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ESG engagement, fiduciary duty and climate lobbying: some PRIinPerson 2015 highlights
23 September 2015
Kigoda Consulting, along with partner firm KudosAfrica, attended the annual Principles of Responsible Investment (PRI) PRIinPerson conference which was held in London from 8 to 10 September. Here are some points that might be of interest from two reports released during the conference and some of the panel discussions.
1. Survey shows high level of ESG investor engagement
On 10 September, at the closing plenary session, the PRI announced the results of a new survey that it had commissioned. The survey, which was conducted by YouGov, presented some interesting results especially on the degree to which retail investors in emerging markets are engaged on environmental, social and governance (ESG) issues compared to those in developed markets. In South Africa, 1001 people participated in the survey.
Findings included:
- While only 33% of respondents in the UK know any of the companies that their pension fund is invested in, this rises to 62% in South Africa. This could be ascribed in part to South Africa’s more limited investment market.
- 51% of respondents in South Africa “consider it ‘very’ important that the companies their pension fund is invested in do not contribute to the burning of fossil fuels which link to climate change”. Only 13% said this was not very important, not at all important or didn’t know. In the UK, only 18% said it was very important.
- 77% and 78% of South Africa respondents agree that “it is important that companies their pension fund is invested in do not pay CEOs too high a salary” and “companies their pension fund is invested in do not exploit tax loopholes” respectively.
These findings are interesting as institutional investors do not appear to hold these issues in the same high regard as the respondents in the survey, which suggests that the way in which portfolios are being managed in South Africa is not aligned with the interests of the ultimate asset owners. Clearly it is easier to answer survey questions than it is to actually take steps to address these issues in a pension, but this reaffirms our view that SRI in South Africa is not working as it should.
2. CRISA should strengthen code
The PRI also launched a new report titled Fiduciary duty in the 21st century. The report, which covers eight markets including South Africa, finds that fiduciary duty in respect of financial returns is not an obstacle to asset owners taking action on ESG factors. Amendments to Regulation 28 requiring consideration of ESG factors in investment decisions has addressed this and provided clarity in South Africa.
The report identifies challenges to the full integration of ESG issues into investment decisions. These include limited knowledge of the evidence for responsible investment, the lack of transparency on responsible investment practices that limit accountability to beneficiaries and inconsistent corporate reporting.
In addition to a series of generic recommendations, the report also makes some specific recommendations for each country. For South Africa, these are:
- For the Financial Services Board to clarify compliance with Regulation 28; address ESG-related competence on pension fund board education; and require asset owners to prepare a public annual report on how they have implemented SRI commitments.
- For the Code for Responsible Investing in South Africa (CRISA) to “strengthen oversight of the code by conducting more detailed analysis of current practice, analysing the investment and other outcomes that result from the code.”
Implementing these recommendations will provide a much-needed boost to the transparency of the SRI market in South Africa. As the report notes, it is currently difficult to assess how ESG issues have been taken into account. Apart from a few asset managers, reporting on engagement and proxy voting is weak despite this being a CRISA requirement.
3. Local institutional investors lagging on climate change
Although there were panels covering topics from corporate tax responsibility to cyber security, and animal welfare to resource scarcity, possibly the most important topic on the agenda was climate change. There were panels on What steps can investors take to address climate change?; Tackling climate change through your real estate portfolio with energy efficiency; Infrastructure: transitioning to a low carbon economy and green building initiatives and another on Engaging with climate lobbying.
Although Africa is one of the continents most likely to suffer extreme impacts from climate change, there is a lack of participation by South African and other regional institutional investors in the various international investor initiatives formed to take leadership on climate change. Regional climate change investor groups from Europe, North America, Australia and New Zealand and Asia have formed a global investor coalition but there is no representation from Africa. There is only a single South African-based signatory to the Montreal Carbon Pledge, which commits investors to measure and publicly disclose the carbon footprint of their investment portfolios annually. This is Old Mutual Group, which has its primary listing in London.
The issue of climate lobbying was especially pertinent in light of recent research suggesting that 95% of the world’s largest companies are members of associations that aim to obstruct legislation designed to address climate change and 45% of these companies intervene directly in processes aimed at tackling climate change. In South Africa, there is very little transparency over climate lobbying although various companies and industry groups have lobbied against the introduction of the planned carbon tax. The PRI has coordinated a working group that aims to address the issue. It has issued a statement – Investor expectations on corporate climate lobbying [pdf] – that calls on companies to be “consistent in their policy engagement in all geographic regions and that they should ensure any engagement…is aligned with our interest in a safe climate”.
Climate lobbying and investor engagement on the topic is likely to become increasingly pertinent in South Africa, which has pledged under the Copenhagen Accord to reduce emissions by 34% by 2020 and 42% by 2025. On 23 September, Business Unity South Africa (BUSA), which claims that its members contribute over 75% of GDP, called for emissions to be allowed to increase past 2025. BUSA represents the majority of major companies. The question is whether institutional investors will follow international leaders who are tackling climate lobbying and taking action “to protect their portfolios from the risks of climate change and seize opportunities arising during the transition to a low carbon economy”.
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