Weekly Viewpoints on Sustainable Investment: In this week's note the release of the ESG guide for pension fund trustees, and some reaction from the market.
In the works for nearly 2 years, the “Responsible Investing and Ownership Guide for Asset Owners” was launched Tuesday in Johannesburg at an event with 120 stakeholders from the retirement funds investment industry hosted by the International Finance Corporation (IFC), a member of the World Bank Group, and the Principal Officers Association of South Africa (POA). The IFC, POA, investment industry association ASISA and the sovereign wealth pension fund, GEPF, have been cornerstones of the Sustainable Returns for Pensions and Society Project. New investment research by SinCo on the progress of environmental, social and governance (ESG) factors applied by pension funds in South Africa provided the intellectual underpin and launching point for the project.
The Sustainable Returns Project, launched in October 2011, has 4 phases. The 90 page guidebook (excluding appendixes around 55 pages) comes 2 years after SinCo was commissioned by the IFC funded by the Government of Norway to research the dynamics of the retirement funds investment value chain in southern Africa in 2012, looking at South Africa, Namibia and Botswana. This new investment research laid the rigorous research basis for the roll-out of this global best practice guidebook on responsible investment today. The Phase 1 report “Defining Momentum: The Retirement Fund Investment Value Chain and the Progress of ESG in South Africa” was based on feedback from seventy-one pension funds and thirty investment industry stakeholders; it's recommendations will be released by the Sustainable Returns project before the PRI in Person conference.
The Sustainable Returns Project, launched in October 2011, has 4 phases. The 90 page guidebook (excluding appendixes around 55 pages) comes 2 years after SinCo was commissioned by the IFC funded by the Government of Norway to research the dynamics of the retirement funds investment value chain in southern Africa in 2012, looking at South Africa, Namibia and Botswana. This new investment research laid the rigorous research basis for the roll-out of this global best practice guidebook on responsible investment today. The Phase 1 report “Defining Momentum: The Retirement Fund Investment Value Chain and the Progress of ESG in South Africa” was based on feedback from seventy-one pension funds and thirty investment industry stakeholders; it's recommendations will be released by the Sustainable Returns project before the PRI in Person conference.
“The Responsible Investment and Ownership Guide...written in simple English, with clear practical examples for retirement fund trustees....will go a long way to further promote responsible investment within the Southern African trustee community.” said John Oliphant, Principal Executive Officer, GEPF.
According to David Couldridge, of activist value investor Element Investment Management, it marks another first for South Africa and may well "help keep South Africa first in the World Economic Forum Global Competitiveness survey in the 'Protection of Minority Shareholder's Interests' category for 2014/2015."
"We are fortunate to have excellent Corporate Governance infrastructure in South Africa," agrees Heather Jackson head of SRI at Atlantic Asset Management. "It is in our best professional and social interests to give legs rather than lip service to integrating this fully in our financial institutions."
The “Responsible Investing and Ownership Guide” includes extensive input from the retirement fund investment industry from first draft in October 2012 that helped to significantly improve its accessibility to the target audience: pension funds and their services providers. Input came from institutional investors, pension and provident funds, unions, the regulator in the form of the Financial Services Board, asset consultants, sustainability specialists, media, and the largest pension fund in Africa, the Government Employees Pension Fund, with US$ 131 billion AuM.
A pilot programme is seeking pension funds to test the guidebook, although the roles and responsibilities, not to mention the funding, for the Guidebook and the longevity of the project are not clear. No word on its use by pension funds outside South Africa.
"Collaborative initiatives, like the Sustainable Returns Project new guide, are very important in the acceleration of ESG integration in South Africa," said Kerry Kilcullen Sinclair, Principal at RisCura.
"As investment professionals," she added, "we can never underestimate the need for clear communication and tangible actions steps to assist asset owners with the implementation of sustainable investment." The questions of costs, value-add and real impacts are still to be answered.
The sustainable investment theme has over US$13.6 trillion AuM globally in 2013 with over US$450 billion in frontier and emerging markets integrating ESG according to SinCo estimates. The AfricaSIF.org 2013 Trends Report has identified at least US$130 billion in AuM is self-described by institutional investors to be applying environmental, social and governance (ESG) factors in African investment. The Defining Momentum report used new data from online surveys to over 170 of the largest funds in the Institute of Retirement Funds and POA member universe. Questions ranging from pension funds’ views on the right investment time horizon to what ESG issues had impacted their funds’ assets were part of the survey co-designed with the UNISA Institute for Corporate Citizenship Responsible Investment Unit. Seventy-one retirement funds and more than thirty key investment stakeholders were surveyed and/or interviewed.
“Without active stewards," said Graham Sinclair of SinCo, the sustainable investment cosultancy, "professional asset management has little incentive to test the merits of key ESG issues, like corruption, water scarcity, acid mine drainage, reducing carbon pollution, job creation and enterprise development, or the pros and cons of fracking in the Karoo.”
The “Responsible Investing and Ownership Guide” launch included presentations and comments by key voices in the industry, including David Couldridge, new Pension Funds Adjudicator, Rosemary Hunter, Today’s Trustee editor Allan Greenblo and John Oliphant of GEPF. Pension funds’ fixation with the short term and their failure to ask the tougher questions of their portfolio companies and investment advisors were flagged by speakers.
The Sustainable Returns project’s research and tools for retirement funds builds on an impressive series of firsts for South Africa since 2011, including the world-first Regulation 28 of South Africa’s Pension Funds Act updated from 1 January 2012 to enable ESG factors to be explicitly considered as one of 9 principles. Other firsts include the voluntary investor initiative, the Code for Responsible Investing in South Africa (CRISA) and the IFC-commissioned Sustainable Investment in Sub-Saharan Africa report which identified Africa as a top 10 market for ESG with US$10.6 billion AuM in private equity integrating ESG in 2011.
"Asset owners now have the information to take action in the interests of fund beneficiaries," added Couldridge. "Will they take action and maintain our position?"
Pension funds in Africa have been low profile on ESG. Few are registered for the PRI in Person in early October 2013 in Cape Town, hosted in Africa for the first time. PRI signatory asset owners and investment managers in aggregate invest $34 trillion AuM globally; 52 signatories are Africa-based and 44 of them investors (5 asset owners and 39 investment managers).
“New evidence-based research is critical to guide funds on what is - and is not - working,” said Graham Sinclair, Principal of SinCo. “Investment is about trust. Making investment decisions when those buy/hold/sell decisions include all factors, including ESG factors, increases investment fidelity.”
Pension fund trustees may serve terms of 3 years or more, so the impact of the guide may be some time coming. Investment literacy of pension funds remains variable, from very low to high. The publishing of the guide is a positive step, according to long-time ESG advocate and Investec Asset Management Africa portfolio manager, Malcolm Gray.
"Today was an important milestone in the evolution of ESG with the South African landscape," said Gray from London. "The ESG manual...driven by a collective of asset owners and the IFC, shifts the conversation forward in a meaningful, practical and empowering way."
Learn more about the Sustainable Returns project at
and SinCo research at
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