Edition: Edition: December 2015 / February 2016
RESPONSIBLE INVESTMENT 2
Change in the climate
Pension funds and their asset managers are in the front line for appropriate
behavioural responses. Seeing will be believing.
Rea . . . outspoken
The respite for the silent majority, who’d
tended to treat investment matters of ESG
(environmental, social and governance) as
peripheral, has come to a clunking halt. Cabinet has
now, after five years of consultation, published for
comment a draft bill that will impose a tax on polluters.
Denialism is rendered irrelevant.
The tax, National Treasury explains, seeks to
price carbon “by obliging the polluter to internalise
the external costs of emitting carbon and contribute
towards addressing the harm caused by such pollution”.
Effects will differ from company to company; the
greater the carbon emissions the heavier the tax.
Investors had better sharpen their pencils and focus
There can be no downplaying the impact of
government actions to counter the effects of climate
change, both directly in affecting the profitability of
companies through a targeted tax and also consequently
on investment returns significantly for pension funds.
The advantageous flip side would be incentives for
Take a leaf from the UK where 19% of FTSE
100 companies (a higher percentage in the JSE’s top
companies) are in the natural resources and extraction
industries. Bank of England governor Mark Carney
recently took the unusual step of warning that these
companies could be left “stranded” by tougher rules to
curb climate change.
He gave notice that the exposure of investors to these
shifts is potentially huge: “The challenges currently
posed by climate change pale in significance compared
with what might come. Once climate change becomes
a defining issue for financial stability, it may already be
Climate change fits narrowly into one aspect of the
ESG matrix but it pervades the “sustainability” whole;
through companies’ socially-responsible investment
(SRI) practices to boards’ governance over them
and stakeholders monitoring of them. The logic for
proactive intervention by asset managers and owners,
particularly insurance companies and pension funds, is
no longer for esoteric debate. It must be recognised and
implemented as integral to fiduciary duty.
Enter the newly-launched JSE/FTSE responsibleinvestment
index series. Says the JSE: “It offers an
objective methodology that further promotes the aims
of stimulating greater transparency by corporates on
ESG considerations and enabling them to integrate
these considerations into investment and stewardship.”
Will it? So far, responses range from the cautiously
favourable to the outright sceptical. Vociferous in the
latter category is Michael Rea. For analysis, depth and
comparison of hard ESG data, the annual report of
his Integrated Reporting & Assurance Services is in a
league of its own (TT Sept-Nov).
More than 11 years since birth of the first SRI index
series by the JSE, he reckons that that it still can’t seem
to figure out how to reach investors at the level of their
specific needs: “That index was on too few radar screens
to make it meaningful, and nobody is doing what needs
to be done to change this sentiment.” On the new index,
- Quantitative ESG tracking (as opposed to the
predominantly qualitative tracking of the old SRI
index) holds the potential to advance responsible
investment. But by cutting back on the population
sample to only the largest 83 companies by
market capitalisation, the JSE has pretty much
disincentivised the other listed companies from
paying attention to ESG matters;
- Because companies knew that the JSE was paying
attention on the old index, some such as Illovo Sugar
had significantly improved their ESG reporting.
Based purely on market cap, however, Illovo Sugar
has been excluded and relative laggard Tongaat
Hulett included on the new index. Smaller-cap
companies might revert to poorer reporting;
- FTSE has stated that it is not in a position to
compare companies by actual performance but
only measure them by what it can find in response
to its indicators. For instance, it suggests that the
Lost Time Injury Frequency Rate cannot be used to
assess the safety performance of companies because“it is not comparable between companies”. However,
ignoring that a standard definition of LTIFR does
exist for all industries, it will look only at the
number or rate of fatalities. If the only thing worth
measuring is deaths, it’s a horrible benchmark for“sustainability”. The goal of safety measurement and
monitoring is to avoid work-related deaths. The goal
of ESG indices should be about predicting such risk;
- Comparability between companies – the
cornerstone of all benchmarking – will diminish.
FTSE deems the indicators that will be sufficiently“material” and will consider others for which
investors ask. But investors don’t know what they
don’t know, so are unlikely to ask e.g. about water
and electricity consumption, the instability of both
creating vulnerabilities for the operations of SA
“We make it easier to invest in companies that invest
in the future,” runs the index’s payoff line. Various
companies, in the sectors about which Carney warned,
have made it onto the index; presumably more for their
reporting than their reliance on carbon emissions.
Another query is about the index using only the
information published in companies’ annual reports,
not necessarily inclusive of data to back up their
assertions. It leads to the temptation for company
reports merely to be heavier with spin and prettier with
pictures. Unless investors interrogate them, it can be
akin to marking one’s own homework.
A cross-section of SA investors and consultants– some large and some small, some
better-schooled in ESG than
others – offers a range of views on
whether the new JSE/FTSE index
will have the desired impact.
Jon Duncan of Old Mutual:
It’s a welcome addition to the SA
investment landscape. There’s potential to help pension-fund trustees in providing a
benchmark for ESG performance. But it does require
that the trustee fully understands the ESG-screening
approach and specifically what the ESG scores
communicate about companies’ ESG practices.
