RI GUIDE FOR PENSION FUND TRUSTEES LAUNCHES IN JOHANNESBURG

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 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

www.sustainablereturns.org.za/

and SinCo research at

http://www.sincosinco.com/project-sustainable-returns.php

PRIVATE EQUITY ESG FRAMEWORKS AND MONOPOLIES ON ALUMINUM WAREHOUSING

Weekly Viewpoints on Sustainable Investment 

In this week's note a view on private equity adoption of ESG frameworks and regulators tracking the financial capitalism fingering the commodities business. 

Connecting at JSE: AIFAM2013 24 July 2013.
PHOTOCREDIT: SinCo 2013

PRIVATE EQUITY ESG

Private equity investments may have horizons of 5 - 12 years. Integrating ESG factors has increased as a key hygiene factor for funds raising capital. In my view, ESG in PE may better be understood as a key success factor. Different frameworks for ESG have been introduced, often from collaborative research and co-work. The European-based LPs have a guideline The EVCA Handbook Professional Standards for the Private  Equity and Venture Capital Industry (Edition November 2012) (PDF) which describes that: "When making investments on behalf of the Fund, the  GP should implement the Fund’s investment policy with  due skill, care and diligence and in accordance with the agreements the GP has made with the LPs in the Fund. A GP should be mindful of the responsible investment impact of the conduct of its business and should give  due consideration to material risks and opportunities associated with responsible investment factors such as environmental, social and governance (ESG) factors  throughout the period of its investment." Most development financing institutions (DFIs) have a framework, for example the IFC (multinational), the CDC (UK) has an industry-leading ESG toolkit for its managers (PDF). DEG (Germany) has also developed an ESG framework, and the PRI disclosure practice guideline (PDF) was published in March 2013. 

In conversations lately with private equity practitioners one current view of ESG is that it is about “pain and fluff”. Firstly, the pain of reporting by GPs on the portfolio company ESG and reporting that to the multiple LPs, many of which may be DFIs with their own reporting requirements. Secondly, some PE practitioners discount all the ESG work as too fluffy, too hard to quantify or offer examples of risk or return impacts on their performance. Private equity is seen as a “tax” on doing business and investment, something with little value, and as a cost to the business dealt with by hiring a worker to write up whatever their investors demand to be written. Case studies are needed. The IFC has sponsored some case studies, for example Cogitel in Tunisia (PDF) published with the Emerging Markets Private Equity Association, EMPEA in 2012. Some good examples may also be teased out of reporting by some of the major General Partners (GPs) operating in emerging markets, for example Actis based in London UK which has published some short notes which I have used in lectures. At SinCo we have been shortlisting and collating company narratives and ESG issues components for writing new case studies in PE. We wait for the right sponsor of the new research, and the right forum to present them to. The PRI PE event in Cape Town on 3 October may be one opportunity, or the annual PE events in London and Washington DC focused on the developing world economies. The PRI event is stacking up well with the PRI's Fong Yee Chan working hard with Michelle at AVCA and Erika at SAVCA (and I have been able to help some of the flow and shortlisting keynote speaker candidates this week). More soon.

ESG AS VALUE DRIVER IN PE

The compelling case for PE of “ESG as value driver in private equity” has underpinned much of the publicly-available research from major developmental finance institutions in the past decade. As I have noted before, investment, and investment analysis, in frontier and emerging markets happens across borders of regulations, guidelines and laws. ESG may act as a proxy for advanced due diligence or a marker for absent rules in the marketplace. The virtuous role of ESG has been illustrated in listed equity research of major companies in Europe. Many companies use ratings as a management tool monitoring for example the strengths or weaknesses analysis or as a means to track future trends [SOURCE: The Impact of SRI An Empirical Analysis of the Impact of Socially Responsible Investments on Companies by oekom research, May 2013]. PE deals in growth markets often intersect with building much-needed infrastructure, whether it is building the rail line for a new mine, or the 6,000 housing units for that mining company in some undeveloped patch of the world. Tharman Shanmugaratnam, the Deputy Prime Minister of Singapore was keynote speaker at the CFA Conference in Singapore in May 2013 spoke of the need for long-term investments (e.g. infrastructure), rather than short term or "indecisive" investments, but argued that there is a shortage of asset managers to facilitate these more complex investments. ESG is a value driver in infrastructure deals, shortening the timeline and increasing the possible positive outcomes. An old Harvard Business School Case that I have used as an MBA teaching tool demonstrates that “positive business and investment behavior reduces barriers to accessing investment opportunities and regulatory hurdles to doing businesses, especially in infrastructure deals” [SOURCE: Esty, Benjamin C., Carin-Isabel Knoop, and Aldo Sesia. "Equator Principles, The: An Industry Approach to Managing Environmental and Social Risks." Harvard Business School Case 205-114, January 2007]. Conversations this past Friday at a sunlit sidewalk cafe with the ESG specialist at a major asset owner in emerging markets and a political scientist reminded me of the critical role of the social factors. With the large governance and environmental footprint, it is not surprising that large infrastructure deals attract heavy-duty due diligence from analysts and investment committees. But with great scrutiny, the role of the social factors - how communities are engaged, how the stakeholders are not corrupted, how the social license to operate is renewed and respected - may become increasingly the key driver. 

