Edition: July / September 2016
Editorials

CLASS ACTIONS 1

Ten out of ten, so far

As it celebrates the first decade of operation since its launch,
UN PRI can boast meaningful achievements globally and not least in SA.
Much more is expected in the advance of ’responsible investment’
and accountability. Pension funds’ involvement is critical.

The Principles for Responsible Investment (PRI) initiative, supported by the United Nations, is an international network of investors working together to put into practice the six PRI principles (see box) as a significant contribution to the development of a more sustainable global financial system.

Its goals are to:

  • Understand the implications of sustainability for investors, and

  • Support signatories to incorporate these issues into their investment decision-making and ownership practices.

In early 2005 the then UN secretary-general, Kofi Annan, invited a group of the world’s largest institutional investors to join a process that would develop the principles. A 20-person investor group, drawn from institutions in 12 countries, was supported by 70 experts from the investment industry, intergovernmental organisations and civil society. The principles were launched in April 2006 at the New York Stock Exchange.

SA’s Government Employees Pension Fund (GEPF) attended the launch. It became a founding signatory.

The principles are voluntary and aspirational. They indicate that ‘responsible investment’ is a process that must be tailored to fit each organisation’s investment strategy, approach and resources. The principles are designed for compatibility with the investment styles of large, diversified, institutional investors operating within a traditional fiduciary framework.

Global network

PRI today has more than 1 500 signatories from more than 50 countries representing over US$59 trillion in assets. The initiative has quickly become the leading global network for investors to learn about responsible investment -- and to collaborate with peers, companies and policymakers to generate sustainable, long-term investment returns for clients and beneficiaries.

Strong growth of the PRI initiative shows that investors have become increasingly aware of environmental, social and governance (ESG) factors. They seek to incorporate these factors before they invest as the ongoing, active owners of shares and bonds as well as other securities and assets.

THE SIX PRINCIPLES

The growth of responsible investment is being driven largely by:

  • Recognition of the financial materiality of ESG issues for individual companies and the market as a whole;

  • Acceptance that integrating these factors forms part of an investor’s fiduciary duty to its clients and beneficiaries;

  • Concerns about the impact of short-termism on company performance, investment returns and market behaviour;

  • A desire to see companies owned and managed in a way that more holistically assesses long-term drivers of risk and return;

  • Increasing public-policy measures requiring investors to exercise their rights and responsibilities as owners, including expectations around voting and engagement.

Many PRI signatories view their initial decision to formally apply to become a signatory as the first step in publicly demonstrating their organisation’s commitment to responsible investment.

The PRI initiative also provides a high-level framework for integrating ESG issues into investment decision-making and ownership practices within the boundary of investors’ fiduciary duties. It offers a comprehensive range of tools and resources to support signatories, including local regional networks such as in SA.

PRI uptake in Southern Africa

The PRI SA Network was launched in May 2009 with endorsement of the GEPF. The network is a platform for PRI signatories in the region to discuss ideas, share experiences and collaborate on a range of ESG issues material to investment decision-making. There are 60 signatories in Africa of whom 52 are in SA. The latter comprise six asset owners, 35 investment managers and 11 professional service providers.

PRI also has a number of network-supporter organisations in Africa. These include the Association of Savings & Investment SA (ASISA), the Institute of Directors SA and the Zimbabwean Association of Pension Funds. PRI network supporters are generally non-profit industry organisations that publicly express support for the PRI within their constituencies.

This partnership enables network supporters to work with the PRI to raise awareness of responsible investment and the PRI within the investment community in different regions and sectors, and to access PRI resources and support.

The GEPF continues to play a lead role in growing the network. Linda Mateza, head of Investments & Actuarial at the GEPF, was recently appointed to chair the PRI’s southern Africa network. The GEPF further assists the PRI globally as GEPF board chair Renosi Mokate serves as the PRI board member for Africa and the Middle East.