Also, since the inclusion process uses only publiclyavailable
information, it can be an important driver
for greater ESG disclosure by issuers wishing to be
David Couldridge of Investec Asset Management:
Some matters still need to be
finalised. A rule-driven approach
will be less controversial than
the old SRI index where some
companies, that had been excluded,
put great pressure on the JSE to be
As trustees take their place
at the head of the investment
chain, the index can help them build greater awareness
of sustainability. They are required to ensure the
integration of material sustainability issues (ESG
factors) as part of their fund’s investment strategy and
included in mandates to service providers.
It is important to understand why certain companies
are included and others excluded from the index,
then to see which companies are included or being
considered for inclusion in the fund’s portfolio. No
index can respond to all the variables of investments,
but it can be used to identify questions that help assess
service providers’ ESG progress.
To ensure a broad-based index, the threshold for
inclusion is low. Inclusion therefore does not imply that
there is no requirement for engagement with investee
companies. This should still take place to ensure that
disclosure practices continue to improve.
Jerry Mnisi of Stanlib:
In the past few years we’ve seen ESG come into the
mainstream as asset managers increasingly incorporate
it into their investment processes and asset owners ask
more questions on how their investments are being
managed in terms of it.
The index will help this process by providing a
benchmark for companies to assess themselves and
a platform for investors specifically to target these
Asief Mohamed of Aeon Investment Management:
Although I welcome the additional
disclosure that the index will
encourage, what appears lacking
is an equivalent disclosure score
similar to the pay-ratio rule that the
Securities & Exchange Commission
in the US has introduced.
Worsening inequalities in SA
and globally require disclosure of
historic trend and current practice for all remuneration.
The ratio might be different for different industries, but
better disclosure would raise the level of dialogue and
I’d also feel more comfortable if it could be taken for
granted that institutional investors actually read annual
reports. That this might not be the rule is indicated by
some curious approvals of executive remuneration. Also
needed is a requirement that retirement and investment
funds report quarterly on what they’ve been doing. This
will help to keep asset managers active and diligent in
their ESG assessments.
Tracey Want of Investment Solutions:
Much depends on whether
companies aspire to become
constituents on the index. As a
start, they must publically disclose
certain metrics that the index uses
to assess their ESG performance.
Disclosure is positive because
it allows investors to track the
performance of these companies
over time, and to compare them with peers in their
Whether the index is useful to pension funds will
depend on their governance budgets. For bigger funds,
which are well resourced and can afford the raw data,
analysis should be able to show them where potential
problems lie and how companies are managing them.
Simply to consider the index will be insufficient.
Transparency is a key driver. However, it isn’t clear
what percentage of each company’s overall score (for getting it onto the index) is based on quality. For
instance, the Top 30 index simply weights the scoring
companies equally while the main index weights the
included companies by market capitalisation. Hence
there is no weighting for quality.
The previous index rated all companies. Because at
present the new index rates only 83 companies, others
might be discouraged by not qualifying for assessment.
Heather Jackson of Atlantic Asset Management:
The new series is an improvement,
particularly in creating an equallyweighted
Top 30 index. It’s
encouraging that this index will
promote those companies that best
integrate long-term business-risk
factors pertaining to ESG.
There’s also now a distinction
between sustainability in the way
that a company manages its own business and the way
in which it provides proactive goods or services that
address social and environmental challenges. Both are
A concern is that the factors determining a
company’s score need to be transparent for investors
to validate how and why ESG matters for a company’s
Clive Eggers of GTC:
Development of a revised
standards, improves the
infrastructure critical for
the adoption of ESG/SRI
principles by SA owners and
While the index provides
the opportunity for improved
ESG reporting by companies and compliance by
pension funds, changes in investment behaviour are
largely driven by motivation. Until there is significant
change in the motivation of asset owners and managers
in adopting ESG principles, their behaviour is unlikely
Kobus Hanekom (with Dirk Oosthuizen) of Simeka:
It will become easier in principle
for the average trustee to formulate
a strategy and direct the selection
of assets to ESG, although it might
take a while before we have clarity
and buy-in on the weightings.
Clarity and simplicity are important
determinants for use.
The old index was obscure in its
composition. The new one seems to be an improvement
in that it incorporates international views and
Some things about the new index need to be
properly understood, for instance the exclusion
of Shoprite. On the other hand Sasol, one of our
largest polluters, is included. It does disclose a lot of
information, as do the extractive industries. Will the
green-informed then use the index?
We don’t anticipate that pension funds will quickly
move from the Alsi, Capi or Swix to the new index, at
least until there’s greater clarity on its composition.
Malcolm Fair of RisCura:
Getting scored on 125 or so
ESG criteria does find its way
into the growing list of matters
on which chief executives
of JSE-listed companies
will need to be accountable.
Rating methodologies play
an important role in raising
consciousness of matters vital to stakeholders.
For pension funds, the challenge is to make trustees
aware of the role they play as shareholders. Rating
methodologies, as now applied by JSE/FTSE, provide
information that funds and their service providers can
use about the owned companies.
While I don’t think that the new index will directly
cause greater compliance by pension funds with Reg
28 (which obliges them to consider ESG in their
investment decision-making), what could encourage
greater compliance is linking the new data (provided by
the ESG rating methodology) into improved training
and education of pension funds and their service