THE DIRTY FINGERPRINTS OF FINANCIAL CAPITALISM ON SHINY ALUMINUM

The asset management industry is going through some tough times as consolidation plays out. For example, IPE reported in June that "AUM growth at 10 largest fund managers outstrips sector", with asset increase of €1.2trn sees and globally, the 10 largest institutional managers were responsible for €12.8bn in assets at the end of December 2012. Elsewhere BCG’s eleventh annual Global Asset Management report reports that “[a]ssets and profits both nearly returned to pre-crisis levels. Still, the asset increase was driven largely by rising markets—not the flow of net new assets, which was modest.” As financial services companies seek yields and uncorrelated returns, so they are broadening their proprietary activities to parts of the real economy. Financial capitalism pervades the real economy. Unfortunately, it seems major players have been bending the rules, as a New York Times investigative report has revealed (THE HOUSE EDGE: A Shuffle of Aluminum, but to Banks, Pure Gold By DAVID KOCIENIEWSKI Published: July 20, 2013). Intermediaries have a place in making markets liquid. Regulators have first place in making them efficient, fair and/or transparent, preferably with a self-regulatory efficiency to enforcement with sanctions overlay to be flexible. And let's price the carbon costs to make sure every cost gets reflected, especially when shuffling metals. And above all, the story is another argument to pay for good quality, long-form journalism that makes it possible to write up these stories. 

Even as the fate of “Fabulous Fab” (SEC won 6/7 counts of the civil fraud suit against former Goldman Sachs Vice President Fabrice Tourre) played out 4 August some five years after the CDO-driven meltdown led to the global financial crisis, the WSJ reports ["LME, Goldman Sued Over Aluminum Warehousing"] that regulators have now named Goldman Sachs and LME in the lawsuit targeting anti-competitive and monopolistic behaviour in the warehousing marketplace for commodities. Sustainable investment is as much about returning good yields on the investments, as in the way those yields are earned. Its the principle of the investment approach. Will this cause Goldman Sachs et al to review their GS Sustain ESG metrics they report on..?

Do good work on sustainable investment that matters.

Graham Sinclair

@esgarchitect

linkedin.com/in/grahamsinclair

Skype: graham_sinclair

SinCo - Sustainable Investment Consulting

SinCo designs ESG architecture for long term sustainable investment that matters. 

www.sincosinco.com

@SinCoESG

Based on my work, experience and interactions, all views and opinions expressed are those of the author and do not reflect the named individuals, institutions or SinCo, it's clients or services providers. No mention suggests endorsement. This commentary does not constitute investment advise. Issued by SinCo to professional investors and stakeholders for information only and its accuracy/completeness is not guaranteed. All opinions may change without notice and may differ to opinions/recommendations expressed by other business areas of SinCo. SinCo may maintain positions and trade in collective investment instruments referred to. Unless stated otherwise, this is not a personal recommendation, offer or solicitation to buy/sell and any prices/quotations are indicative only. SinCo may provide sustainable investment architecture and other services to, and/or its employees may be directors of, companies referred to. To the extent permitted by law, SinCo does not accept any liability arising from the use of this communication.

© SinCo 2013.  All rights reserved. Reprinting or republication of this report on websites is authorized by prominently displaying the following sentence, including the hyperlink to SinCo, at the beginning or end of the report. "ESGextra Weekly Note is republished with permission of SinCo."

