An unexpected consequence of the recent debacle over the distribution of social grants was the increased focus on the role that asset managers can play in supporting a more sustainable and responsible investment environment, by incorporating environmental, social and corporate governance (ESG) issues into their investment decisions.
Major investors in Nasdaq-listed Net1 UEPS, Allan Gray and the World Bank’s International Finance Corporation (IFC), faced difficult questions over their failure to challenge Net1’s Cash Paymaster Services (CPS), which manages the distribution of social grants, on its questionable cross-selling practices and weak corporate governance.
This failure led CEO of Sygnia Asset Management Magda Wierzycka to question whether “compliance with ESG policies is mere lip service”. Wierzycka was subsequently accused of double standards and Sygnia of being, as a passive investor, “oblivious to the sensitivities of environmental, social and governance (ESG) criteria that lie at the heart of ‘responsible investment’”.
South Africa is seen as an emerging-market leader in responsible investment (RI). In 2011, the Committee on Responsible Investing by Institutional Investors in South Africa, which was convened by the Institute of Directors in Southern Africa, launched the Code for Responsible Investing in South Africa (CRISA).
CRISA is designed to provide guidance for institutional investors and their service providers on integrating sustainability issues into investment strategies. It is based on five principles that, in addition to the integration of sustainability considerations, address active shareholder ownership through voting and engagement; collaboration; conflict of interest; and transparency and disclosure.
Amendments to the Pension Funds Act of 1956 require funds and trustees to include in their investment decisions considerations of ESG issues that may materially affect the sustainable long-term performance of their portfolios. This regulatory pressure, together with market demand and increasing evidence that responsible investment is not detrimental to investment returns, have led many of South Africa’s largest asset managers to take steps towards implementing responsible investment practices.
However, as the debate over Net1 and other recent controversies illustrate, there are a number of concerns about how responsible investment principles are being implemented. Wierzycka, for example, has described some ESG policies as PR exercises and questioned why asset managers were not being held accountable for their investment decisions. While numerous asset managers claim to endorse CRISA, a 2013 report found significant shortcomings in both the application and disclosure of CRISA. CRISA is voluntary and there is no formal oversight of how institutional investors or asset managers perform against CRISA’s five principles.
Kigoda Consulting has launched the Kigoda Responsible Investment Ranking 2017, which uses CRISA’s five principles and its practice recommendations to independently assess whether ten of the largest asset managers in South Africa have the policy frameworks and governance structures in place to implement sustainable and responsible investment, and to adequately disclose information on their responsible investment performance. These ten managers account for around two-thirds of total assets under management in South Africa by asset managers, including multi-managers.
The scorecard was developed by identifying the relevant issues for consideration under each of the CRISA principles. The weighting of each CRISA principle was determined by the respective number of issues and their relative importance, with a view to giving each of the high-level categories approximately equal prominence. An exception is Principle 5, where the higher weighting reflects the extent to which transparency and disclosure underpin responsible behaviours. The Kigoda Responsible Investment Ranking 2017 is based solely on publicly-disclosed information.
- Overall performance: There is a wide variation in the implementation of responsible investment practices as outlined in the CRISA principles by the ten largest equity asset managers assessed in the Kigoda RI Ranking2017. Best performers Old Mutual Investment Group and Investec Asset Management, followed by Sanlam Investment Management, demonstrate strong commitment to sustainable and responsible investment through their policies, governance structures and transparency. At the other end of the spectrum, there is no publicly available information on how Absa Asset Management approaches CRISA, and no public disclosure of its responsible investment policies, if any. Absa Asset Management receives a single point in the Kigoda RI Ranking 2017, because it is a signatory to the UN-supported Principles for Responsible Investment, a global responsible investor group.
- Responsible investment policies: Nine of the ten asset managers assessed have adopted a responsible investment policy, although there are considerable differences in the robustness of the policies. However, only six of the asset managers make their policies publicly available as required by CRISA.
- Governance: Five of the assessed asset managers provide information on the governance structures and controls which they have implemented to support responsible investment, as required by CRISA. Eight of the ten asset managers task management, portfolio managers and analysts with responsible investment implementation. Only four of these have a specialist responsible investment staff: Old Mutual Investment Group, Investec Asset Management, Sanlam Investment Management and Momentum Asset Managers.
- Voting and engagement: Voting on shareholder resolutions and engaging with company management on key ESG issues are the cornerstones of active ownership. Seven of the ten asset managers assessed have a publicly-available voting policy and five have a publicly-available engagement policy. Despite clear CRISA guidance on what constitutes good practice with respect to responsible ownership, only six of the assessed asset managers disclose voting decisions for each resolution on a quarterly basis. Only three provide updates on engagement activities on an annual basis or more frequently.
- Collaboration: CRISA states that “where appropriate, institutional investors should consider a collaborative approach to promote acceptance and implementation of the principles of CRISA and other codes and standards applicable to institutional investors”. Four of the assessed asset managers (Old Mutual Investment Group, Investec Asset Management, Sanlam Investment Management and STANLIB Asset Management) have a formal collective or collaborative engagement policy or processes to prioritise engagements, but only the first three take steps to explain how and when collaboration will take place.
- CRISA disclosure: Nine of the ten assessed asset managers have provided some indication over the past three years that they endorse CRISA, either on their website or in their reports. However, only three provide any sort of annual disclosure on CRISA implementation. These are Old Mutual Investment Group, Sanlam Investment Management and Prudential Portfolio Managers.
It is important to note that the Kigoda RI Ranking 2017 is an assessment of the implementation of RI practices: the ranking does not assess the sustainability or ESG performance of the companies in the portfolios managed by the assessed asset managers. An asset manager could have the recommended RI policies and governance structures in place, yet still be invested in sectors or companies with poor ESG performance. In fact, in South Africa this is the norm.