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 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."

A thirtysomething trillionaire at the Zimbabwe Stock Exchange

A thirtysomething trillionaire. Like Wired Magazine predicted Bill Gates would be back in 1999 [you recall how that ended!]. I do not even know how many dollars or euros or francs or rands it took, but the smiling moneychangers at the Zimbabwe - Zambia border posts had more than a few. A trillion is 10.12, a lot of zeroes!

Hyperinflation is what happens when politics believe their own hype, and command the reserve bank and treasury to print money which is not backed by real assets. It ruined the Weimar Republic in Germany in the 1920s, and Latin America in the 1980's. With hyperinflation, confidence is wiped immediately, and the irresistible force of geometric compounding swamps calculators as each unit of currency becomes worth decimals of what it once did. Zimbabwe’s president has bankrupted his country. But being better educated and able to manipulate the levers of power, Mugabe no doubt has his wealth offshore. Not in Switzerland, too close to those who hold him accountable, and as of Friday, a less secret place to stash the cash. No, his money is allegedly further east, probably in Singapore, Malaysia or Kong Kong. But also embarrassingly, Mugabe may have cash in the Isle of Man and land in the UK, according to Harvard Kennedy School Professor Rotberg who has covered the ZIM corruption since 2007.

HK is where Mugabe's daughter is getting her degree. I have never met her and she may be the nicest person. Readers may recall that HK is where his wife allegedly took around USD50k cash - straight from the ZIM Reserve Bank - to go shopping, and where she managed to be famous for punching a photographer [the media is real outside ZIM]. The obliging HK administration declined to press criminal charges. Anyway, I am surprised Mugabe's daughter did not simply have her father order the university to issue her with one. But then, having driven past the University of Harare last week, one understands the head of state’s own family choosing to study elsewhere: it was impossible to see the campus buildings through the head high grass and weeds. Perhaps the student activists who reject the presence of the dictator’s child in class may create more of a challenge to “normal” than the is possible within Zimbabwe itself. If the university is anywhere decent, it will have more freedom of expression, and more accountability, than Zimbabweans have experienced in the past twenty years.

Like opinion polls to politicians or market prices to CEOs and their bankers, a currency’s worth is a relative score on the perceived health of a political economy. Which is why for the first time one may recall, the Chinese premier called upon the US to be fiscally responsible and to guarantee its good credit over the weekend around the G20 summit. Yes, the Obama USD 800 bn rescue package has a price tag, and the low interest rates and trillion-dollar spending will lead to a weaker dollar, just not today. The Economist has its own problems with it. SeekingAlpha website covered the hyperinflation effect for the US. The mighty Swiss france has become too strong for its banking and manufacturing industries, leading the Swiss to devalue their currency by intervening in the forex market. A short term strategy that “beggars-thy-neighbour”, but the CHF is small enough to slip by for now.

So where does “responsible investment” factor into the ZIM situation? In November 2008 when I visited London I recall a furore that Anglo and Barclays were making new investment into their ZIM country operations - ZIM Barclays does have the cleanest buildings. The ZIM regime is despised in a way I would think apartheid South Africa once was. But the convoluted and conflicted behaviour at a country level within the UN system, the lure of ZIM’s mineral wealth, and Mugabe’s “street cred” among African “liberation” politics including his ability to manipulate has kept him around way past his sell-by date. But how many country screens are excluding ZIM?

Few investment policies will even reference ZIM, partly because it is dwarfed by other major investable countries, and by its southern neighbour. Burma receives much more attention in the US, for example, with Chevron [NYSE: CVX] being targeted for action this shareholder season. 

The 2009 resolution seeks greater transparency on how Chevron evaluates its human rights impact, especially in high risk countries like Burma. It calls on the company to report on its criteria for investment, continued operations in, or withdrawal form specific countries. The annual meeting is expected to take place in May 2009.  The resolution was co-filed by the following institutions: Teamsters General Fund, AFL-CIO, Ms. Adelaide Gomer, The Maryknoll Fathers and Brothers, Mercy Investment Program, Newground Social Investment, Ursuline Sisters of Tildonk and the Unitarian Universalist Association. The International Trade Union Confederation (ITUC) and the International Federation of Chemical, Energy, Mine and General Workers' Unions (ICEM) have both endorsed this resolution, as has the Canadian Labour Congress (CLC). 