PRIVATE EQUITY IN AFRICA AND LEADING SUSTAINABILITY FROM CAPE TOWN

Weekly Viewpoints on Sustainable Investment 

In this week's note a view on private equity in Africa and academic research on sustainability in Cape Town. 

John Oliphant, Head of Investments and Actuarial at the Government Employees Pension Fund of South Africa, gives morning keynote to kick off African Investment and Funds Management Forum at Johannesburg Securities Exchange 23 July 2013

PRIVATE EQUITY AS GROWTH CAPITAL

Private equity is an important asset class in frontier markets with growing economies. There are 2 types of private equity, firstly financial engineering (made famous by the novel based on the Nabisco deal in the 1980s Barbarians at the Gate: The Fall of RJR Nabisco), and secondly growth capital, financing high growth medium-sized companies' expansion. In many frontier and emerging markets PE is more often growth capital than financial engineering because capital is in demand, medium sized companies may be high-growth, and debt markets are no appetite for gearing. So what of PE in Africa, is it helping to grow investment in the continent? Certainly PE in Africa is different in several ways. Firstly, a sizeable chunk of the capital for PE has been supplied by development financing institutions (DFIs), finance arms tied to governments such as Canada, The Netherlands, UK, France or the USA. Secondly, due in large part to the large chunk of assets being supplied by Limited Partners (Investors), at least one-in-two dollars in assets of the fund invested by General Partners (Fund Managers) are filtered for ESG factors. This implies the private equity asset class in Africa is a leading category integrating ESG factors. Thirdly, Africa remains on the margins of the investment universes of many global investors and for the private equity asset class. Africa makes up just 2% of global GDP, 1% of financial markets capitalization, but 13% of population, including a large portion of young citizens. While Africa has gone from being considered a hopeless continent to a hopeful continent, the reality beneath the hype is that most sovereign ratings reflect risk concerns, the absolute size of economies is small, and the available deals are limited. Fourthly, the patchy governance of financial markets in some African countries fail to provide a firm footing for investors worried about the rules of the game, and with doubts about ever seeing their capital again. Finally, the perception arbitrage exists - some benefit from the vacuum of accurate, fresh and plentiful data-points, others are frustrated by it. Today have clean data on companies operating in Africa is the comparative advantage, not even the analysis of it.

Tracking PE demands hard to get data. industry surveys and reports are useful, although LPs and GPs may be exhausted from providing responses! Helping to add some real new data has been the RisCura Bright Africa report. A recent Financial Times feature on PE head at RisCura Fundamentals explained the value of better metrics tracking valuations and deal pricing. A final comment on PE in Africa. My experience suggests that more capital will be flowing, but the timing is unknown. PE fund managers like Carlyle have been putting heaps of CO2 into the atmosphere at 37,000 shopping the Africa story and their new fund. It is a marathon. On the other hand, GEPF has committed $500m to two PE Pan-African funds investing outside South Africa (PAIDF II and PIC pan-Africa ex-South Africa) as John Oliphant explained at this week's Africa Investment Funds and Asset Management Forum 2013 AIFAM2013 at the JSE (see tweets on #AIFAM2013).

GOOD WORK PUTTING SOUTH AFRICA ON THE SUSTAINABILITY ACADEMIC MAP

I was privileged to be invited to join last Friday’s Ph.D research workshop hosted by University of Cape Town Graduate School of Business to learn and share on research in the sustainability theme. The theory of business is examined in multiple ways. Some have been over-research as academics strive to carve out their niche and their legacy. Other areas are under-researched, sometimes because the data does not exist (often the case in developing markets). You are reminded its academic when an early question is: “what is theory”?! Insights from Professor Tima Bansal, Canada Research Chair, Richard Ivey School of Business, University of Western Ontario, Canada, were compelling, including future research work on time, space and scale and their impacts on business (I was invited but unable to attend the University  of British  Columbia  (UBC)  Faculty  of  Law and  the  Responsible  Investing  Initiative seminar: It’s Time: The Temporal Dimensions of Responsible Investing on 20-21 June 2013). Firstly, Tima's appreciation for Ralph Hamann for his good work in promoting academic work in sustainability. Ralph has helped spur my further thinking on research methods, assumptions and frameworks, been a great supporter for different projects including the Access to Nutrition Index (www.accesstonutrition.org) and spoke at the launch event series for AfricaSIF.org in 2010 VIDEO. He has been responsible for exposing African researchers to leading academics, including Professor Jonathan Doh from the Villanova Graduate School of Business, my MBA thesis advisor and co-author. A good man for sustainability in Africa, Secondly, Tima reflected her ongoing academic work with Andy Hoffman, and their ongoing academic debate on if/how sustainability can only thrive as its own field versus it needs to be an element of the major functional business areas. This debate reflects the similar questions I have been asking, and have revisited in recent conversations with sustainable investment practitioners in London, New York, Boston and Washington DC. 

