Edition: August/October 2018


Where responsibility lies

Regulator lights a fire under trustees on funds’ investment policies. ESG to the fore.

When the Financial Sector Conduct Authority (previously the Financial Services Board) issues a directive to pension funds, trustees should either be inspired by the challenge for compliance or cautioned by the penalties for non-compliance. May it be so with the FSB draft directive, issued shortly before Dube Tshidi departed as Registrar of Pension Funds, for “sustainability reporting and disclosure requirements” under the Pension Funds Act.

The best to be said for the draft, doubtless eventually in some refined form to become a directive, is that it’s a well-intentioned effort to elevate the guidance in Regulation 28 to a condition that pension funds apply “sustainability” criteria in their investment policies. Replete with the word “must”, implying quasilegal force, the directive-to-be should jolt trustees to act as asked; at least to wean them from their infatuation with comparing asset managers primarily on the basis of short-term performance.

The worst is in the vague terminology, unhelpful for application by funds or enforcement by the regulator. It’s presumed, perhaps fancifully, that trustees and the FSCA respectively possess the specialist proficiencies to make and assess the quality of disclosures. Better that the skills are acquired. With an absence of sanction, and disclosure apparently an end in itself, the directive’s intent and imperative are one and the same.

The conventional definition of “sustainability”, used here, “means the ability of an entity to conduct its operations in a manner that meets existing needs without compromising the ability of future generations to meet their needs”. Devoid of detail, lacking yardsticks for measurement, that’s saying the obvious.

It doesn’t intimate that pension funds divest from fossil fuels or tobacco and liquor, both impractical in SA’s thin universe of liquid stocks. Neither does it extend environmental, social and governance (ESG) factors to specify such vital areas of responsible investment as job creation, although it does include “managing the impact (of the business entity) on the life of the community (and) the broader SA economy”.

Yet this an initiative to be lauded and supported. Its bite is in the obligatory disclosures (see box). These would certainly be capable of FSCA ticking. They should go further.

While every pension fund “must” produce an investment policy statement (IPS) that reflects the sustainability of its assets, the foremost means of communication is discretionary. Only “if the pension fund has a website” need it be used for the required disclosures “accessible to any person, whether or not a member”.

Jackson . . . jobs, job, jobs

In this day and age, it’s high time that pension funds’ websites were made mandatory for publication of each fund’s annual report and other information that the directive stipulates for exhaustive reporting to stakeholders on sustainability. As a corollary, there’s no obvious reason for the FSCA not to publish it all– simultaneously with receipt -- on its own website for the funds themselves or in addition to them.

“Can we think twice about where and in what we are investing?” Finance Minister Pravin Gordhan asked a recent seminar. Coincidentally, he was describing the philosophical rationale for the draft.

“In the world of state-owned enterprises (SOEs), we would typically ask the boards: what kind of incentives do you provide? What behaviour do you drive? In the private sector, investors need to ask similar questions to those we pose SOEs. We are all responsible for creating fair outcomes for all.”

His approach synchronises with the emphasis in the draft on “active ownership” whereby the role of SA pension funds is catalytic because of their dominant stakes in domestic equities and bonds. The marriage is in the alignment between the longterm nature of funds’ liabilities and the long-term obligation to service them.

Numerous studies show that proper management of long-term ESG factors enhances risk-adjusted returns. In the UK and US, where popular demand has pushed ESG investment into the mainstream, there’s a scramble to recruit analysts capable of discerning through the myriad metrics from board diversity to climate control; then to provide product for the explosion in exchange-traded funds and others, now increasingly hedge funds, seeking companies that pass muster for social responsibility.

But ESG is not the be-all and end-all, particularly in SA. An easy part is to approve some governance boxes for compliance with King IV; for instance, on a board’s independent chair. More complex is to take a stand on such issues as redress of inequalities (e.g. executive pay), control structures (e.g. Naspers), environmental matters (e.g. food retailers that use non-biodegradable plastics for packaging) or ethical considerations (e.g. British American Tobacco and brewer AbInBev).


The draft directive says that, “as the sustainability of the assets of a pension fund is a key factor that should inform its investment policy”, every pension fund must reflect in its investment policy statement:

  • How its investment approach ensures the sustainable long-term performance of its assets;
  • Its policy in applying ESG factors to the assets it intends to acquire;
  • How regularly it measures the compliance of its assets with ESG factors and its sustainability criteria, in particular the manner in which broad-based black economic empowerment is advanced by the business;
  • Its active ownership policy;
  • The mandate (in respect of the above) given by the pension fund to relevant service providers that it engages.

Pity the fund that’s down-weighted top performers. In making investments and exercising proxy votes, asset managers have no need to be conflicted provided they receive clear guidance in mandates from client funds’ investment policy statements. Also, the manager can vote differently for different clients. Again, the importance of the IPS is supreme.