The unintended consequence of Mugabe bankrupting the country is that it makes a micro-point of any global emerging markets exposure at a country level. Investors into Africa probably only have indirect exposure to ZIM by holding firms that are still ticking over in the country [see Financial Mail’s breakdown of ownership in ZIM brands].


Buy or Sell ZIM?

The investment policy for investors that integrate environmental, social or corporate governance factors [ESG] is the appropriate place to look for the response at a macro level. Major institutional investors now consider ESG factors, and CalPERS has an explicit approach to emerging markets investment. Perhaps the most well-known advocate of ESG in global investment is the Norway Government Pension Fund – Global, with NKr2.275bn [Eu258bn, USD329bn] in AUM. The Norwegian Global Fund, a sovereign wealth pension fund created from North Sea oil revenues, has a investment policy explicitly outlining ethical factors, and practices investment by having an ethical council screen investment opportunities. International investors saw this in action in the pages of the New York Times and Wall Street Journal in 2006/7 when Norway flagged Wal-Mart for exclusion, generating some diplomatic activity, and raising the profile of the ethical council. It also made a useful Harvard Business School case study, Norway Sells Walmart.Later in 2008, the fund published a report on child labour: corporate governance, children and the environment remain primary key issues. In last Monday’s FTfm the fund's "thorny path" was highlighted.

The easiest route is to disregard investment merits and divest immediately, and buy back quietly when the storm has passed. This approach only generates a better investment argument if the accompanying publicity will drag on the share price wherever it is traded. Shareholder activism is a public approach to have the company address the issue. A high profile investor when faced with a high profile problem may need to take this route – the Norwegian fund has addressed the costs of climate in a white paper in response to an NGO asking a pointed question. Environmental NGO Bellona recommended the fund exclude carbon emissions violators in a report to be submitted to Norway’s parliament 26 March. Shareholder activism is not limited to ESG factors, and in each year our experience at Sinclair & Company is that some have greater emphasis than others. In 2009, clearly executive pay has become the lightning rod – just ask Messers Goodwin or Liddey what their majority shareholders [UK or US taxpayers like you] think about fat cat salaries…

Shareholder engagement is an approach by investors “behind closed doors” approach less concerned with shareholder proxies but with suasion, and better explained in hindsight and ex-post facto. The most recent, 2007 SIF report identified increased activity in the USA covered through 31 December 2006. 

The average level of shareholder support for resolutions on social and environmental issues increased 57 percent from 9.8 percent in 2005 to 15.4 percent in 2007, a record high.  The total number of resolutions increased from 360 in 2005 to 367 in 2006.  Institutional investors that filed or co-filed resolutions on social or environmental issues controlled $739 billion in assets in 2007, a more than 5-percent rise over the $703  billion in assets counted in 2005.

Engagement works in smaller, clubby circles of capitalism, where the connection between investors and companies, and the professional circles they move in, is much smaller and the prestige of the matter carries some weight. Some of the more effective conversations have come where advisors put publicly combative parties in a room, and as people and professionals new ways forward were sought. The UK, Brazil or South Africa are examples of these smaller investment circles of influence.

The shareholder activism has practical challenges. Pauline Skypala in today’s FTfm covers the recent handwringing on shareholder rights at the UK's National Association of Pension Funds [NAPF] conference last week. NAPF has been a proponent of integrating ESG factors, and is a conference of investors with a longer-term perspective. The influential Lord Myners, himself renowned to be frank, had institutional investors expressing “a lot of this [corporate governance] is rubbish”. How long investors should stay invested, whether all investors offer the same direction to a company, and when to extract investors from a situation are all practical challenges of implementing an investment strategy that [correctly] integrates governance into the investment equation.

The momentum of actions that seek to target at the country level are unpredictable, and may succeed in direct relation to the publicity, not necessarily the weight of arguments. Tibet is overshadowed by China’s massive bulk. Burma continues to attract attention of human rights activists and the investors that map to that [see GES Investment Services' briefing on Burma this month, March 2009], while countries which also have poor human rights records may feature less. It is so that ZIM attracts almost zero attention in the US while the Sudan/Darfur issue has generated major student, media and investor action. Acolytes of the sage of Omaha, Warren Buffet, have heard him explain his position on China National Petroleum Corp. [HK:0135, CNPC] because of Sudan [see Marc Gunther's 2007 Fortune piece], and they may not even know where ZIM is on a map.