Thirdly, the critical path for academic careers demands publishing articles in a limited number of journals. It is both a qualifier, and a bottleneck. Any new academic research ideas or approaches must be vetted by “incumbent thinkers”. It does not seem to be a place for innovation. The emphasis is on extending current theory, not for understanding phenomena. But the positive news is how there is now a “thick pipeline” of qualitative research explicitly exploring the environmental implications of business and its operations. Finally, Tima's insights on the leading journal American Management Journal were helpful, especially her promotion of research from frontier markets and developing countries seeking to write academic papers with lessons that are generalizable from, for example, Kenya. Academic contributions to moving forward sustainable investment are critical. I hope the Journal of Sustainable Investment and Finance grows. Just this week I pulled in the new (unpublished) work by Andreas Hoepner et al at University of St Andrews on ESG in China using RepRisk data that won the FFR research award in September 2012. Ahead of the PRI event in October, the role for a PRI Academic Network is being explored by Robert Harding at PRI and Dominique Douf. The objective of the PRIANA is to support the work of the Principles for Responsible Investing Academic Network (PRIAN) by fostering a network of scholars, investors, practitioners, policymakers, regulators and students interested in responsible investment (RI) and environmental, social and governance (ESG) issues in Africa. We need so much new thinking, new systems thinking, and good research. Let’s hope the research pipeline grows, for academics and PE fund investors.

Do good work on sustainable investment that matters.

Graham Sinclair

@esgarchitect

linkedin.com/in/grahamsinclair

Skype: graham_sinclair

SinCo - Sustainable Investment Consulting

SinCo designs ESG architecture for long term sustainable investment that matters. 

www.sincosinco.com

@SinCoESG

Based on my work, experience and interactions, all views and opinions expressed are those of the author and do not reflect the named individuals, institutions or SinCo, it's clients or services providers. No mention suggests endorsement. This commentary does not constitute investment advise. Issued by SinCo to professional investors and stakeholders for information only and its accuracy/completeness is not guaranteed. All opinions may change without notice and may differ to opinions/recommendations expressed by other business areas of SinCo. SinCo may maintain positions and trade in collective investment instruments referred to. Unless stated otherwise, this is not a personal recommendation, offer or solicitation to buy/sell and any prices/quotations are indicative only. SinCo may provide sustainable investment architecture and other services to, and/or its employees may be directors of, companies referred to. To the extent permitted by law, SinCo does not accept any liability arising from the use of this communication.

© SinCo 2013.  All rights reserved. Reprinting or republication of this report on websites is authorized by prominently displaying the following sentence, including the hyperlink to SinCo, at the beginning or end of the report. "ESGextra Weekly Note is republished with permission of SinCo."

ESG INVESTMENT IMPLICATIONS IN EMERGING MARKETS, AND OLYMPIC-SIZE CORRUPTION

Weekly Viewpoints on Sustainable Investment 

In this week's note some reflections from a global webinar on emerging markets, looking across to Brazil and ahead to PRI in Person in Cape Town. 

Low altitude sky view of Cape Town harbour and city centre toward Table Mountain, 9 July 2013. 
PHOTOCREDIT: Jean Tresfon, by permission. http://www.flickr.com/photos/jtresfon/

EMERGING RULES OF INVESTMENT     

The rules of investment are different in frontier and emerging markets. Even before the start of the 100th edition of the Tour de France 13 stages ago, I had taken to explaining the gaps between regulations and realities in investment by using the example of cyclist Lance Armstrong (first "I never tested positive" for a decade, then that tear-jerker Oprah Winfrey half-apology apology). Investment, and investment analysis, in frontier and emerging markets happens across borders of regulations, guidelines and laws. The SinCo Investment Philosophy is that there is ESG in every investment decision in the global professional investment management industry, sized at $62 trillion by BCG. Sustainable investment is proactive approach to advanced investment management through integrating ESG factors. It is a broad term, and details matter. None more so than when investing in frontier and emerging markets, the subject of Thursday's global webinar hosted by MSCI ESG "ESG Investment Implications for Emerging Markets". My view remains that "emerging markets" tag is a sweeping simplification, useful in the 1980s when coined by the IFC, redundant in this decade. China has an orbital manned space program, India launched a missile from a submarine platform. Emerging?! We have a competitive economic marketplace in which "[c]hanging trade patterns show, the BRICs and the N11 becoming bigger should make us all wealthier in aggregate...the view of the BRIC countries becoming bigger than the US before 2015, and bigger than the G7 by 2035..." according to Jim O'Neill in his last note "The World Still Needs Better Economic BRICs" in April 2013.

My presentation to the global webinar covered two major themes (slidedeck here http://slidesha.re/13DiVpC):

A. Beyond BRICS countries, towards frontier markets and frontiers of ESG:  

1. Defining your universe of opportunity, and your portfolio entry points. 
2. Understanding the license to operate of professional investors and their portfolio companies. 
3. The scope of rules and regulations is smaller than global reputations. 
4. Relationships are critical in markets with more forms of alternative ownership models and new offerings.

B.  PRI in Person outlook, the enigmatic Africa opportunity: 

1. PRIiP2013 has an important footprint effect for PRI, leveraging strategic opportunity in Africa.
2. Introduces opportunities in fragments, the frustrating search for scale. 
3. The asset allocation decision and sector exposure may be more important than the geographic universe opportunity in Africa. 
4. Will the PRI legacy be more than FIFA FWC 2010?

ESG may act as a proxy for advanced due diligence or a marker for absent rules in the marketplace. Food and beverage products with a good reputation are critical to food and beverages companies, as well as their investors, regulators, consumers, and politicians. Food is politics, never more so than when analysis by FAO and OECD predicts that cheap food is history. The Access to Nutrition Index project has illustrated to me that making ESG happen in growth markets will reveal limits to ESG data coverage, national differences in reporting, culture differences, language and jargon barriers, and opportunities to re-interpret ESG concepts. 

PRI ANNUAL EVENT COMES TO AFRICA

Africa introduces opportunities in fragments, and may frustrate businesses and investors seeking for returns to scale, because the continent is so diverse, and so large. For investors seeking exposure to the Africa growth story (not the McKinsey-esque hype, the other story based in reality), I suggest exploring the asset allocation decision and sector exposure. Choosing the right sectors, and which asset classes to invest through may be more important than the geographic universe opportunity to be had in covering Africa. At SinCo we encourage thinking that mirrors the business being done in emerging markets, following anchor industries with multi-stakholder high-impact, high-visibility sustainability profiles, for example, investing in frontier markets in the mining sector faces issues of resource scarcity, above-ground risks, lesser regulated jurisdictions, community pushback, transparency, the "Bumi syndrome" where historical, relational business collides with expectations of corporate governance. So investing in this theme will track a material economic and sustainability trend. The Africa growth story is overplayed. This is demonstrated plainly by the latest UNCTAD report describing intra-Africa trade barriers, often experienced by overland travelers and trucks by hours-long border crossings. 

And so the annual event machine that is the PRI in Person event is cranking up for the conference 1-2 October being hosted in Africa for the first time. Like the FIFA Football World Cup 2010, it will be in Africa's largest economy, South Africa. Africa has been represented in the Principles for Responsible Investment (PRI) from the start by Africa's largest sovereign wealth pension fund, the US$131 billion AuM Government Employees Pension Fund of South Africa. The PRI South Africa network was one of the first country networks, illustrating the take up by investment managers and services providers, asset owners have been largely absent. John Oliphant, Head: Investments & Actuarial, has lobbied hard to get the annual show onto the continent. I was at a particularly frank meeting of stakeholders in 2010 when investment professional colleagues were left staring at their notepads as questions about making responsible investment happen in Africa were hanging in the air over the boardroom table at GEPF headquarters in Tshwane. 

