Issue: December 2011 / February 2012
Get ready for CRISA
Institutional investors must prepare to apply or explain their compliance, advises Prasheen Singh. Trustees of pension funds have an important role.
Singh...Reg 28 underpin
The GEPF’sJohn Oliphant,who chaired the committee responsible for producing the final CRISA code, was strident in his challenge that those of us involved in the long-term savings industry pledge commitment to it principles(see box). Included is an initial milestone of 1 February 2012 as the date by which institutional investors and service providers should indicate their adoption (or not) of the principles and practice recommendations in CRISA on an “apply or explain” basis. This issimilar to the approach used in companies’ reporting on adherence to King III.
Whether you represent the asset owners in the industry or represent one of the various service providers to the asset owners, such as investment managers and consultants, the question remains: “Will you apply the code or explain it away?”
It’s worth pointing out that the final draft of CRISA contains an additional principle that wasn’t in the discussion draft; namely, the fourth principle which requires that one be mindful of potential conflicts of interest and manage them proactively. This principle isn’t something that is explicitly spelt out in other international codes on RI but the committee felt that it warranted special mention, given the more concentrated ownership and governance realities in the SA marketplace.
To date, a lot of commentary and action around the topic of RI has come from investment managers and a few of the big pension funds. However, this code is aimed at all asset owners and their fiduciaries and their investment-related service providers (i.e. all pension / long-term savings funds, life assurers, investment managers, asset consultants etc. – or more specifically, the trustees or directors responsible for the assets and businesses of those entities).
So, if you are an institutional investor or service provider as defined by CRISA, what do you need to do to address the challenge if you’ve not done so already?
Firstly, you need to “believe”. Adopting and practising the principles of CRISA has considerable operational consequences with uncertain benefits and costs. Indeed, it also has potential costs (with possibly no benefits) if you don’t adopt the principles. So it can’t be ignored.
While investment managers need to adjust their investment processes to integrate ESG factors into their analysis and actions, it is the owners of the assets they manage who need to believe in the merits of why this should be done. Add to this the fact that from February onwards, institutional investors will need to disclose the extent of their adoption - or intent to adopt - then it’s essential that pension funds meaningfully address RI and CRISAas soon as possible.
Why would you do this? Besides believing this is ‘the right thing to do’, there is a growing body of evidence pointing to the positive correlation of above-average long-term returns and good ESG practices by companies. Institutional investors should further recall that the preamble to Regulation 28 now states that prudent investing “should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character”. So it would be prudent to ask: do you have a choice?
Ideally before February:
There is a lot to do. It’s not expected that all will be in place by February, but it is hoped that the first steps will have been taken with momentum growing thereafter. If you lack ‘knowledge’ or ‘resources’, there are consultants and advisors able to help. However, if you lack ‘time’ no one can address that but you. Have you started yet? Will you apply or explain?
FIVE KEY PRINCIPLES
CRISA provides guidance on how institutional investors (owners and their agents) should execute investment analysis, investment activities and exercise rights so as to promote sound and responsible governance: