Making responsible investing a reality
Very few people know what responsible investment involves or what they should be doing to deliver it. Bringing clarity to this popular yet misunderstood concept needs research, data, accurate measurement and informed analysis if South Africa is to develop a sustainable, long term, responsible investment industry.
“While there is broad acceptance of the principal of responsible investment, at this stage it is very difficult to evaluate to what extent an asset manager has truly embraced the principles of responsible investment” says Tracey Want, Investment Solutions.
With the introduction of the Code for Responsible Investing in South Africa (CRISA), South Africa became the second country after the United Kingdom to formally encourage institutional investors to integrate environmental, social and governance (ESG) issues into the investment process.
CRISA endeavours to assist the investor community give effect to the King Report on Corporate Governance in South Africa (King III) in line with the United Nations-backed Principles for Responsible Investment (PRI).
The intention of the voluntary guidelines is to encourage asset owners to consider long term sustainability issues when making investment decisions. It also extends to how asset owners should exercise their ownership rights to promote good governance.
Getting this right is important as evidence suggests that responsible investment and responsible ownership promotes sustainable practices at companies - creating platforms that can deliver sustainable returns. As such, it is critical that investment managers themselves have a view as to how environmental, social and governance (ESG) issues can be effectively incorporated into their existing alpha generating process.
“The relative success with which investment managers integrate and balance the legislative and ethical demands of responsible investing with their performance objectives is key to performance in this rapidly changing industry” says Want.
Right now, however, it is very difficult to assess how asset managers have incorporated responsible investment into their investment process. Certainly “it is not as simple as reviewing the holdings of a portfolio and making a call as to whether the portfolio complies with ESG criteria or not” says Want.
The analysis of asset manager behaviour goes a lot deeper than that. One would have to assess their DNA and investment process relating to buying and selling decisions, along with their activities around engagement and proxy voting. Only then could you make a call as to whether the asset manager is paying lip service to ESG and sustainability issues or if they are truly committed to the cause.
To get this right Investment solutions has established a Responsible Investing Committee to interrogate ESG issues and develop a philosophy and methodology to score these.
While it’s still very early days Want says this process needs to start with a survey of asset managers both locally and globally. Once the data is run and trends identified “we’ll be in a better position to develop a practice to accurately value, rate and guide ESG issues” says Want.
And although voluntary, “let no one think that CRISA isn’t set to become a permanent feature of South African investment practice” adds Want.
To date, it has been widely accepted by different industry bodies. The Institute of Directors in Southern Africa, the Principal Officers Association, the Association for Savings and Investment South Africa (Asisa), the Financial Services Board (FSB) and the Johannesburg Stock Exchange have all made public declarations of acceptance of the code.
Furthermore, “initial findings by Investment Solutions confirm that institutional investors have already adopted principles contained in CRISA to different degrees” says Want.
As such, asset managers at the most engaged end have dedicated resources to actively research and promote responsible investing principles into their investment process. These managers typically engage the management of the companies in which they invest on matters relating to ESG. The shares they hold on behalf of their clients are generally actively voted, with voting records made publicly available.
In the middle of the spectrum are managers that claim sustainability issues are part of a long-term investment strategy and, as such, are incorporated into their investment process. These generally, however, “struggle to articulate exactly how they apply the code, even though it is evident some of the correct practices are in place - primarily those protecting the value of their investment and informing their long term decision-making process” observes Want. These managers typically do not employ an ESG analyst but generally actively vote their shares and carefully consider all decisions put to them. They may also engage companies privately on issues they believe important to an ESG cause.
At the other end of the spectrum are managers that do not openly accept CRISA principles. These managers generally hold that “their primary role is to create long-term value for clients and that focusing resources on non-direct investment related issues detracts from performance” explains Want. Yet, surprisingly, even these managers have certain practices aligned to responsible investor behaviour. If well-resourced and large, they may even have sufficient depth within their investment team to discuss and make decisions based on ESG issues.
Only once Investment Solutions knows what the profile of a responsible fund manager looks like “will we be in a position to share this information and openly encourage responsible behaviour” adds Want. For example, two companies could both present very high responsible investment profiles even though they had completely different portfolios. One could have a portfolio that excludes investment in so-called sin stocks (polluters or fossil fuel guzzlers) while another (actively investing in polluters or fossil fuel guzzlers) could present a highly responsible investment profile because they actively engage and encourage change at these companies.
Comparing and rating these very confusing and apparently contradictory strategies “needs an in-depth assessment of the managers process, after which one would need to work out how to measure, and then report findings, in a lucid and easily comparable format” say Want.
So while the action of adopting the CRISA code is relatively simple, making the principles a reality as well as being able to provide proof that the principles exist in a portfolio is a much more complex process – “particularly where a client makes use of more than one underlying investment manager” concludes Want.
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