The PRIiP2013 agenda has taken shape for the 2 days (http://www.unpri.org/events/pri-in-person-cape-town/). I am pleased that private equity is receiving specific attention, albeit outside the formal program on 4 October and have supported the PRI team in London with designing the program, and encouraged the co-work of private equity associations AVCA and SAVCA. PRI is being hosted in a city, within a country and on a continent that has a long history and a demanding current reality. PRIiP2013 delegates do well to scale their rhetoric to the realities. Impact, longevity and equity matter: global asset management is $63 trillion, only $450 billion in emerging markets. Will PRIiP2013 leave a better legacy than FWC2010? FIFA made a tax-free $1 billion in 2010, forced the building of the beautiful white elephant stadium in Greenpoint, Cape Town, and stoked a corruption wave in South Africa that saw a whistleblower assassinated and that is today still playing out with construction companies "facing a firing squad" according to the CEO OF Murray & Roberts (OTCMKTS:MURZY). Corruption is a two-way deal. Sustainable investment aims to come down hard on corruption in business, and most ESG dashboards have pretty sophisticated approaches to filtering governance failures. The details of how the market was manipulated needs to be further understood. Meanwhile construction companies governance scores in South Africa will have tanked. 

CONSTRUCTIONS FIRMS AND WORLD CUPS/OLYMPICS: IT'S COMPLICATED

Based on the largest street protests in a generation in fellow BRICS major Brazil, it looks like the role of construction companies, and their billion dollar contracts, will also play out. I am looking forward to the FIFA FWC2014 in Brazil (especially following THAT 3-0 hammering of Spain last week), and the Rio Olympics 2016. In the withering glare of the business media this week has been billionaire Cesar Mata Pires (Bloomberg: "World Cup Billionaire Stirs Brazil Protests Over Stadiums"). The 90% shareholder of construction firm OAS has benefited hugely from infrastructure projects, and has leveraged financing from Brazil's BNDES development financing bank. OAS has low income housing deals with Brazil's 3 largest pension funds which have an asset base 2x Luxembourg's GDP in 2012. BNDES saw its loans double since 2008 to 156 billion reais last year, twice the total lending of the World Bank. PRI Board member, PREVI, is the largest in Brazil, and is based in Rio de Janeiro. Apparently, a street protester's placard allegedly included "The $ for Education Went to OAS". Ouch! No doubt @BW journalist @BlakeSchmidt is off Mr Pires's scoop shortlist... Bloomberg reports that with the help of subsidized loans from Brazil’s state development bank, closely held OAS SA had revenue of $3.4 billion last year. The OAS head of investor relations Barreto described protesters’ "targeting of OAS is “ignorant” and “simplistic,” and that the company obeys the law...It’s the only existing business model in Brazil." In future posts I will offer some comments on alternative ownership structures and the role of the national governments in frontier markets in financing growth.

MARKETPLACE REPORT ON ESG IN AFRICA INCOMING AUGUST 2013

And finally, a quick update on the marathon project to roll out the AfricaSIF.org 2012 Trends Report (http://www.africasif.org/trends-2012.php). Along with the all-volunteer team of practitioners and graduate students across Africa, I have been working on nailing down the data, analysis and commentary for this first-ever report. The excitement in the report is this new analysis from Africa for Africa and the world. The team is now targeting the IMN Africa Cup of Investment Management 27-29 August for the start of the launch roadshow. This first-ever reporting of professionally managed assets investing in Africa with ESG in some way included in the process. Collaborative project includes GEPF, MSCI, Bloomberg, Investec Asset Management, SinCo, RisCura, Mergence Investment Managers, OMIGSA, and Frost and Sullivan. The survey estimates that the level of sustainable investment in Africa is high with about $233 billion AuM or 63.4% of total AuM of Africa investments is self-reported to be managed according to sustainable investment principles. This implies the African (competitive) market is material for sustainable investment firms, but also pretty scrappy to command market share. Research is costly, especially north of South Africa where reporting is thinner. This helps explain why all major ESG research shops now have decent large firm coverage in South Africa, and why MSCI ESG just hired their first Africa-based analyst starting end August 2013 in Cape Town. Good timing. Chris Froome, current race leader and likely the first Africa-born winner of Le Tour, may be lying on his couch wearing a yellow jersey by the end of July.

Do good work on sustainable investment that matters.

Graham Sinclair
@esgarchitect

Principal
SinCo - Sustainable Investment Consulting
www.sincosinco.com
@SinCoESG

Based on my work, experience and interactions, all views and opinions expressed are those of the author and do not reflect the named individuals, institutions or SinCo, it's clients or services providers. No mention suggests endorsement. This commentary does not constitute investment advise. Issued by SinCo to professional investors and stakeholders for information only and its accuracy/completeness is not guaranteed. All opinions may change without notice and may differ to opinions/recommendations expressed by other business areas of SinCo. SinCo may maintain positions and trade in collective investment instruments referred to. Unless stated otherwise, this is not a personal recommendation, offer or solicitation to buy/sell and any prices/quotations are indicative only. SinCo may provide sustainable investment architecture and other services to, and/or its employees may be directors of, companies referred to. To the extent permitted by law, SinCo does not accept any liability arising from the use of this communication.

