Sustainable Investment 2014 #NI2014 #ESG

Videodeck playlist for Friday's @netimpact #NI14 Beyond Spreadsheets: Sustainable Investing for the 21st Century 1:00 PM - 2:30 PM, 7 November 2014 #ESG

Investing as if the future matters: Graham Sinclair at TEDxTableMountain

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Breaking - @TEDxTableMtn just posted last October's talk by @ESGarchitect - "Investing as if the future matters" - hope some of these ideas get debated, counter-pointed, advocated, challenged, supported. We CAN invest more mindfully, for positive impact, for a sustainable future with environmental, social and governance (‪#‎ESG‬) factors.



Watching that day, I am instantly back in how that moment felt, the blinding lights, the dead silence of the room at moments, the laughter, being first up at ‪#‎TEDxTableMtn‬. What live speaking looks like - wish we had do-overs..!



Chapeau TEDxTableMountain! Take a bow for all your team's hard work that made these ideas come to life at ‪#‎TEDxTM2013‬. We thank you Carlos Charlie Alves Carryn Ortlepp Marion Adamson Candice Pelser et al.



Touching on ‪#‎MarshmallowTest‬ ‪#‎LanceArmstrong‬ ‪#‎Anthropocene‬ ‪@Zapiro‬ ‪#‎NobelPrize‬ Nobelprize.org #Zapiro @SinCoESG #sustainability #SRI #CSR #ImpInv #Africa @MSCI_Inc #ImpactInvesting 

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."

DEFINING SUSTAINABLE INVESTMENT

Weekly Viewpoints on Sustainable Investment 

In this week's note a view on defining sustainable investment, sustainability in investment and ESG. 

Language and definitions matter.
PHOTOCREDIT SinCo 2013

DEFINING SUSTAINABLE INVESTMENT: WHAT IS ESG?

Definitions for sustainable investment differ. We choose to define the theme of sustainable investment to explain that ESG issues are in every investment decision. But only some investment professionals proactively manage ESG for increased opportunity set and reduced risks exposure. Definitions and the language of sustainable investment have often been a stumbling block to investment practitioners building more formal ESG approaches. Over the years a broad genre of investment practices that integrate the consideration of ESG issues emerged with a perplexing array of names (see how the names have played out in the academic arena in N.S. Eccles; S. Viviers, The Origins and Meanings of Names Describing Investment Practices that Integrate a Consideration of ESG Issues in the Academic Literature, Journal of Business Ethics. 2011;104(3):389-402). Explaining sustainable investment and the role of environmental, social and governance (ESG) factors in investment management needs context. Sustainability has its own language. Explaining ESG starts by opening up the conversation. Of SinCo's five recommendations in the seminal report on Sustainable Investment in Sub-Saharan Africa (by SinCo + RisCura commissioned by International Finance Corporation funded by the Government of South Africa, published July 2011, see project page LINK), the very first was to articulate ESG in the language of the institutional investor.  

KEY REFERENCE DOCUMENTS

ESG is a useful abbreviation. It is just a simplification, just a tool. The work of developing an ESG philosophy and integrating it into the investment life cycle of a private equity fund or pension fund or listed equity active fund relies as much on the investment philosophy that the investor has of the world (how it see the world as an investor?) as on the definitions of sustainability offered by experts and stakeholders (what material sustainability issues intersect with the stakeholders in the future of the firm?). In framing the best approach to sustainability for a fund, I have used the most recent references (for example the latest IFC sustainability principles launched January 2012 (see also IFC resources for promoting sound environmental, social, governance (ESG) and industry standards) or the Global Reporting Initiative G4 sector guidelines launched in May 2013 or the Kenya Vision 2030 plan in Kenya) in working on design projects for SinCo in private equity in Africa. But we are also mindful of the institutional history through which we have come, for example the 1987 definition of sustainable development by the Brundtland Commission. 

• "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs" 

But few practitioners are accurate in describing the two riders, namely needs of the poor and technology:

• "the concept of "needs", in particular the essential needs of the world's poor, to which overriding priority should be given; and 
• the idea of limitations imposed by the state of technology and social organization on the environment's ability to meet present and future needs."

The overall investment ecosystem of pension fund trustees, PEOs, advisors, and ratings agencies influence new investment practices. Investors are mostly conservative with a culture of investment-as-usual. Recently, SinCo research in southern Africa (Botswana, Namibia, South Africa) for the IFC and Principal Officers’ Association (POA) indicates that corporate governance, corruption and water scarcity stand out as ESG factors that investors worry may have a significant impact on their funds’ investment performance over the medium term. This research is captured in our forthcoming research paper Defining Momentum:  A Review of the Retirement Fund Investment Value Chain and the Progress of Responsible Investing in Southern Africa (SinCo commissioned by IFC, published July 2013) prepared for the industry-led initiative Sustainable Returns for Pensions and Society Project described in the SinCo portfolio of work LINK.