It overrides the manager’s discretion and amplifies the onus on trustees to make their own ESG judgment calls. They, not the manager, are accountable for them.

Duncan . . . change driver

Eskom, of course, is in a class of its own. Strictly, on each of the ESG criteria, pension funds should steer well away from its bonds. If they did, however, the impact would be utterly negative for the economy. Such are the practical complications at the micro level that befuddle the macro.

In the scale of SA priorities, ESG is overshadowed by the exigencies for impact investment. Job creation, skills transfer, affordable housing and infrastructure development aren’t spurred by the directive, but they’re integral to sustainability. Without them, at scale and momentum, it isn’t only the future of investment portfolios that are threatened.

Heather Jackson of Ashburton, who set up the first highly successful Jobs Fund – it attracted R700m of institutional money and achieved its target of over 9 000 new sustainable jobs – insists that there be greater focus on positive impacts for SA’s real economy. Instead, she notes, asset managers tend to concentrate on the listed space where the earnings of major companies are derived from operations abroad.

Jon Duncan of Old Mutual Investment Group, a leader in responsible investment and disclosure of its stakeholder engagements, insists that capital be used beyond simple return expectations and that managers demonstrate proper custodianship: “Unless it can be shown that the transformation codes are applied, sustainability risk is heightened.”

OMIG, privileged by size relative to other institutions, boasts the largest portfolio of impact investments (TT May-July). But smaller competitors are increasingly focused on “alternatives” from healthcare and education to renewable energy and agriculture. Regulation 28 allows retirement funds to invest up to 15% of their assets in “alternatives”, such as private equity and unlisted debt, but few have hardly begun to approach this ceiling.

Rhona Stewart, of Stratfund Consulting, is leading a private-sector research initiative to help accelerate impact investing in SA: “Retirement funds typically delegate ESG to their underlying managers and then don’t bother to monitor it. I’m hoping that the directive will force trustees to be more assertive.”

ESG is only part of responsible investment, she argues, but impact is really the new wave: “The lack of impact investing is the most serious risk for retirement funds. Trustees should ask themselves about the type of country in which members want to retire.”

In a sense, the draft directive underpins the voluntary Code for Responsible Investing in SA (CRISA) that applies to institutional investors. Major asset managers, but to date few retirement funds, are signatories. Perhaps the directive offers a jolt for CRISA to be reinvigorated, not least for compliance monitoring by the industry itself.

Delivery awaited

“Sustainability” goes way beyond ESG where the “S” factor is often underplayed. It extends to impact investing, or investing with a social purpose, which in turn requires opportunity in public-private partnerships to make the difference. There’s no shortage of money – and the new Financial Sector Code indicates no shortage of willingness – on thepart of banks, life offices and retirement funds.

The scarcity is in long-term bankable projects whose viabilities are measurable. They should be aligned to the National Development Plan which sets out the prerequisites for economic growth. For the scarcity of such projects, blame government.

Anybody remember the NDP, or adoption of the United Nations 2030 agenda of “sustainable development goals” where the NDP represented its local adaptation for outcomes that require “policy coherence”? Or such noble intentions that include improving the quality of education for black people, creating employment and strengthening national infrastructure?

Go back to the National Infrastructure Plan launched amidst fanfare in 2102. Six years later, few of these projects have been completed. They were meant to propel SA from recession. But, over the period, public-sector spending on infrastructure as a percentage of gross domestic product has decreased while debt has increased. Expenditure focused not on building the economy but on subsidising consumption.

Of the R834,1bn planned for public-sector infrastructure spending over the next three years, public-private partnership projects account for only R18,5bn or 2,2% of the total budget. It appears that there isn’t much scope for long-term savings to participate in the financing mix.

Moreover, according to the 2018 Budget Review, last July national departments were called to submit proposals for large infrastructure projects designated as a national priority by the Presidential Infrastructure Coordinating Committee. These projects, the Review says, are intended to contribute to economic growth and improved social welfare.

However, only 64 projects with an estimated funding requirement of R139bn were submitted. Worse, only 38 of these projects (from the transport, water, telecommunications, health, justice and protective services) met the initial submission criteria. These projects are now to undergo a “detailed technical assessment” which means they can’t be expected to come out of the ground anytime soon.

And these relate only to projects at national level.

There are cash-strapped municipalities and provinces too. Take for example the proposed mega-city project that Gauteng had announced, at a cost of R1,8 trillion over 15 years, to be a model of public-private partnership (TT Sept-Nov ’17). Since then, not another peep has been heard.

The latest Budget Review, the NDP and the FSCA draft directive should be introduced to one another.