© SinCo 2013.  All rights reserved. Intended for recipient only and not for further distribution without the consent of SinCo. SinCo reserves the right to retain all messages. Messages are protected and accessed only in legally justified cases.


UPDATED 15 July 2013: Text edits, paragraphing, hyperlinks.

THE STATE OF SUSTAINABLE INVESTMENT: AWKWARD TEENAGER YEARS?

Weekly Viewpoints on Sustainable Investment 


In this first of a new series of my weekly notes, I reflect on my conversations on the state of play in London with European colleagues in the investment industry operating in theme of environmental, social and governance (ESG) factors in investment decisions. I hope these comments and analysis encourage you in your good sustainable investment work.

Good audience for Responsible Investor RI Europe 2013 in London 11-12 June 2013. PHOTOCREDIT SinCo2013

STATUS QUO

What is the state of play in sustainable investment? It is a common question posed to me by colleagues when I meet, or ask when I travel back. All professionals are tracking their progress, and that of the vocations. Partly it is driven in by the long term insecurity of an investment theme that has very much had to fight for recognition amidst a crowded investment belief system, and has had to strive for credibility. I was asked by Hugh Wheelan [@hughwheelan] and team at Responsible Investor to lead the panel covering ESG in frontier and emerging markets for the RI Europe 2013 conference (I will cover the panel in next week's note, see some instant analysis at #RIEurope2013). Being live in London provided an opportunity to explore the mood of experienced colleagues, and take the temperature of where things are at. 

RI EUROPE 2013

The superficial data points at the event speaking to the health of the industry are what they are: for another year, RI Europe had around 300 people in one place, 66 as content providers (the most impressive being Dr Paul Woolley, Chairman of the Paul Woolley Centre for the Study of Capital Market Dysfunctionality at LSE and former GMO head for London). It was at a newish, somewhat snobby hotel, with around 15 stalls of vendors presenting their wares. In my conversations on the state of sustainable investment with peers, I was exploring reactions to some of the comments by Erika Karp, Head of Global Sector Research at UBS based in New York. Erika announced her 31 July exit the previous week in the last of her weekly notes which have been one source of inspiration. Referencing her strategy/tactics approach and "The Art of War", Erika described "The war has indeed been won for proponents of long-term corporate excellence as business models for the future need to evolve to address the greatest issues of our day...Now the warriors of the past three decades can move along with the mainstream….as will I." Erika's comments jive with an overall tone that a change is happening across the industry, something that I flagged back in December 2012. But I am not as bullish that it is all onward and upward. Some of the peers we have been working with the past decade are cycling on to new seasons. a few have cashed out. Sustainability is not necessarily a welcome addition to conversations with investment professionals, but more of the concepts can fit into strategic, operational, reputation, legal and business model risks. Conversations on ESG factors happens much more easily in a broader range of conversations. New ESG functions have been created or configured, for example the new role being recruited for at Harvard Management Company in Boston to tackle sustainability for their US$31 billion endowment. Expanding sustainable investment means expanding ESG research and ratings. The industry consolidation the past 2 years continues. For example, sustainability rating agency Sustainalytics has just hired a new head of relationships in Germany and MSCI ESG has added to their servicing staff in London. And yet, large parts of listed equities portfolios have little coverage and/or fundamental equity coverage that includes ESG issues in recommendations. 

