Edition: Dec 2013 - Feb 2014
Editorials

RESPONSIBLE INVESTMENT

To move it along

Launch of the Sustainable Returns project, the culmination of exhaustive research and consultation, switches from a talk shop to practical assistance for implementation.

Bombarded with pressures to support “sustainable investment”, like it or not, trustees of pension funds and their asset managers can become befuddled. How seriously must they take it? How do they implement it? Is it merely a cosmetic decoration or is it a fiduciary duty that actually requires proper compliance?

Help is at hand. It comes in the form of a 94-page easy-to-read publication entitled Responsible Investment and Ownership: A Guide for Pension Funds in SA. Get a copy from the Principal Officers Association.

Launched in September by the International Finance Corporation and the POA, it’s the product of two years’ engagement with the SA pension-fund industry inclusive of government, organised labour and investment-service providers. Also involved was the UN-supported Principles for Responsible Investment (PRI). Thanks to the government of Norway for having funded the Sustainable Returns project.

It’s intended to underlie the ground-breaking initiatives in SA, particularly by the revised Regulation 28 and adoption of the Code for Responsible Investing in SA (CRISA). The initiative aims to boost their practical meaning.

Giving it the stamp of his endorsement is Finance Minister Pravin Gordhan. Opening the launch function, he said on video: “The investment decisions of the country’s retirement funds have a direct bearing on pensioners and the society where they will retire. Their size means they have unprecedented power to secure sustainable long-term returns by insisting on high standards of environmental care, social concern and better governance in the assets where they invest.”

A bevy of speakers from SA and abroad addressed different aspects. They were complemented by a panel discussion that had to tackle three issues: what’s needed for responsible investment (RI) to take hold in the SA industry; how the guide can become a living document, and ideas for moving it to implementation.



Oliphant . . . foundations
laid

First up was John Oliphant, principal executive officer of the Government Employees Pension Fund:

The RI journey began in 1976 when the Rev Leon Sullivan drafted a code of conduct for US companies doing business in apartheid SA. But jump to more recent history.

In 2005 the UNEP Finance Initiative (a global partnership of over 200 financial institutions) put out what famously became known as the ‘Freshfields report’. It offered a legal framework for the integration of environmental, social and governance (ESG) issues into the institutional investment process. It set a solid foundation for the PRI initiative, launched later that same year by UN secretary-general Kofi Annan.

The GEPF was a founding signatory. Many other institutions quickly embraced it, making the PRI a significant milestone. To date the PRI has more than 1 000 signatories with assets under management north of $32 trillion.

There’s an argument that a number of SA signatories followed the GEPF only for marketing purposes. This argument is backed by events in 2009 when the PRI wanted to deregister them for implementation failure. The GEPF intervened and requested that it be given an opportunity to engage with the SA signatories.



Ramalho . . . clear mandates

This led to birth of the PRI SA network. A lot was achieved through it, including inputs to the draft King III at the time. It led to the 2011 creation of CRISA because it was clear to us that King III would not be a success unless we had an active shareholder base to hold investee companies accountable. Next came the new Reg 28 which requires trustees to take ESG factors into account.

All the foundation work is now in place. But still many pension funds are sleeping giants, not active owners. Is it a knowledge issue, or are trustees unaware of their ownership responsibilities? One only hopes that the guide launched by the Sustainable Returns project will close the knowledge gap.

Next came Ansie Ramalho, chief executive at the SA Institute of Directors:

King III and CRISA are flip sides of the same coin. The former guides boards and directors on how to execute their legal duties. The latter provides the framework for institutional investment on RI.

Today, most investment in large companies is by institutions. It means that employees, through their contributions to retirement funds, have risen (albeit indirectly) to prominence as investors. That’s why trustees of these retirement funds owe it to the beneficiaries to invest in ways that will contribute to sustainable outcomes.

Institutional investors are catalysts for either good or bad governance of companies because they have the power to hold boards to account. Many people blame passive shareholders for contributing to the global financial crisis.

A thought-provoking statistic is that the period for retaining US-traded shares in the 1970s averaged seven years. The current average is seven months. It begs the question as to the behaviour that investors promote in investee companies if there is an expectation of a return within such a short period.

CRISA was intentionally drafted from the point of view that the asset owner, e.g. pension fund, is ultimately accountable for the RI of those assets and should ensure that this ethos is followed by service providers, e.g. asset managers and consultants. Recent research by the CRISA committee shows that this approach is not well understood and executed.

A critical area that needs to be addressed, to achieve clarity, is for asset owners to agree unambiguous mandates with service providers that enable asset owners to hold service providers accountable.

She was followed by David Couldridge of Element Investment Managers:

SA has 44 signatories to the PRI. Unfortunately, only five are asset owners so mandates requiring an RI approach have been slow.

Our industry’s system of incentives is not aligned with the long-term liabilities of our funds. It encourages managers to take action that is sometimes not in the interests of funds’ beneficiaries. Short-term performance can sometimes put longer-term returns at risk.

We must assume that the current system will be around for some time. If asset owners continue to send out surveys and questionnaires without taking further action, nothing will change.

In 2007 the PIC put out a R90bn tender. Its ‘request for proposal’ to SA asset managers asked whether they’d signed up to the PRI. Prior to the tender there were only four signatories. Almost immediately afterwards, a further 10 signed. A few months later, the number grew to 18.

If trustees at the due-diligence or report-back stages ask these questions of service providers, sustainability integration and active ownership will follow:

  • Will you please take me through your investment process and show how you integrate material sustainability or ESG issues? Could we have a practical example?
  • At the last report-back you gave us two examples of your engagement activity. How do you expect that these will add value or reduce risk for our funds that you manage?
  • Where and how have you exercised your right to vote at shareholder meetings by proxy? Did your vote help to reduce risk or add value?


Couldridge . . . powerful
levers

Finally there was Aimee Girdwood, a researcher and consultant on sustainability-related policy:

There must be a common understanding of what’s meant by RI. Development of case law, directives and guidelines (such as an updated PF130) will go a long way to assist the interpretation and application of these principles on a case-by-case basis.

At present there’s uncertainty on where to start, how to apply, how to assess risks and opportunities, and how to measure and assess performance. This does lead to an increase in costs that, one hopes, can be mitigated by developing a widely-accepted understanding of what RI is; providing access to reliable data, and developing processes and systems to implement. The Sustainable Returns guide is key, as is the CRISA practice note on disclosure.

We should not rely solely on asset managers. Pension funds remain accountable and are therefore required to correctly mandate asset managers, and to manage their performance. These mandates need to be continually reassessed over the life of the relationship between the asset owner and manager.



Girdwood . . . costs impact

From the floor there was Kerry Sinclair of RisCura:

We’ve worked with pension funds on ways to incorporate RI into their investment-policy statements and mandates. The biggest questions remain around the costs and resources involved in RI implementation. To generate momentum, these questions must be tackled meaningfully and directly.

The panel’s chair, not far removed from this publication, had to stick in his oar too:

Traction requires much more bottom-up awareness, from the level of the individual member of a pension fund, of being a shareholder. This would be encouraged if the individual’s annual benefits statement included the main shareholdings of his fund and other pertinent disclosures (see First Word in this TT edition).