Due to the efforts of then principal executive officer John Oliphant, the GEPF was also instrumental in bringing the PRI annual signatories’ event to Cape Town in 2013. ‘PRI in Person 2013’ was attended by more than 400 participants representing some 220 organisations from 25 countries.

PRI is represented on the Code for Responsible Investing in SA (CRISA) and the ASISA responsible investment (RI) committees. This enables PRI to share global developments in RI with SA-based signatories. It also provides local SA signatory inputs into PRI global workstreams and projects for the benefit of the SA investment industry, PRI and its local and global signatory base.

Also in SA, the PRI was a significant initiator and contributor to the Sustainable Returns for Pensions & Society Project This was an initiative of the Batseta Council of Retirement Funds for SA and the International Finance Corporation. It saw the release in September 2013 of Responsible Investment and Ownership – A Guide for Pension Funds in SA, a seminal publication.

The network is actively working towards increasing SA and African asset-owner membership of PRI and to extend its footprint in neighbouring African countries. Presentations and trustee training workshops, focusing on responsible investment and PRI, were delivered during 2015-16 in SA, Zimbabwe, Malawi, Botswana and Swaziland.

Trustee training

PRI is also working towards a global trustee-training programme in RI. It will complement the PRI Academy online programme which offers self-paced online courses in responsible investment.

A review of the list of SA signatories indicates that the majority are investment managers and service providers. In fact, the asset-owner category – reserved by way of example for retirement funds and insurance companies – comprise fewer than 12% of all SA signatories.

This contrasts poorly with the rest of the world. Globally, PRI’s asset-owner signatories represent just over 25% of the total. PRI is working with its signatories and industry stakeholders in southern Africa to raise awareness and educate retirement funds on the importance of responsible investment and to explain the real benefits of signing up to PRI.

At the top of the investment value chain are retirement funds. As asset owners, their role is critical when it comes to mandating their investment managers to embed the analysis of ESG factors into their investment activities. By doing so, they ensure that they discharge fully their fiduciary duty to clients and beneficiaries.

Asset owners’ beliefs and expectations on how ESG issues should be managed, to best contribute to portfolio returns across asset classes over time, may not always be fully in line with those of their investment managers. Aligning the interests of both parties is a fundamental requirement for the delivery of sustainable portfolio returns over the longer term.

It is also central to a mission of the PRI initiative. This is to support signatories in helping develop a more sustainable global financial system.

Reg 28 and RI

A starting point for SA retirement funds is to apply the principles outlined in Regulation 28 under the Pension Funds Act (administered by the Financial Services Board) as well as those of CRISA. Put briefly, fund trustees should make sure when appointing a service provider (such as an investment manager or consultant) that there are clear expectations; in particular, on how ESG issues can and should be managed and reported to the asset-owner client, and are contained within the investment mandate.

PRI has a number of resources available to its asset-owner signatories. They’re intended to assist them in discussing this aspect with fund managers.

An early success of the PRI’s coordinating powers in SA, by means of the local network, was engagement with the King committee during the stakeholder-consultation process ahead of the King III code on corporate governance. The submission from the network argued for the inclusion of a chapter on shareholder responsibilities to support good governance in SA companies.

Discussion between the network and the committee gave rise to development of CRISA. What emerged was an intentionally a strong alignment between PRI and CRISA principles, four of them being shared. CRISA applies, like King III, on an “apply or explain” basis whereas PRI is a voluntary global investor network to which organisations apply for signatory membership.

Whilst CRISA gives guidance on how the institutional investor should execute investment analysis and investment activities, and exercise rights to promote sound governance in SA, PRI provides implementation support in the form of best-practice resources to assist signatories implement these voluntary principles.

Of immense help to SA asset-owner and investment-manager signatories to PRI is the annual PRI Reporting & Assessment framework. It has a number of questions which intentionally address CRISA requirements as well as PRI implementation.



Bertrand ... African thrust

This enables the SA signatories easily to report on their application of both the PRI and CRISA principles to their members, beneficiaries and broader stakeholders using the annual PRI Assessment Report which they receive each year.