LINKING HARD LAWS AND SOFT RULES

Sustainable investment has tried hard to find hard ground of definitions, and many have emerged. Considering the carrots and sticks of promoting sustainable investment, definitions are necessary at a very practical level in order to establish the "rules of the game" that allows for policymakers to establish laws and regulations to be administered. The emergence of voluntary investor initiatives has been an important precursor to regulations, and sometimes a practical and pragmatic substitute for laws. These voluntary initiatives are a hybrid between hard rules (direct laws and regulations) and soft rules (moral suasion, stakeholder pressure). So for example, in identifying ESG issues and how they apply to investment, pension fund’s are flagging the realities of how investment happens within a broader investment ecosystem.  A sample of ESG issues include: 

• Environmental - Environmental Performance, Global Sanctions, Toxic Chemicals. 
• Social - Child Labor, Consumer Product Safety, Workplace safety, Diversity, Labor Relations. 
• Governance  - Separation of powers and duties, Publish What You Pay, Extractive Industries Transparency Initiative.

The CFA ESG Toolkit launched in June 2008  (PDF) also lists a good range of ESG issues as reference. Voluntary initiatives play an important role in defining some of the issues and differing perspectives to defining sustainability. For example the UN-supported Principles for Responsible Investment (PRI) (an investor initiative with UN environment Programme Finance Initiative (UNEP FI) and the UN Global Compact), the Extractive Industries Transparency Initiative (EITI), Code for Responsible Investment in South Africa (CRISA), the Equator Principles or the Carbon Disclosure Project (CDP) have played an important role in framing ESG issues. 

From my experience, the ratio of importance of ESG issues, and the exact issues, will vary from region to region, and so will their impact in the investment lifecycle given different asset classes. A positive outcome for institutional investors has been the emergence of investor collaboration. For example, pension funds have used the investor initiatives to increase pipeline of investment opportunities, to increase precision of due diligence, to spread risks in the deal, and co-invest leveraging development financing institutions (DFIs) capital. In shareholder activity the voices of more shareholders and shareholders with greater assets represented helps to generate more influence with companies or policymakers that sustainable investors are trying to influence. For example, this past week has seen the lobbying disclosure resolution filed by the Province of St. Joseph of the Capuchin Order receive 55% shareholder support at Alliant Techsystems (NYSE:ATK), with significant support from collaborating institutional 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.

SUSTAINABLE INVESTMENT, SOCIAL MEDIA AND THE KINETIC SOCIAL LICENSE TOOPERATE

Weekly Viewpoints on Sustainable Investment 

In this week's note some reflections from a week's work in Washington DC which gave a sense for where the investment aspects of sustainability are right now, and challenges for financing sustainability trends, as well as some catch ups with colleagues doing interesting work. I hope this commentary and analysis encourages you in your good sustainable investment work. 

IFC Sustainability Forum 18 June 2013

IFC SUSTAINABILITY SUMMIT
At the invitation of IFC's sustainability team responsible for Commdev (promoting stakeholder investment in sustainability issues), I was an invited stakeholder for two back-to-back events in the political capital of the world's dominant economy: the IFC Sustainability Forum (aimed at a trends conversation, hosted at the suitably imposing Renaissance Hotel) and the IFC Sustainability Exchange (a multi-stakeholder listening and reframing format, squeezed into IFC's headquarters on Pennsylvania Ave). I took up the invitation partly because of the good systemic work that I see the IFC having the opportunity to influence, and to be a voice presenting the developing markets viewpoint and representing our work at AfricaSIF.org promoting sustainable investment in Africa. As always, instant commentary is via twitter, where I helped out the @IFC_org by tagging the events - #sustysmt2013 and #ifcsustyx2013, see http://commdev.org/sustainabilitysummit. The heavyweights on the first day's IFC Sustainability Summit topic spoke to the season of change I have spoken of before that I sense in the industry, it was headlined "Dealing with Uncertainty". The humility of admitting that the future cannot be forecasted is a good starting point, especially in a town better know for hubris and talking heads. But few speakers helped frame ways to get one's hands around the uncertainty. The IFC team did well to get some major voices in the room, albeit World Bank President Kim only as video message, and the question sessions were good, and the weaving role by moderator Jon Lukomunik worked well. Looking around the room though, and listening to sidebar conversations, the voices seemed a little narrow, missing was a broader voice from South America, Eastern Europe, the Middle East, Africa and South East Asia. Little did the speakers know that the stock markets would have a mini-meltdown come Thursday that reminded everyone how thin the progress out of the global financial crisis is, and the discontent on the streets of Brazil, the darling of emerging markets, reflecting the gaps between how things may appear, what politicians may describe, and what is happening on the ground with ordinary citizens. The political economy continues to shift investor reference points. This month Goldman Sachs changed their 2013-2014 GDP forecasts, revising down the outlook for the Euro area, China, Russia and Turkey and upgrading Japan’s. No word on Brazil...

