Issue: December 2012 / February 2013


Down to the nitty-gritty

All very well in principle. Somewhat more difficult in practice.

It’s over a year since asset managers and other SA institutional signatories committed themselves to implement the Code for Responsible Investing (CRISA). How are they doing? Two surveys – one by Momentum Manager of Managers, the other by Investment Solutions – provide the answers and illustrate the problems.

For its survey, completed in August, MMM approached 60 investment managers of whom 50 participated. Main findings:

  • 90% agreed that it’s important to integrate environmental, social and governance (ESG) and sustainability issues into investment decisions. But most mentioned such difficulties as educating staff, finding reliable data and fairly valuing different companies;
  • There’s a need for clearer guidelines on how the CRISA principles should be rolled out. Most participants are motivated to apply CRISA throughout their investee companies;
  • The 10% of managers who didn’t regard ESG integration as important indicated that government should regulate such issues, that passive managers faced challenges due to a lack of research in indexing, and some felt that clients should dictate CRISA inclusion. One suggested that sustainability formed part of efficient company reporting;
  • On average, 84% of respondents claimed already to be applying all five CRISA principles (TT March-May ’12) while the remainder reported that they’d be applying them in the near future.

Their main difficulties with application related to practicalities of incorporating ESG into the process. These included qualitative against quantitative criteria, costs of administration and ESG having different meanings to different investors.

Ultimately, MMM points out, a main priority for any investment manager should be to ensure their clients’ investments grow over time while simultaneously being looked after responsibly. But the market still has a long way to go in quantifying ‘responsible investing’ and making the case for these strategies to pay off over the long term. Yet significant majorities believe that the exercise of voting rights, engagement with investee companies and integration of ESG analysis will positively affect returns.

The first of what will be an annual Investment Solutions survey, produced in October, showed the results of canvassing 28 local and 17 global investment managers for their opinions on responsible investment: “It revealed a lack of clarity, and some frustration, on the practicality of implementing RI and the readiness of clients to accept that focusing on sustainability required a shift in focus from the short to the long term.”

Many said that RI was already part of their investment process. Although 60% of managers surveyed had no resources dedicated to the task, this is not considered a problem provided that ESG factors are formally considered.

A controversial aspect is how RI may affect performance. While most believed that it should enhance returns, the survey found, “there was a notable lack of conviction in this statement”. While 23% of all respondents said its affect was unknown, only 9% of local managers believed that incorporation of ESG factors “led to a better understanding of the financial and non-financial risks a company faced, therefore enhancing the decision-making process”.

The more that asset managers acquired RI knowledge, the survey concluded, the greater the shift from passively considering it to actively integrating it in structures developed to “promote a culture” of practising RI. Given the investment required in terms of systems, procedures and time, a more formal approach will require less concern about potential costs to more belief in the financial benefit.

Biggest Drivers

Biggest Barriers

He said it

Comment by a participant in the MMM survey:

The biggest challenge is that fund manager's investment performance is measured against a predetermined market benchmark. Such current benchmarks do not incorporate ESG factors in the determination of their consituents.

They are merely either market cap-based or free float-based. So, to the extent that a particular company presents good value from a valuation point of view but has shortcomings from an ESG point of view, a portfolio manager is not likely to exclude such company from his portfolio.

Benchmarks will either will have to be revised industry-wide to take account of CRISA, or compliance with CRISA will have to be restricted to shareholder activism only.