Edition: Edition: December 2015 / February 2015
Editorials

RESPONSIBLE INVESTMENT 1

Reach for the stars

UN-backed international report lays it on thick for ESG.
SA features prominently.

SA, bless its heart, has laws intended to prevent armed robberies and jumping traffic lights. Their efficacy depends on forceful implementation. Similarly, SA has a plethora of requirements to promote compliance with environmental, social and governance (ESG) criteria in corporate behaviour and investment management. Their efficacy begins with robust interrogation. Unless there’s effective policing, neither can make much headway.

As matters stand, pension funds are subject to the Regulation 28 which requires them to consider ESG in making investment decisions, and under circular PF 130 of the Financial Services Board to compile investment-policy statements. Merely to “consider” ESG, usually delegated by fund trustees to consultants, is insufficient so long as carrots aren’t accompanied by sticks.

But compulsion, which must necessarily be backed by regulatory guidance that’s so far obscure, requires resources for research: on the part of the FSB to monitor compliance and to intervene when its evaded; on the part of trustees to know what they’re supposed to do, and risk being smacked when they don’t; and on the part of asset managers as well as consultants who either carry the costs themselves or agree with trustees that at least portions be passed back to the funds (i.e. to fund members who might take some convincing, if they’re to be consulted at all).

The recently-released Fiduciary Duty in the 21st Century report – produced by the United Nations Global Compact, amongst others, and launched in SA during October – makes no bones about it. Predictably countering the contention that ‘responsible investment’ conflicts rather than complements the fiduciary duty to deliver financial returns, its country report for SA makes key recommendations. They are that the FSB should:

  • Clarify that compliance with the requirements of Reg 28, particularly those relating to ESG issues, should be seen as an integral part of fiduciary duties imposed by the Pension Funds Act;
  • Clarify that responsible investment includes ESG integration, engagement, voting and public-policy engagement;
  • Explicitly address ESG-related competence, expertise and skills in forthcoming guidance on pension-board education;
  • Require asset owners (pension funds) to prepare a public, annual report describing how they have integrated responsible investment into their investment-policy statements, practices and processes, and their investment-manager selection, appointment and monitoring processes.

CHECKLIST CHALLENGE

The National Association of Pension Funds in the UK has prepared a series of questions, equally pertinent for SA, to assist trustees in their dialogue with prospective investment managers. Trustees should ask them:

  • What does “stewardship” mean? Is it viewed as undertaking activities on behalf of clients to monitor, engage and, where appropriate, intervene on issues that may affect the long-term value of investee companies and the capital invested in them? Or is it a voting compliance issue?
  • To which codes of conduct or principles have you signed up? The Stewardship Code (read the Code for Responsible Investing in SA) and/or the United Nations Principles for Responsible Investment?
  • How are non-financial risks incorporated into your investment decisions? Are they built into investment research and decisions? Does your approach differ across asset classes?
  • How do you respond when a non-financial risk is identified in an investee company? Do you engage with the company to influence change, alter the stock weighting or something else? Is your engagement led by the fund manager, the corporate-governance team or both?
  • On what issues do you engage with companies? Is it in relation to both financial and non-financial decisions? What about the corporate culture and board leadership; executive pay; board diversity; the performance of and relationship with the auditor, and any other material factors?
  • What proportion of stocks would you expect to vote? In all jurisdictions? UK, US, Europe, Japan, Emerging Markets (read SA)?
  • Are you able to demonstrate the effectiveness of your stewardship activities? Can you provide examples where you have identified issues of concern, engaged upon them and achieved appropriately positive corporate change?
  • How do you report on your stewardship activities? Do you provide clients with a voting report at least highlighting votes against management?

It’s asking for a lot, for a giant leap forward from nice-to-have aspiration to the nitty-gritty of application. Arguably, asset managers and consultants push it with greater vigour than many trustees who carry the fiduciary duty for the longer-term ‘sustainability’ of their own investments. Put differently, it’s for pension funds to be more active owners of the companies where they’re invested and to assert their rights as shareholders as a potent force for ESG improvements.

The report goes further. It refers to the Code for Responsible Investing in SA – a voluntary code for providers and allocators of capital, like the King recommendations for companies, signed by most asset managers but few pension funds. Its proposal is that the CRISA committee “should strengthen oversight of the code by conducting more detailed analysis of current practice, analysing the investment and other outcomes that arise from the code”.

All very well. All that’s needed for progress are commitment and resources. From whom?

THOUGHT LEADERSHIP


Radley . . . essential
priority

An exhaustive publication on responsible investment has been produced by Old Mutual Investment Group. Setting out a series of explanations, definitions, philosophies and practicalities, the 54-page Tomorrow: The role of investors in shaping the future adds local value to the depth of international literature. It’s well worth the download for industry digestion.

The variety of articles is from experts within and outside OMIGSA. Their presentations are as easily readable as they are informative and stimulating. Merely for an appetiser, take this excerpt from the introduction by OMIGSA chief executive Diane Radley:

The North-South divide has thrown into strong contrast developed markets, and the wealth accumulated there, often disproportionately – and which, at times, has been to the detriment of emerging markets. Going forward, strong economic growth is required in emerging markets to ensure social stability.

This growth will be driven by investment and, if it is to be sustainable over the long term, investing responsibly will be a priority for both asset managers and asset owners.

Here they’re shown multi-faceted ways, through the numerous RI/ESG elements, to think about prioritising it. Agree or disagree, but think.