Edition: Dec 2013- Feb 2014

RisCura Consulting guide to responsible investing

Fair . . . practical advice

Regulation 28 puts responsible investing on trusteesí agendas and many are wondering where to start.

The first step is to realise that responsible investing is an approach, not a product. It is not an asset class that should be ring-fenced in a portfolio by investing in one of the many socially responsible investment (SRI) products available on the market. It goes deeper than this. Itís a way of considering all investments, and cuts across different investment mandates, asset classes and investment products.

Responsible investing integrates any factor that affects longterm sustainability, including environmental, social and governance (ESG) factors, into investment practice. Put simply, it is about balancing risk and return while considering the world and society in which they live.

The issue of returns

A common belief is that investing responsibly affects returns negatively. Yet every year, more and more international research demonstrates that responsible investing does not, in fact, result in lower returns.

In reality, responsible investing is being proven to affect fund returns positively because it calls for a deeper analysis of companies and their impact on markets and societies. This should result in better decisions and, more importantly, reduced risk by uncovering key issues that traditional number-based analysis can miss.

Retirement funds are in the perfect position to drive long-term thinking around responsible investing to parallel their longterm investment horizon. Retirement fund investing should not be about 3-month, 12-month or even 3- year returns; it should be about 10- 20-year sustainable returns. It is becoming increasingly apparent that sustainable long-term returns require the integration of ESG factors.

Where do you start?

Learn the regulatory frameworks on integrating ESG into investments
The new Reg 28 pushes trustees to integrate the concepts of investing responsibly into their strategy, and the Code for Responsible Investing in South Africa (CRISA) sets the stage for action on how to go about doing this.

Document your plan on responsible investing in your investment policy statement (IPS)
There are many examples available of how you can begin to craft the language and philosophy of responsible investing and incorporate it into your investment policy statement. This is an important step in formalising your Fundís responsible investment plan.

Ensure ESG expertise and focus is part of your process for selecting investment managers
Probing managers on how they integrate ESG factors into their investment process, policies and decision-making can be challenging, but should remain a priority.

Check on proxy voting by your asset managers
Asset managers are able to bring about change through exercising the vote attached to the shares that they own or manage on behalf of their clients. Trustees should be made aware of the stewardship and/or proxy voting and engagement policy adopted by their investment managers and should receive regular reports on activities that relate to these policies.

Ask your investment consultant about their ESG focus
With the new preamble to Reg 28ís specific focus on investing responsibly, consultants should be the thought leaders on how ESG considerations impact idea generation, portfolio construction, management and implementation.

Incorporating ESG into investing shouldn’t be overwhelming
Despite the variety of approaches in the market for responsible investing, the requirement to consider ESG integration neednít be overwhelming for trustees. CRISA provides a valuable roadmap for funds to meet the regulatory requirements, and with the assistance of their services providers, trustees can follow an easy to execute plan to get started.

Malcolm Fair, RisCura