ESG research providers have made available screening products that are not expensive to build and easy to pitch which focus on countries or companies that fail criteria of certain international initiatives or agreements. EIRIS has country sustainability profiles and convention ratings, and Riskmetrics ISS Innovest offers sovereign ratings in their screening boutique. Companies' own dilemna on whether to stay or go is newsworthy material for the media: should they stay or should they go? Divestment is a fairly blunt instrument. Unfortunately for the average ZImbabwean, lovely people, their country does not warrant the attention of the world, despite the country being mis-managed into -40% GDP tailspin. Divestment is a dramatic tool, with much scope for collateral damage. The investment decision is the least of matters.

Air conditioners in Singapore, drunken Tree Shrews in Malaysia

The best invention ever? The air conditioner. My Singaporean friend smiled as he offered this declaration by a Singaporean statesman on my first visit to Singapore and Malaysia this week. Choon is a good man, works in Pharma in SE Asia, sometime rugby player and U of Michigan Ross School MBA alum. I was invited to Malaysia to cover my EM work for CSR and SRI experts at The International Corporate Social Responsibility Conference 2008 jointly organised by the EUMCCI, OWW Consulting and RUSS Consulting, 29th-31st July in a feature presentation on Responsible Investment in Emerging Markets. The region must be one of Carrier or LG or Dakine’s best sales areas. I expect few expats from cooler northern climates in the financial district’s highrises would last long over their XLS spreadsheets without a steady 72F/19C! But what of the climate impact? I’m still waiting on word of how many units are sold without CFCs, and like any competitive and emerging society, I suppose many may be serviced by solo entrepreneurs in small shops doing the best they can, with or without ISO certifications. The climate impact of the air conditioner business post Montreal Protocol, from manufacturing to consumption patterns, maybe worth a paper from my old mate at UNEP working in the Global Environmental Fund.

Walking the streets of SIA and KL has added colour and texture to my understanding of the SE Asia region beyond three letter airport acronyms. Singapore has always been pitched as the goto for investment in the region, and Malaysia has been interesting for me ever since the massive investments in post-apartheid South Africa in 1994/5. It has the similarities with affirmative action and economic empowerment and the tied destiny in the 1997 Asian flu that whacked the South African rand as traders rushed to quit any EM exposure and the ZAR was so liquid [regularly in the top ten most traded currency]. SE Asia is understandably complex, and research rewards the curious, but one needs the street-skills typical of EM. How to explain the site of a bay of waiting cargo ships, the mixed low and high rise properties, curry for breakfast, white bean hot drink, wakeboard center open until 11pm on Saturday night, and dainty bakery items my mum would be proud of baking [I was reprimanded for taking a photo - since when did baked goods become so competitive?!]?

One needs to be on the ground in SE Asia to properly assess performance, especially for understanding environmental, social and governance [the ESG in sectors report is a good illustration Taking Stock — Adding Sustainability Variables to Asian Sectoral Analysis]. The usual pitches by the hotel and the airport to being green were in evidence. The “onsite” argument view was confirmed in conversation with a respected colleague and expert in the region, a former i-bank analyst heading ASrIA. The data is there, what is and is not being done. But one needs to dig for it [the blunt tools of questionnaire and engagement letter are ignored], and the data or its information is not necessarily well-organized. Covering ESG performance in SA Asia may benefit those with the raw data and local knowledge to analyze it. The information asymmetry benefits locally based players in the ESG space, like Fortis, Aberdeen and Lazard. As a former HSBC guy turned business journalist at Channel 7 explained, sharing a story of how his team, in trying to sort lending exposure post the 1997-meltdown, posted his own people to stake out a factory for a couple of days to see how it was really doing, counting movements of widgets to assess inventory, as opposed to the smiling handshakes of the planned visit which hid the real activity driving the factory cashflows.

