How to invest responsibly (or check that your asset manager is)
8 July 2015
South Africa has made great strides in setting up the frameworks, policies and regulations required to support the shift toward sustainable investing. So what’s missing? The simple answer: YOU.
Moneyweb on 23 June ran a piece by Hanna Barry titled “Asset managers must invest responsibly, do yours?” While it is great that Moneyweb covers the growth of sustainable and responsible investment (SRI) in South Africa, the question remains: how do you know if your asset manager invests responsibly or not?
As we’ve noted before, South Africa has made great strides in the field of responsible investing through various initiatives. These include the Johannesburg Stock Exchange’s Socially Responsible Investment Index, which has improved disclosure; amendments to the regulations of the Pension Funds Act to require that they give appropriate consideration to environmental, social and governance (ESG) factors; and the establishment of the Code for Responsible Investing in South Africa (CRISA). These frameworks have contributed to South Africa being recognised as a leader in terms of responsible investing.
SRI not working as it should
However, not everything is working as it should. As acknowledged in the Moneyweb article and frequently seen in the finger-pointing at industry conferences, there is a circular argument over who is responsible for and who has the power to drive the necessary changes still required for a more sustainable and responsible investment community. The asset managers, who don’t actually own the assets, blame the asset owners, which might be pension or provident funds or insurers, for not setting the necessary mandates. The trustees of the asset owners, who still need more support in this area, blame the asset managers for not taking the lead. And both asset owners and asset managers blame the consultants.
But this omits another important actor in the sustainable investment ecosystem: the individual investors who, in addition to their investments in stocks or unit trusts, are the ultimate beneficiaries or owners of the assets in pension funds and insurance schemes. The Moneyweb article raises the question of “whether South African investors, asset owners like you and me, understand the issues and want to get involved”. Many South Africans are extremely concerned over issues of inequality (which is linked to executive remuneration), labour rights, environmental pollution and degradation and governance issues such as corruption. We have also seen some positive signs of individual investors starting to raise questions on these issues at company AGMs while, following the international trend, campaigns for divestment from fossil fuels are also taking off. Given the passion that many South Africans show for environmental and social causes, understanding and caring about ESG issues does not appear to be the major factor.
The power of individual investors
However, it does appear that many South African investors do not understand the power they have to call for changes to the way the system works to ensure a more sustainable future. Nor is it clear that they understand that their contributions to their pension funds might, for example, be invested in fossil fuels or “sin stocks” such as British American Tobacco. There are limited opportunities for retail investors to subscribe to sustainability-focussed funds, so it is difficult to ascertain how much interest there might be. As a result, whether South Africans want to get involved in sustainable investing is difficult to answer but this question also, to some extent, misses the point. Although the regulations could be strengthened, pension funds are now required to consider ESG factors as part of their fiduciary duty. And as public-awareness grows of the power that individual investors have to drive positive change within companies through their ownership interests in pension funds and life insurers, the number of investors looking for sustainable and responsible alternatives is also likely to grow.
Look past the marketing…
The real question then is how do individual investors determine which funds and which managers are acting in a responsible manner? It is difficult, if not impossible, to engage directly with fund managers to assess their investment strategies. And unfortunately, it is all too easy for an asset management firm to say that they integrate ESG into their investment decisions, without changing how they do things. Equally, CRISA is a voluntary code, so little value should be attached to firms declaring themselves to be signatories. There is little doubt that there is a degree of “greenwashing” in how funds approach the issue. Greenwashing normally refers to how a company might use clever marketing tactics to show itself in a favourable environmentally-friendly light, while ignoring the crux of the problem. So, as with any due diligence of investment opportunities, it is important not to take things at face value.
…and ask questions
A first step is to ask the trustees of your pension fund, either via email or post, how they ensure that the asset managers managing your fund give adequate consideration to ESG factors. Or you could be more specific and ask them, for example, how your pension contributions support a transition to a low carbon economy. There are also numerous specific questions you can ask about investments in particular companies. For example, if a percentage of your portfolio is invested in British American Tobacco – as most South African funds are – you could ask the trustees of your pension fund how its fund managers reconcile such an investment with the legal and regulatory risks associated with the manufacture and sale of tobacco products.
You can also check to see how well the asset managers of your various portfolios, whether within your pension or as part of wider investments, performs on its commitments to CRISA (that is, if it is a signatory). The CRISA Practice Notes calls for public disclosure to make the principles effective. Questions might include:
- Does the asset manager have and publicly disclose its policies on:
- Sustainable investing
- Ownership, such as proxy voting
- Conflicts of interest
- Does the asset manager disclose its proxy voting results and is this disclosure a summary or is it for each resolution? Are explanations or reasons given for the vote? How often are results disclosed?
- Does the asset manager disclose how it engages with the companies it invests in and the nature of each engagement?
If institutional investors are transparent about the content of their policies and how the policies are implemented, as required by CRISA, it should be relatively easy to gauge how well they are addressing the issues relating to sustainable investment. By assessing the quality of disclosure, asset managers can be compared and market leaders can then be identified. It should also be possible from comprehensive voting and engagement reports to build a picture of how an asset manager tackles complex issues ranging from executive remuneration to air quality standards.
Time to make a start
Clearly, this approach takes more effort than simply investing with the fund name one recognises from billboard advertising at airports or comes recommended by a friend. Unfortunately, the majority of South Africa’s financial advisors are not currently well-versed in the developments around responsible investing, so are unable to provide much assistance. So for now, if you want to invest responsibly, you will have to raise these issues with your pension fund’s trustees and question your financial advisor or broker about your portfolios. This will give insight into how institutional investors are responding to sustainable investing and ESG demands. You might find that the answers gives you the assurances you need. You might also find that the responses fall short, meaning you should engage further or even look for more responsible asset managers to manage your portfolios. As Legal & General’s Meryam Omi said at a recent debate in London on coal divestment, “[asset managers] can only take action if investors tell them”. While this is just a starting point, it will add momentum to ensuring that ESG factors are integrated into investment decisions. Until then, feel free to contact us for advice and share your experiences that might assist others wanting to invest sustainably and responsibly.
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