STARBUCKS SELLING WELL

The red-eye from New York arriving at the world's busiest airport first thing in the morning always leads to a manic experience on the first, long day. One colleague suggested I do not so much drink caffeine, but am secretly fueled by it. Not so much anymore, but on the 30 hours mission in London, it was necessary. Mostly fair trade, organic coffee (unlike that served on United). And definitely necessary in the afternoon when panelists droned on in dysfunctional fashion, meandering over talking points even they were not convinced of. The late afternoon double espresso dash to the nearest Starbucks included face-slapping cold drizzle (that sorted out the jetlag for a few hours, the upside of inclement weather England?!). Mr Schultz will be pleased to know that the Starbucks messages of corporate responsibility were reliably posted on the wall and the long queue confirmed meeting a societal need. But the volume of trash generated remains an Achilles heel for Starbucks and a philosophical challenge to fast food retailers' sustainability ethos in general, given few customers chose to bring their own cups. One longtime sustainable investment colleague from Northern Europe voiced a concern that many have been expressing in different ways, that sustainable investment has lost it's way, and that one's efforts may not be amounting to much. It is a big question. For me it partly explains the emergence of the "impact investing" sub-theme, as well as my future work in real economy investments through infrastructure and private equity as growth capital. Industry initiatives are being more critically assessed as they seek to re-boot, for example GRI, PRI, the SIFs and the Equator Principles have each been re-formatting their programs and organizations. Rumblings of discontent remain. A pattern I have observed is that colleagues with many years in the profession start to seek greater impact from their work, and want to know that progress is being made as a whole. For some, stepping into different asset management and research roles is the next step, for others it is moving into work at - and for - companies. The state of play questions - why and how - are often raised by new voices. Sometimes the comments are as naive as from my MBA students who have not done the background readings. Sometimes the comments can be cringeworthy. For example, in the panel on "Real Assets" I cringed at a newbie rattling on about subjective epiphanies, without the wisdom of the decades of academic research, industry experience or philosophical. It is like hearing your hometown's ills being categorically described to you by tourists. The room was polite though unsettled. As the panelist opined about his personal epiphany fellow panelists started to look like they had left the toaster on.

TRANSATLANTIC

I wrote this note on the return leg at 37,000 feet over the Atlantic en route Manhattan for The Conference Board conference on "Ethics and Shareholder Value Summit" that I helped shape over the past six months. The fact that a company trade group is hosting this event with panels using the voice of investors (for example "Investor Panel: Why Corporate Governance and Ethical Practices Make a Difference to Shareholders"), suggests the state of play for sustainable investment is healthy. The event comes just weeks after The Conference Board "Summit on Sustainability", where Erika Karp described a "stellar "win". My view remains that companies remain more fearful of their customers than their investors (unless they're an aggressive hedge fund). In deciding on how best to describe the state of play and the progress by the 4 key actors - companies, researchers, policy makers, and investors - perhaps the better explanations come through explaining the progress of each separately. Sustainability will progress, fail or succeed in each stakeholder category in inter-related but different ways. In my experience, investors are conservative. Companies may be moving, especially larger multinationals competing globally, as demonstrated by this week's release of the Interbrand Green reputation rankings on the "best green global brands". But for sustainable investment, the situation is mixed. In Europe, my sense is of an industry that has figured out a lot, has much of its basics right, but is also at the risk of being buffeted by the economics of investment and research. The greyness of a broad theme like sustainable investment with its own vernacular and a dearth of finite edges contributes to this sense of instability. New investment products are being launched, but softly. Research is expanding, but is really just catching up with where investors have always expected it to be, and career professionals in sustainable investment are not secure. Sustainable investment remains at a "teenager" stage, sometimes speaking well, at other times not a welcome presence, prone to fits and starts. How it turns out requires a whole lot more bad hairstyles but hopefully few wardrobe malfunctions.

  

Do good work on sustainable investment that matters.

Graham Sinclair
@esgarchitect

Principal
SinCo - Sustainable Investment Consulting
www.sincosinco.com
@SinCoESG

Based on my work, experience and interactions, all views and opinions expressed are those of the author and do not reflect the named individuals, institutions or SinCo, it's clients or services providers. No mention suggests endorsement. This commentary does not constitute investment advise. Issued by SinCo to professional investors and stakeholders for information only and its accuracy/completeness is not guaranteed. All opinions may change without notice and may differ to opinions/recommendations expressed by other business areas of SinCo. SinCo may maintain positions and trade in collective investment instruments referred to. Unless stated otherwise, this is not a personal recommendation, offer or solicitation to buy/sell and any prices/quotations are indicative only. SinCo may provide sustainable investment architecture and other services to, and/or its employees may be directors of, companies referred to. To the extent permitted by law, SinCo does not accept any liability arising from the use of this communication.

© SinCo 2013.  All rights reserved. Intended for recipient only and not for further distribution without the consent of SinCo. SinCo reserves the right to retain all messages. Messages are protected and accessed only in legally justified cases.


UPDATED 15 July 2013: Text edits, paragraphing, hyperlinks, caption.