The International Corporate Social Responsibility Conference 2008 was hosted at Hilton Kuala Lumpur with its four storey window overlooking twisting highway and lush treescapes a few kilometres from the city center of the Lake Gardens. Day One was CSR focused, Day Two on RI, with Day 3 trying to square the circle with the WBCSD workshop. I was most interested in understanding what was actually being done on the ground by local firms. Geoff Williams at OWW Consulting and other local partners have done good work presenting this conference with CSR and SRI days back-to-back, with the WBCSD workshop tomorrow hopefully putting investors, corporate CSR and company development people in the same room. This is another stop in the project to assess the presentation of the sustainability proposition by companies to investors. I met Geoff when I was leading the PRI in Emerging Markets Project at UNEP FI, where Geoff was a positive in building momentum in the region [expect more on the PRI in EM project in future posts]. Geoff, myself and two academics from the local university covering sustainability, USM, will be moving forward on a mapping survey on RI later this year, building on my work with the similar mapping in SA last year – we’ll be keeping lead author in SA, Neil Eccles at UNISA Centre for Corporate Citizenship, looped. I prefer to work collaboratively. Old PRI colleagues at NZ Super amongst others will be supporting the survey. Universiti Sains Malaysia [USM] is positioning itself as the leading sustainability university in Malaysia (in Asian fashion, it has its own USM song). The survey will cover attitudes to RI in Thailand, Korea, Singapore and Malaysia from asset owners, investment managers and service providers. While not groundbreaking, if we build with the appropriate rigour, it may form the basis for a decent view on the state of play, comparison and contrast to the South African State of Responsible Investment study in 2007, and I will look to replicate it in Latin America and Eastern Europe in 2009.

My connecting WBCSD and OWW was important to increase the EM exposure for the WBCSD Business Theme valuation project by getting to Malaysia, and closing the gap between corporate and investor perspectives. Ten CEOs were expected for the workshop on Thursday, and a representative sample of investors [I will cover the project in more detail in Q4 2008]. The WBCSD project will explicitly cover the perspective of multinational companies, local operations of MNCs, as well as local EM country champions. I look forward to the South Africa event at the JSE in November. As with any of these initiatives that I deal with across the sustainability theme – and there are too many of them – I continue to make the case for real, on-the-ground input and activity from an EM perspective.

In my presentation on Responsible Investment in Emerging Markets, by show of hands, there were just five investment professionals in the hall. Most of the 250 delegates were corporate CSR, NGO, academic or public policy people, except for the likes of Anne-Maree O’Connor from NZ Superannuation Fund, Colin Melvin, CEO of Hermes Asset Management (UK) which manages the £35 billion British Telecom Pension Fund, Kris Douma, Head of Responsible Investment Support & Active Ownership at Netherlands based Mn-Services [we met at the Institutional Investor event in Amsterdam in March], which manages €65 billion and Alexis Krajeski, Governance & Sustainable Investment expert, F&C Investments, (UK) which invests more than £100 billion in Socially Responsible Investments [now moved from Boston to London]. YK Park, project Director at ASrIA, covered the Carbon Disclosure Project [CDP] work – ASrIA acts as regional partner for CDP, for example the 2007 CDP5 report. ASrIA has played a key role in opening doors for investors from outside the region. I was hoping YK would offer more information on how the CDP data is being used by investors and CDP members. Understanding the investor impact – and increased use of CDP data – must be measured for a sense of CDP’s impact, a project I have motivated CDP to move on globally in 2008/9.

To hook my insights on EM and ESG in “Responsible Investment: the experience in emerging markets“, I used a little fact I picked up from the BBC Tuesday night to act as metaphor for my speech, see “Malaysian tree-shrew is heavyweight boozer” BBC 29 July 2008. The connection was to the fact that scientists had only just discovered some rather unique behaviour of the small forest creature, how they measured behaviour, and how tracking it over time gives us metrics on how it thrives, including whther it will still be around in 2012.

A tiny tree-shrew that lives on alcoholic nectar could - pound for pound - drink the average human under the table – Proceedings of the National Academy of Sciences . Malaysia's pen-tailed tree-shrew waits until nightfall to binge on fermented nectar from the bertam palm. Insights into how humans' alcohol tolerance first evolved.

