Issue: September-November 2011
Editorials

RESPONSIBLE INVESTMENT

Trustees must come to the party

For all these good CRISA principles to work, pension funds had better do their work. It means applying proper thought to drafting of investment policy statements and mandates to asset managers. This will also help trustees to comply with the new Reg 28.

In rapid succession, three related documents have come together:

  • The UN Principles for Responsible Investment, signed by leading SA asset managers;
  • The revised Regulation 28 under the Pension Funds Act, which highlights the fiduciary duty of pension funds to act in the best interests of members “whose benefits depend on responsible management of the fund assets”;
  • The Code for Responsible Investing by Institutional Investors in SA (CRISA), drafted by institutional representatives themselves, which esssentially supplements the King III code on responsible investment.

Sounds a mouthful, but their common denominator is in moving “responsible” investment from platitudes to policies and practices. The concept is refined in the CRISA principles across environmental, social and governance (ESG) criteria to promote long-term “sustainability”. It also gives implicit dimension to such overlapping catchphrases as “targeted investment”, socially-responsible investment (SRI) and corporate social responsibility (CSR).

How then does a sample of institutional asset managers intend to integrate CRISA into their investment processes?

Malcolm Gray, portfolio manager at Investec Asset Management:

Pension-fund trustees need to understand that there are a range of factors which could have a material impact on the long-term value of their members’ investments. ESG issues could significantly affect the way companies perform. Hence it has become increasingly important to assess ESG as part of our investment process when we analyse companies. For their part, trustees should:

  • Closely review the wording of their current investment mandates;
  • Reflect on the way that investment managers are assessed and appointed i.e. to ensure that the managers understand the importance of integrating ESG factors into their investment decision-making process. By partnering with asset managers who follow a responsible approach to investing, trustees will be well placed to meet their fiduciary responsibilities;
  • Review how performance is monitored and assessed. Unfortunately, the focus has shifted toward short-term returns. Rather, trustees need to ensure that the current structure will enable them to meet their funds’ long-term liabilities and that the appropriate investment mandates are in place.

Better disclosure will become central, from companies adopting integrated reporting guidelines to investment managers improving their transparency on such corporate governance issues as proxy voting and activism. Also, trustees need to consider anew the long-term objectives of their funds and whether their investment mandates serve these objectives.

Heather Jackson of Cadiz Asset Management:

CRISA represents a fundamental shift in attitude. It’s no longer possible for asset owners (and their proxies, the investment managers) either to ignore the sustainability of investee companies or simply to walk away by selling their shares. CRISA also provides a timely framework for implementing the sustainability elements of the new Reg 28.

ESG factors are central to both enhancing returns and reducing risks. Moreover, asset owners are in a unique position to change the behaviour of companies in which they’re invested.

CRISA has galavanised our drive to find better ways to monitor and incorporate ESG into our investment-making and proxy-voting decisions. While we’ve developed special projects based on SRI principles, CRISA requires that we implement these and other sustainability-related principles across the board.

To achieve this, we’ve begun a process of internal education as well as the sourcing of appropriate partners to complement our efforts. The use of expert partners assists our team to upskill and implement these principles faster.

Patrick Mathidi of RMB Asset Management:

As signatories to the UN PRI, the merged RMBAM/MetAM entity has made significant progress to incorporate aspects of this code into our mainstream philosophy and process. CRISA is a further positive development towards inculcating a culture of accountability. It requires managers of client monies diligently to consider and apply ESG issues that may have a long-lasting impact on the value we’re able to generate.

Certainly, there’s room for us to improve. This is notably around the area of proactive shareholder engagement and disclosure of it to stakeholders. We’re committed to do so.

Properly implemented, CRISA has the potential to be truly transformative in the manner that scarce capital is allocated to businesses which can deliver superior and sustainable returns. This will help to grow a sustainable economy, thus delivering a higher standard of living to a much broader society.

The ideal is worth pursuing, not least for our own business to be sustainable.

Jon Duncan, Old Mutual ESG research analyst:

The launch of CRISA and the revised Reg 28 mark the start of a new era in the SA investment industry. They formalise society’s expectations around the allocation of capital for long-term value creation. It’s a seemingly subtle but actually monumental shift in the way trustees, asset consultants and investment managers need to start thinking about the concepts of “long term” and “value”.

Sustainability is an emerging megatrend that’s reshaping the competitive landscape in every industry. Companies able to anticipate changes and innovate early are reaping the benefits of improved operating efficiency, better risk management, new growth and a stronger licence to operate. As a longterm investor, we believe that companies with sound ESG performance will be better positioned to deliver sustainable returns to shareholders over the long term.

While full integration of the five CRISA principles will take time, initially much of the focus will be on how trustees incorporate them into their own investment mandates and contracts for asset managers. We’re working to inform and support the process of integrating ESG risks and opportunities across all our investment and ownership decisions.

Not only does this make business sense but it’s also the right thing to do as a custodian of our collective long-term future.

Armien Tyer, managing director of Sanlam Investment Management:

The emergence of CRISA, and the five principles on which it’s based, is a very good development. SIM supports it. Since it’s largely derived from the UN PRI, to which we’re signatories, we’re well advanced in several aspects of making these principles a reality in the way that we manage our clients’ money, engage with investee companies or stakeholders in general, disclose our proxy voting, screen and integrate ESG principles into our investment choices.

CRISA is reinforcing and reemphasising the ESG principles encapsulated in Reg 28 and King III. Together, these developments can be highly transformative.

But the real issues will be in implementation; particularly how boards of trustees redefine mandates, reframe objectives and redefine their funds’ risk and return parameters as well as their members’ choices. This is the debate that must now start in earnest.

Rowan Burger, LibFin head of investment strategy:

We consider ESG to be a theme, not a separate asset class. Opportunities exist separately for SRI. Consideration of ESG factors is critical to delivery of sustainable investment performance. ESG performance may be a proxy for management quality. Companies well positioned to manage ESG risk and opportunities have the potential to outperform others over the long term.

Because explicit and systemic ESG analysis has not become mainstream, value can be realised in sustainable investing. But because there is no way to include sustainability analysis in investing, it’s an art rather than a science and difficult to measure at this stage.

It is incumbent on Liberty, as custodians of clients’ monies, to be active owners of assets and to participate accordingly in decisions of shareholders. All such actions must be transparent and conflicts mitigated.

Adherence to CRISA requires little change to existing processes of underlying investment managers. But it will require some work in terms of communicating the approach; for example, more meaningfully to show proxy-voting information.