Issue: March / May 2013

Vital to embed CRISA principles

Some investment houses still aren’t. They must, insists Liberty Corporate head of asset consulting Felix Ubogu.

Ubogu . . . active stance essential

The Code for Responsible Investing in South Africa (CRISA) was launched in July 2011. Despite this, however, some asset managers are still to embed these principles in their businesses.

Unless the ultimate owners (notably pension funds) take a more active stance on the matter, some investment houses are likely to make modest progress with regard to fully incorporating the principles contained in the code into their investment process. The aim of CRISA is to encourage a greater emphasis among institutional investors and their service providers regarding the issue of long-term sustainability and ESG (Environmental, Social and Governance) factors.

The core objectives of a pension fund are to safeguard and grow the retirement benefits of its members and ultimately to achieve superior long-term investment returns. The assets being managed must grow sufficiently in order for the members to maintain a reasonable lifestyle in retirement.

The principles promoted by CRISA are supportive of the ultimate objective of a pension fund. For example, one could view the active exercise of ownership rights as a means to ensure that companies in which one is invested continue to be run as efficiently as possible.

A number of asset managers actively engage with JSE-listed companies on governance matters and make their voting records available to beneficial owners. Most role players in the industry agree with the principles behind CRISA and the change that this code is trying to embed in SA’s corporate culture to ensure sustainability.

Having said this, although the investment process followed by most managers is likely to already take sustainability into consideration in one form or another, a few well-known investment houses are still to endorse the principles contained in the code. This is perhaps partly because of the difficulty in incorporating all the principles contained in the code into their existing investment processes.

Trustees, as representatives of pensionfund members, have an important role to play. Investment firms will vote at investee companies’ annual general meetings on behalf of the shareholders whom they represent. As such, beneficial owners who subscribe to sustainability principles are able to encourage the companies in which they have an ownership interest to adopt a consistent approach.

While much of the onus may be placed on the trustees, the investment responsibility is often outsourced to expert asset consultants. They assist the trustees in formulating an appropriate investment strategy and will regularly engage with the asset managers on the fund’s behalf. Because asset consultants play an important role in the selection of investment managers, they should consider an investment manager’s approach to CRISA and whether or not sustainability considerations are incorporated into the investment process as part of the due diligence assessment.

The fact is that many well-established companies are already playing a role in similar areas, having adopted good governance principles in some form. Good governance ensures that there is a balance between non-executive and executive directors and that appropriate standing committees, including a remuneration committee, are established.

For now, CRISA is a voluntary code and it is likely to remain so for some time. Similar codes of responsible investing have not been introduced as a legislative requirement in other jurisdictions and CRISA is also unlikely to be established as such in SA. Yet it is possible that, at a point in the future, regulators may step in to make some form of compliance mandatory.