The photo was used to reflect 3 messages on “Responsible Investment: the experience in emerging markets“: context, facts, and metrics. My view is that, to understand where RI is and where it may go through 2012, one must appreciate firstly, the socio-economic context of each country [attitudes toward sustainability and ranking of ESG factors will vary], secondly, facts are important and data is available but may need better discovery with better analysis in that cultural context, and finally, the importance of measuring where RI in EM is going, including understanding the appropriate metrics over time per region or country. The message fits the intersection of sustainability and investment where I work. While outside the geographic coverage [Brazil and UK] of the Natural Value Initiative on biodiversity headed by Annelisa Grigg and my former UNEP FI colleague Susan Steinhagen, I think the shrew fits neatly into the fundamental question: how may investors better quantify the biodiversity value of ecosystems? How much is the scientific discovery of this behaviour worth? How much is each shrew worth?

The audience was typically Malaysian (or so my hosts tell me): in the Q&A session – for the first time ever in my public speaking career - no questions! In a region where culture dictates no losing face and reticence amongst strangers, at least in general session, 250 polite people stared back at me. I smiled. This is what you learn when you fly halfway around the world…

Investment as Usual is Broken [Part 3 of 3]: next generation needs

State Street Corp.'s [STT] State Street Global Advisors [SSgA] has been slowly moving into some ESG-applied research for the past few years, because ESG factors are starting to become mainstream according to Bill Page, head of the company's ESG Team in Boston. Bill was my recent guest in the final session of MBA865 Sustainability in Investing Strategies where he was pitched by students’ investment ideas for the new SSGA Global Environmental Opportunities Strategies [GEOS] fund. Bill says his GEOS investment team is using ESG research for accounts of some rich investors and private institutional investors, such as endowments. His new strategy has secured its first mandate, and he is flat out covering demand.

Globally, the Principles for Responsible Investment [PRI] has emerged as an organizing theme for asset owners, investment mangers and their service providers. The PRI is an institutional investor initiative, launched in April 2006 by UNEP FI and the UN Global Compact. The PRI supports the work of UNEP FI in engaging financial sector, environmental responsibility goals of UNEP and the Global Compact’s 10 principles aimed at achieving the Millennium Development Goals by 2015. The PRI appreciates that, at least on paper, the informed end-investor drives all activities in investment value chain. Key factors like climate will be integrated when demanded by the market. Significant risks and opportunities for investment valuation will come with climate changed perceptions; from taxation and regulation, changes in weather patterns, technological innovations, shifts in consumer attitude and demand. There will be winners and losers in the transition to a low carbon economy: investors need information to determine how companies will be affected. Approximately 25% of global emissions were reported through CDP in 2007.

But where is investment practice today? Involved asset owners e.g. pension funds are exploring the boundaries. Pension funds have a business case for reducing negative and increasing positive externalities. CalPERS[i], the biggest U.S. pension fund, has identified the investment case for incorporating corporate governance as firstly, shareholders are willing to pay a premium for well-governed companies, secondly, a “corporate governance premium” can be captured to increase shareholder value, and thirdly, well-governed companies have a competitive advantage in attracting capital. Institutional investors have linked superior investment performance with strong governance according to research by Watson Wyatt and Oxford University. In September, 2007, a powerful group of investors and advocacy groups filed a petition with the US Securities and Exchange Commission asking the SEC to require publicly-traded companies to assess and disclose their financial risks from climate change. "Among the 22 petitioners - which include Environmental Defense, a US non-governmental organisation, and Ceres, a coalition of investors and environmentalists - are a group of major US and European institutional investors that collectively manage more than $1.5-trillion in assets" the FT reported.

UNISA’s Centre for Corporate Citizenship, the UNEP Finance Initiative and Noah Financial Innovation, together with the PRI, have found in their study that while most market participants think integrating ESG factors in investment practice is important and has a material impact on how companies are valued, few financial institutions or advisers are doing much about promoting this kind of investment. The 32 pension funds, 19 asset managers and 11 investment advisers involved (between them controlling more than US$700million) believed that ESG issues were material to a company’s value. But most were either doing nothing about responsible investment or had limited involvement.

