Institutional investors in South Africa are beginning to incorporate environmental, social and governance considerations into their investment strategies. But is the rest of the investment community – and the companies they invest in – changing their behaviour? In the third EY Trialogue sustainability forum, panellists and attendees discussed the drivers of – and obstacles to – responsible investment in South Africa.
- Glenn Silverman
- Jon Duncan
Has responsible investment (RI) changed significantly in the past three-to-five years? Where has progress been made?
Jon has seen his role within Old Mutual shift away from compliance to meaningful senior-level strategic engagement. “When I first started this work, there was an assumption that they’ll hire me and tick the box,” he says. “Now I’m sitting down with our CEO and debating what RI actually means.” This transition may be symptomatic of a bigger shift within the industry. Systemic thinking is proving to be a critical driver of RI, and both panellists agree that challenging conversations are taking place at senior positions within the industry. Ultimately, the question is where opportunity exists to build and adapt innovative products that will have meaningful financial returns while contributing to natural and social stocks.
From his bird’s eye view as a multi-manager, Glenn is seeing variation across his asset managers. While they tend to be strong with regards to governance (particularly in South Africa), environmental and social issues are still proving challenging. “The conversation has certainly changed,” he says. “I get the sense that our managers are thinking hard about these measures, and in some instances have been incorporating ESG into their processes for some time.”
At some point, addressing pressing sustainability issues may be ‘right’, regardless of short-term financial outcome. Jon recalls the passion of university students campaigning against carbon emissions around the world. “The last generation fought against apartheid because it was a civil rights issue. Now they’re fighting against climate change because it’s a human rights survival issue. If the science is so conclusive, how can trustees not think about it?” Unfortunately momentum has been slow to pick up and there is a long way yet to go.
What are the barriers to mainstreaming RI?
Glenn questions the notion of creating shareholder wealth as the ultimate goal: “I think that’s extremely damaging. Ultimately shareholders are but one of four key stakeholder groups.” Also important are employees, government and the general community. “Sustainability is as much a moral philosophy as an economic concept,” Jon says, “business education needs to reflect this.”
Getting an asset manager to embrace a broader definition of wealth and returns either requires the person to make an ideological leap or to realise it’s in their best interest to do so. Glenn feels that the latter is far more effective among the investment community.
The panellists also noted that CRISA – a significant driver of RI – focuses on listed entities. Both agreed that the unlisted space holds great potential for RI. Investors can place their bets on what they think a sustainable South Africa will look like in 30 years. Jon suggests that the National Development Plan provides a useful indication of the direction investment will take in the coming years, and that one would be hard-pressed to find these opportunities in the listed market.
While CEOs and pension fund trustees are typically in seat for three-to-five years, RI asks that they manage for the long-term. Glenn feels that misaligned timeframes and incentive structures are at the heart of the challenge.
Do the right tools and data exist for informed decision-making? If so, do analysts know how to use them?
Analysts are getting ESG information from companies’ annual sustainability and integrated reports, and this information is also increasingly available from providers such as Bloomberg. In addition, some firms are building proprietary data rating systems. However non-financial metrics are still ‘a few data points in a sea of data’ and as such aren’t often given heavy weighting by analysts.
Jon relates that Old Mutual has built its own data rating system for governance performance. “While it isn’t necessarily a deal-breaker for portfolio managers, we use it as a discussion point. It forces analysts to monitor assumptions and helps to sense-check them.”
Glenn is sceptical of a common data set: “As a multi-manager, we get better results from diversity of approach, style, philosophy. I like that they’re all competitors,” he says. “Over-reliance on one system can create risk. The most important issue is how you use the data.”
While comparability and standardisation of data remain a challenge, Jon feels that if SASB items were a listing requirement, it would help, however it would present additional administrative burden.
Is the regulatory environment (Regulation 28, the carbon tax, producer pays) the real game changer?
Panellists agree that while regulation is important, it isn’t a silver bullet. Jon prefers market signals that drive innovation, and Glenn fears excessive government interference: “Taxes can distort a system without a view of the bigger picture. I spend more time worrying about compliance than I worry about investments, but that’s not what my clients pay me to do. We need some balance.”
How convincing is the evidence that RI can deliver positive financial and sustainable outcomes?
Glenn says that the studies are quite varied. “I can find proof that it adds to return, that it detracts from return, etc.” He believes that a focus on ESG aspects, if done right, should reduce risks. Timeframe is an issue, however. “How long does it take to show that I’ve added value? We want to give clients competitive returns, but believe we can do this while considering ESG performance.”
Are you aware of any cases where companies have made changes to their strategy as a result of engagement with investors?
Jon has read of examples, but hasn’t personally seen it in South Africa yet. “We have been on our own journey over the past three years – from proxy voting to disclosing our RI policy, voting disclosure and engagement,” he says. “But I’m not convinced that just because of our engagement with a company, they’ve changed their tack.” The South African market has quite a lot of maturing to do before it’s ready to respond to shareholder pressure. “Companies respond to what’s issued at the AGM and in this country, there aren’t many shareholder-led resolutions.” In the US, these are led by faith-based organisations and NGOs.
Glenn thinks that changes are happening, but beneath the surface. “A lot happens, even before the proxy votes and resolutions.”