Issue: March 2012 / May 2012
Expert Opinion

Mantra for the new economic order

It’s called “responsible investment”. Pension funds and their service providers must rise to the challenge. John Oliphant, head of investments and actuarial at the GEPF, underlines the importance of their particular role.

The very future of capitalism now occupies centre stage. World leaders continue to grapple with seemingly endless fallout from the 2008 global financial crisis, plunging economies into recession and leaving many pension funds reeling. Market crashes have become more frequent and pronounced in the past few decades, clearly indicating fundamental ills in the global financial system.

The crisis shows that there cannot be a reversion to business as previously. Days of laissez-faireism are over. Governments are seeking more active roles to prevent excesses by corporates in pursuit of short-term profits at the expense of long-term sustainable investment returns.

Clearly, the status quo is untenable. While there are increasing government interventions, institutional investors -- such as pension funds, insurance companies and their service providers -- are also committing themselves to a more active ownership approach to investments made on behalf of their members and beneficiaries. Asset owners, especially trustees of pension funds entrusted with the life savings of their members, are required to think more strategically about ensuring investment returns for the long term.

Hence the Code for Responsible Investing in SA (CRISA) as a voluntary mechanism to help asset owners, asset managers and their service providers integrate, monitor and report on sustainability (environmental, social and governance, known as ESG) issues with regard to their investment processes. CRISA was introduced into the South African investment landscape last July after the CRISA committee (comprising investment-industry representatives) launched the five CRISA principles.

From February this year institutional investors are required to publicly report against the application of CRISA. The initiative seeks to form part of an effective governance framework complemenatry to King III. According to CRISA, investors will be required to incorporate sustainability considerations, including ESG, into investment analysis and investment activities as part of the delivery of superior risk-adjusted returns.

In the same way that world leaders grapple to chart the way forward, asset owners must look for innovative and responsible investment practices in order to continuously create value and equitably share prosperity. At the same time, they must strive to ensure that investee companies in their portfolios operate within the carrying capacity of the earth’s natural environment.

Oliphant...institutional influence

Oliphant...institutional influence

As fiduciaries, we must consider these sustainability issues in our investment decisions and adopt an active ownership approach on behalf of the real owners of the assets we manage. These real owners are the members of pension funds.

In our view as the Government Employees Pension Fund (GEPF), the next biggest systemic risk to the financial system -- and by extension to pension funds’ investment portfolios -- is the threat of fossil fuel assets becoming stranded as the shift to a low-carbon economy accelerates.

According to London-based research company Carbon Tracker, in the past decade investors have suffered considerable value destruction following the mispricing exhibited in the dot.com crash and the more recent credit crunch. “The carbon bubble could be equally serious for institutional investors – including pension beneficiaries – and the value lost would be permanent,” states a research paper.

This is one of the risks that trustees need to actively manage to protect their members’ voluntary and compulsory savings of about R2 trillion worth of assets. Collectively, members of pension funds own sizeable shareholdings in each and every major company listed on the JSE. For example, members of the GEPF own approximately 4% of Anglo American, 10% of Impala Platinum, 7% of ArcelorMittal, 10% of Standard Bank, and sizeable interests in many others.

The fact is that the investment landscape has changed. Pension-fund trustees and their service providers will find themselves having to give account to the new owners of capital – the workers – as to their approach to investments. Regulation 28, issued under the Pension Funds Act, obliges them seriously to consider the long term by integrating ESG factors into their investment decisions.

I believe that CRISA -- working in conjunction with Regulation 28, the UN-backed Principles for Responsible Investment (PRI) and other best-practice frameworks --provides an enabling framework for institutional investors, as custodians of their members’ assets, to engage and hold companies in which they invest accountable to the demands of sustainable returns in the new economic order.

The GEPF is committed to playing its part. We call upon other asset owners to join us in seeking sustainable returns for all our members.