INVESTING IN FRONTIER MARKETS

SinCo has worked on projects with the IFC since 2009, but perhaps the IFC deserves a quick primer. IFC's role is private sector investment in developing countries - originally through project finance (loans) but over the years increasingly in various equity products, bonds and financial market investments (for the latter IFC typically lends to a Bank or PEF who then on-lend to sub-projects - this is now a sizable part of IFC's business). For all of these, IFC are usually a long term investor and work with the client over sometimes many years on developing their E and S management / sustainability systems in order to meet development objectives. A significant amount of conversation covered agri-business sector and oil, gas and mining sectors. IFC clients range from junior exploration companies to the majors such as BHP-Billiton, Rio-Tinto and Anglo-American. As of June 2012, IFC had a portfolio of emerging market investments of US$31.4 billion, of which US$9.8 billion is in equity. In the year ended June 2012, IFC committed more than US$15 billion of debt and equity investments in 559 transactions, of which US$2.1 billion was equity. Since inception, IFC has invested approximately $19.3 billion of equity in more than 2,100 emerging markets transactions, with more than 1,340 exits. Why would IFC be hosting a global think session for sustainability in developing countries? IFC has an important promoter role to play, demonstrating that sustainability makes sense for investors, and for channeling investment to corners of the world where commercial investors are too skittish to invest in. The influence flows in 2 ways: as technical advisory through support for sustainability at company portfolio or regional levels, and as actual investor in equity or fixed income of portfolios and companies. In the field of sustainable investment, IFC has influence on the terms of sustainability through their IFC ESG standards (the basis for industry initiatives like the Equator Principles as well as private equity reporting for PE firms managing money for IFC, OPIC, and others), and directly where IFC's own asset management company (IFC Asset Management Company, LLC) is investing capital, with around US$4.8 billion of assets under management in five funds. AMC funds co-invest alongside IFC’s investments but has independent fund governance, for example AMC’s Board has majority independent members and separate fund investment committees. IFC s investments are typically limited to 25% of the total capitalization of the company or the project IFC equity ownership is typically limited to 20%. IFC does not take control positions.

EVERYTHING IS PUBLIC
Transparency was a refrain across speakers. The powerful, democratic tool of social media in sharing information (both accurate and inaccurate, fair and snarky) is critical for doing businesses in developing countries. The statistics on cellphone penetration is legend. If information is power, then sharing information is about using that power with equity. A term that had resonance was "information equity", talking of a fair deal when all stakeholders voices are reflected, captured and monitored over time. I have inserted into our most recent investment value chain analysis in recent papers for the IFC / POA (see Defining Momentum project page http://www.sincosinco.com/project-sustainable-returns.php) and WWF / GEPF ( see Shuffling Feet report on Navigating Muddy Waters page http://www.sincosinco.com/portfolio-climate-risks.php) some perspective on making sustainable investment happen in the context of pervasive social media and the demand for transparency. In this new Twitter-enabled context, we operate investment decisions within the overarching paradigm of maximum transparency, as a primary lens for building credibility. The ultimate defense may be to "wiki-leaks" proactively because there is no more any internal/external divide, as has so dramatically been demonstrated by young Mr Edward Snowden (future Iceland asylum seeker?). 

SOCIAL LICENSE TO OPERATE
Social media is the social license to operate (SLTO). The role of social media is that it monitors SLTO and offers a grassroots communication channel that encourages (forces) companies, politicians, administrators, investors and other actors to be mindful of treating people fairly. It is not static. The SLTO changes over time. This insight from Rio Tinto's T.Malan was an important one and which many speakers added to. It is also not comforting. Hard-won stakeholder reputation and agreement is not fixed in stone, in coal or gold. It will change, meaning stakeholder mapping and monitoring needs refreshing on some regular cycle, some suggest annually is enough. The point was reinforced in the most granular session which focused on the IFC Commdev Financial Valuation Tool (FVT) widget, basically a strategic planning and valuation tool relying on a ex ante discounted cash flow analysis to value the "investment" opportunity set for stakeholder actions based on the positive/negative cash and time-flow effects on development of site projects. A new Wharton case study using Newmont in Ghana has a helpful context for FVT. No company seems to be using FVT across all projects, although Anglogold Ashanti (NYSE:AU) presented its use in their Geita mine, along with network power/influence analysis. From my perspective, FVT is not being used to explain to mining company institutional investors how company mine investments in sustainability are being made, something I hope we can help change. Anglogold claim mine operators are spending 60% of their time on sustainability issues, that 40% of projects are affected and 25% result in material cost over-runs. And a final word to Vale, the Brazil global miner. Their global public affairs hushed the audience into thoughtful silence by reminding us that mines make profits but also losses, and in the fullness and fairness of sharing the development of riches from rocks, more conversations should include situations that generate profits as well as losses, not only the former. The framing makes sense to investors, but politicians. Too often rights are disconnected from responsibilities. We do well to keep them related, with rights comes responsibilities.

Do good work on sustainable investment that matters.

Graham Sinclair

Principal

@esgarchitect

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.