“PRI, as a global collaborative investor network, is keen to continue to establish and deepen its network of signatories and network supporters across the African continent,” says Africa head Adrian Bertrand.

He’s confident that -- working with current signatories, network supporters, regulators and supportive governments -- it is only a matter of time before many other African countries follow SA in terms of its progress in mainstreaming responsible investment by means of both legislative and bestpractice guidance for institutional investors and their service providers.

Trustees can drive RI uptake

The PRI’s 10-year anniversary provides an opportunity to reflect on all that has been achieved in the first decade. It also provides the opportunity to reflect on the remaining obstacles and barriers to mainstream responsible investment practices by institutional investors across the globe.

SA has its own set of ESG challenges which responsible investors are required to successfully navigate and manage, not to mention the current country-specific economic challenges. These can easily be argued to have arisen, at least in part, from unchecked and unmanaged ESG issues at country level.

At the SA launch of the Fiduciary Duty in the 21st Century report, published by the PRI (in conjunction with UNEP FI, UNEP Inquiry and the UN Global Compact) last year, the PRI signatories were again reminded that institutional investors need to ensure that their commitments to ESG integration are followed across the entire investment process:

  • Investors need to require investee companies to provide robust, credible and detailed accounts on their management of ESG issues, and of the financial significance of these issues;

  • They must engage policymakers on issues relevant to long-term performance;

  • Intermediaries – legal advisers, investment consultants, stock exchanges, brokers and data providers – should analyse and take into account all long-term value drivers, including ESG issues, in their investment practices and processes;

  • Recognise in practice that ESG issues are an integral part of codes of professional ethics such as the CFA;

  • Raise market awareness of the investment case for ESG integration.

Policymakers should insist that fiduciaries take account of ESG issues in their investment processes, their active ownership and voting activities, and their public policy engagements. In these, they must be transparent on all aspects of ESG integration and investment practice.

Further, they should also support efforts to harmonise national legislation and policy instruments (e.g. stewardship codes and disclosure requirements) on long-term responsible investment. At the same time, they must work to develop an international statement or agreement on the duties that fiduciaries owe to beneficiaries.

SA is a pioneer in having been one of the first countries globally to incorporate the consideration of ESG issues when investing as per the revised Reg 28 as well as CRISA (first emerging-market stewardship code and second such code globally after the UK Stewardship Code). However, there remains room improvement. The 21st Century report, in its coverage of SA, offers recommendations to both the Financial Services Board and the CRISA committee.

The FSB should:

  • Clarify that compliance with the requirements of Reg 28, in particular those relating to ESG issues, should be seen as an integral part of the 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-fund board education;

  • Require asset owners 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 report recommended that CRISA committee should:

  • Strengthen oversight of the code by conducting more detailed studies of current practices;

  • Analyse the investment and other outcomes resulting from implementation of CRISA principles.

Of critical importance is the report’s conclusion that failure to look at ESG factors, in terms of the risk they present to portfolios, is actually a breach of fiduciary duty. This applies as much to a pension fund’s board of trustees as it does to the investment manager(s) appointed by a board to make investments on a fund’s behalf.

Many leading SA investment managers, like their international peers, have already committed extensive resources to understanding ESG risks and opportunities at individual company and also portfolio level. Climate change, black economic empowerment, executive pay, health and safety in the extractives sector, ‘fracking’ and gender diversity at board as well as management levels, are examples of relevant ESG investment issues.

“Now is the time for pension funds seriously to review their policies in light of Reg 28 and CRISA requirements,” Bertrand urges. “Trustees must ask their funds’ asset consultants and managers for explicit information about their investment processes and how these incorporate ESG factors, from both an ESG integration and active ownership perspective.”


* More information about PRI can be obtained from Adrian Bertrand, Head of Africa, by email at adrian.bertrand@unpri.org or phone +27 (0)84 500 6474. Also see the www.unpri.org website.