny too often neglected. They actually do indicate how respective companies are, or aren’t, implementing SRI as they understand it. Generally, the companies can hold their heads high because, to the extent that business savvy doesn’t apply, transformation bludgeoning does.

For one, there are the legislated imperatives of black economic empowerment (including the concomitants of skills development and affirmative procurement). For another, there is the Financial Sector Charter (including “targeted investments” and active involvement by asset managers in companies where they invest). Both prioritise social goals, monitored by scorecards.

Especially pertinent for retirement funds is an observation of the National Treasury task team: “They (the funds) appear not to appreciate that, unless there are fundamental changes to our economy, such as significant increases in employment, all retirement income is at risk. While fund trustees are not expected to make investments that will not result in a real return, a measure of social investment by funds is appropriate and can contribute to our financial security and economic growth.

”The policy question is whether it’s legitimate to skim from retirement funds, as a single savings category, rather than from taxpayers as a whole. The practical question is what this might mean, for the task team has recommended that funds disclose SRI investments “likely to yield returns lower than those which might be expected of other investments”.


In a seminal study for the UK Social Investment Forum, authors David Coles and Duncan Green used four criteria to assess retirement funds’ SRI practices. They might equally be used in SA, complementing the Financial Services Board circular PF130:

  • Policies. How clearly does a fund’s Statement of Investment Policies articulate why ESG issues should be considered in the fund’s investment programme?

  • People. Who is accountable for monitoring the ESG performance of the companies in which the fund invests?

  • Implementation. How does the ESG assessment integrate into the fund’s investment and risk-management processes?

  • Transparency. Is there an effective dissemination of the fund’s SRI activities?

Clearly, it has in mind something that goes beyond SRI as the term is conventionally understood. It describes the convention as “investments of the least controversial kind, the kind that entails screening for good corporate governance, sound labour relations, environmental friendliness and so forth”.

Obviously, something of the more controversial kind will require changes to Regulation 28, which sets out principles for retirement funds’ prudential investment: “As long as an SRI investment is sound, that is, that it will retain the real capital value...and SRI investments of this nature by a single fund do not exceed, say, 10% of its assets (by value), then it can make for a prudent fund investment.”

The ball game has drastically changed since 2004 when the recommendation was originally made. Rocketing inflation threatens real capital values. Soaring interest rates ratchet upwards the cost of capital. How then should SRI be applied to fund investments not of “the least controversial kind”, to retain capital values and still to make social impacts?

The implication seems to be that up to 10% of any one fund needn’t show a real rate of return. Will this be for any specific reporting period? Might it entail high-risk investments (say, to preserve jobs in a manufacturer whose sales cannot compete against cheap imports) on the off-chance that capital value is eventually restored? From where will retirement funds draw the expertise, or acquire the mandates, to make decisions of this type? And how does fairness to members come into it, where some funds opt for zero real return on a portion of assets while other funds don’t?

Intentions are good but implementation is vexed. There are limited alternatives:

  • Reintroduce prescribed assets, for government to make the calls on investments it chooses to describe as SRI, with the potentially disastrous effect on fund returns (hence retirement provision) previously experienced;
  • Bring back retirement-fund tax, for all its inequity and adverse effect on savings that government wanted to avoid when abolishing it;
  • Concentrate responsibility on the state fiscus for infrastructure bonds to be issued at competitive rates and for social programmes to be funded by the general body of taxpayers at large;
  • Stick with what exists, on the basis that what isn’t broken needn’t be fixed. It’s for empowerment codes and sector charters to work their SRI objectives, and for companies to progress their own SRI practices through stakeholder pressure or self-realisation of their own best interests, without retirement funds being singled out for special sacrifice.

There are two myths about SRI. One is that they occasion a lower return than non-SRI. This needn’t be true of “conventional” SRI, and the numerous SA asset managers who run SRI funds can show it to be untrue. Forcing more “controversial” SRI, however, can have more controversial effects.

The other relates to retirement funds. It’s that their long-term natures carry more weight with companies, to elevate SRI above immediate profits, than the short-term strategies of hedge funds and pressures on asset managers. Their competitive edge – not least to attract business from retirement funds, paradoxically – relies on peer outperformance, quarter after quarter, year after year.

SRI needs a reality check. It starts with definition, so that those charged with it and being charged for it at least know what it is. Otherwise, as SA enters retirement-fund reform, it can end in chaos where nobody is able to differentiate conventional from controversial SRI except by the effect on their pockets.

FTSE, the global index company, has indices for every occasion. Its FTSE4Good index series, providing SRI benchmarks and trading indices, applies rigorous screening for investors to navigate through the multiplicity of codes and standards worldwide.Where SRI performance has been relatively weaker than other indices, it could be because of the FTSE4Good ethical criteria. For instance, the screening out of armaments would cause “benefits” of the Iraqi war to be lost.The graphs, all denominated in US dollars, illustrate how some SRI indices compare with the performance of more general indices over the past five years.

1. BRIC represents Brazil, Russia, India and China
2. South Africa falls into the Advanced Emerging category