Issue: March / May 2013
EXPERT OPINION

Shortcomings in addressing sustainability

Investors have a significant role to play, urges Momentum Asset Management ESG research analyst Johan de Kock.



De Kock . . . pension funds must engage

SA’s ongoing corporate, social and labour instability -- most notably in the mining and resources sector -- have put the spotlight on corporate sustainability. It’s an issue that many companies take seriously under the King governance code, but the events at Marikana show that more can and should be done.

A main contributing factor for companies’ inability to address the social costs associated with operations is that few of them price social costs into the products and services they provide. These social costs are either deferred to the next generation in terms of a deteriorating environment or are a liability to future taxpayers.

This is blatant in the mining sector if one considers the acidic water problem in Johannesburg. Some experts warn that it could turn the city into a wasteland. SA miners are blamed for having sold low-cost gold deposits without having paid for the water pollution they caused.

Whether or not this is the case, it is yet another issue that hangs over the heads of SA miners, potentially discouraging investors and destroying value. The sad reality is that, as a direct result of mining activities where the cost of water treatment was not priced into the final product, gold miners or taxpayers are now on the hook. Either way, it’s a lose-lose situation for SA.

While local companies are acknowledged to be amongst the best in terms of governance reporting, current upheavals do call into question the relevance of sustainability reports of many
companies.

Around the world, investors have played a meaningful role in persuading companies to properly address sustainability issues. This is seen particularly in the US, partly spurred by its litigious
culture. In comparison, SA investors have played a lesser role.

Yet, two years ago SA became the second country (after the UK) formally to encourage institutional investors to integrate environmental, sustainability and governance (ESG) considerations into their investment decisions. They became signatories to the Code for Responsible Investing in South Africa (CRISA) that the Institute of Directors had released.

The code seeks to encourage socially-orientated business practices by shareholders and companies. As importantly, it requires investors to report on their policies at least annually on their extent of CRISA compliance.

The carrot for asset managers is that companies which apply socially-responsible principles to management decisions will likely be more valuable than those that operate in isolation of the communities where they operate.

The sobering reality is that many asset managers are unwittingly hamstrung in their ability to play a leading role in demanding greater management attention to sustainability. This is due to the many conflicts of interest that are likely to discourage financial-services companies from challenging companies’ boards. These range from issues like director remuneration (which asset managers themselves are unlikely to address) to pressuring a potential client.

Asset consultants who advise pension funds, and the pension funds themselves, could and should play a meaningful role in demanding a greater board focus on sustainability issues. Both asset consultants and pension funds could, and also should, put greater pressure and scrutiny on asset managers’ ESG policies.

There are encouraging signs that companies have recognised the new role investors are likely to play in respect of CRISA. Some boards are proactively engaging with shareholders about ractical
solutions to sustainability issues, including remuneration and other governance policies.

It is speculated that one of government’s objectives for the proposed National Savings & Social Security Fund will be the creation of superannuation funds, similar to those in Australia. Through them, investors will have a major influence on companies as corporate citizens and on the role of asset managers in unlocking value. So far, SA asset managers have mainly flexed their muscles in unbundling or unlocking value. Expect similar action, but on a far larger scale, in relation to sustainability issues as well.