Edition: Edition: December 2015 / February 2015
RESPONSIBLE INVESTMENT 1
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
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
- Clarify that responsible investment includes ESG
integration, engagement, voting and public-policy
- Explicitly address ESG-related competence, expertise and skills in forthcoming guidance on
- 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.
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
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
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
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
All very well. All that’s
needed for progress are
commitment and resources.
Radley . . . essential
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.