Experimentation and development of new tools is progressing. A new biodiversity tool evaluating ecosystem services in the Food & Beverage Sector in the UK and Brazil is being beta tested by European investment managers supported by Flora & Fauna International and UNEP FI. In the past few months, several fund-of-funds -- hedge funds that invest in other hedge funds -- have sprung up to cater to the market for investments adhering to certain environmental, social and corporate-governance standards as WSJ 's Carolyn Ciu reported.

At the cutting edge of the new approach to investment as usual, are efforts being made in emerging and frontier markets. The PRI in Emerging Markets Project is aimed at integrating ESG factors into investment decisions impacting business in 25+ emerging markets and developing countries through December 2008. The logic model makes the compelling case for investors [both within and into emerging markets ] that increasing the visibility of ESG factors along the investment value chain in emerging markets by addressing systemic thinking of investors will reduce barriers to improved ESG performance in country.

Environmental, social, ethical, and governance issues are embedded in any firm's corporate strategy. Anything that affects a firm's business model can also affect the firm's financial performance - therefore its valuation - and these issues are no exception. The question posed is: “If business may be a positive driver for sustainability, and investors own or lend money to these companies across asset classes, can their active voice influence better ESG disclosure and action, thereby driving positive ESG performance?”

In emerging markets, perhaps a leapfrog in thinking will mirror the leapfrog in approach to telephony: many emerging markets – South Africa, Brazil, Thailand - have skipped the full deployment of fixed landlines, and made the leap to embracing mobile phone telephony. On 6 February 2008 in Geneve, Switzerland, an IFC consortium led by Standard & Poor’s Equity Index Services together with KLD and CRISIL, an Indian credit rating agency, will launch the first ever Indian company ESG index, featuring indexes with 50 and 100 companies scored on ESG performance. Carbon analysis firm TruCost together with investment firm CLSA is studying monetizing the environmental impacts of companies in the MSCI Emerging Asia ex-Japan index, as well as investment research, mandating identification of comparable and quantitative key performance indicators relevant for the largest listed sectors in India, Thailand, Malaysia, Vietnam, the Philippines and Indonesia, together with the World Resources Institute [WRI, wri.org].

The next generation of investment analysis must be ready to cover - explicitly or implictly - ESG factors in their investment analysis. Analysts will also be expected to act as investors, engaging firms directly to improve ESG performance, realizing the influence on the investment case may be bi-directional. A version of these comments was edited for the UN Chapel Hill Kenan-Flagler Business School's monthly publication for the Center for Sustainable Enterprise. I conclude this three part thoughtstream in the same way:

A New Approach to Investment Analysis

Environmental, social, and governance issues (ESG) are embedded in any firm's corporate strategy. Anything that affects a firm's business model can also affect the firm's financial performance—and therefore its valuation. ESG issues are no exception. Many bright minds have played with this, and will again - see back to the Cable & Wireless WWF effort To Whose Benefit? in 2003. The next generation of investment analysts must be ready to:

1. understand the industry/sector dynamics of key ESG issues
2. identify the material impacts of ESG factors on a firm’s corporate strategy
3. drive toward clarity on ESG data points delivered with consistency and clarity into the valuation process
4. make investment decisions presented over both short-term and long-term horizons

The next generation of investment analysts may also benefit their investor clients by acting as active investigators, engaging firms directly to improve firm ESG performance, appreciating the articulation and influence on the investment case may be bi-directional: investment analysts may not know all. “Investment as usual” will change as companies adapt their strategies to the realities of a connected, globalized world with creative talent sensitive to ESG issues. So too the next generation of investment analysts must change. And with each passing page of Dan Reingold's confessional "Confessions of a Wall Street Analyst", I become more certain of the need for these changes, and how they must be driven into the incentive structures for analysts. if the title "analyst" is ever to "get some respect" again.

The investment world is fast and pressure-filled. Investment professional mind “other people’s money” [OPM]. It is an awesome responsibility to act as the interpreter and fiduciary for the savings of others. Investment as usual must change with the next generation of investment analysts, integrating sustainability in investing strategies.

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[i] CalPERS Active Corporate Governance Program, William Sherwood-McGrew, Corporate Governance Officer, November 21, 2003 NYSSA CG Conference NYC.