TREE-HUG­GER?

CAN YOU AF­FORD TO BE A SO­CIALLY RE­SPON­SI­BLE IN­VESTOR?

Finweek English Edition - - Cover Story - By Marc Ash­ton

“I WANT MY LIFE BACK.”

With these words, Tony Hay­ward – for­mer CE of Bri­tish Petroleum (BP) – raised the ire of stake­hold­ers world­wide and set him firmly in the sights of United States Pres­i­dent Barack Obama. The dev­as­tat­ing oil spill from one of BP’s rigs in the Gulf of Mex­ico that cost Hay­ward his job – while wip­ing bil­lions off BP’s mar­ket cap­i­tal­i­sa­tion – was held up by sup­port­ers of so­cially re­spon­si­ble in­vest­ing (SRI) as an ex­am­ple of just what hap­pens when com­pa­nies don’t take a close look at en­vi­ron­men­tal, so­cial and cor­po­rate gov­er­nance (ESG) is­sues.

With “sus­tain­able in­vest­ment” and “SRI” be­com­ing pop­u­lar buzz­words in the South African in­vest­ment mar­ket and new funds be­ing launched, lo­cal in­vestors need to take a crit­i­cal look at what’s thinly dis­guised mar­ket­ing and what’s a gen­uine ad­van­tage for the com­pa­nies they in­vest in.

The line that gets spun out is: “Can you af­ford not to be fo­cus­ing on so­cially re­spon­si­ble in­vest­ing?” How­ever,

Fin­week chal­lenges that, ask­ing: “Can in­vestors ac­tu­ally af­ford to sac­ri­fice in­vest­ment re­turn on the back of SRI in­vest­ment prod­ucts? A look at the at­tached ta­ble shows

that if in­vestors are seek­ing to grow their wealth then with most of the ex­ist­ing prod­ucts the short an­swer is no.

“If there’s one thing that needs to be said on this topic it’s that un­der no cir­cum­stances should pen­sion fund trustees give up re­turns for the sake of do­ing so­cial good,” says An­drew Can­ter, chief in­vest­ment of­fi­cer at Fu­ture­Growth As­set Man­age­ment. Can­ter, who is widely recog­nised as one of SA’s lead­ing in­vestors in the sus­tain­abil­ity sec­tor that op­er­ates in­fra­struc­ture devel­op­ment and ed­u­ca­tion funds, might up­set a few peo­ple with that com­ment but he touches on per­haps the biggest stick­ing points in the SRI and sus­tain­abil­ity sec­tor: ac­count­abil­ity.

Can­ter says while there may be many in­vestors who want to “do good” with their money, it will “mess with the heads” of in­vestors try­ing to man­age the money if there isn’t a clear def­i­ni­tion of what’s “good”. And that, he says, is a draw­back for many of those in­vest­ment prod­ucts.

The clos­est he can find in SA is Shariah (Is­lamic) funds, where the guide­lines are at least more con­sis­tent than those of other SRI type of­fer­ings.

That view is shared by Sa­man­tha Matthew, an in­vest­ment an­a­lyst at San­lam Glacier, who says while SRI in­vest­ing has grown quite promi­nently it still faces a num­ber of chal­lenges. “A uni­ver­sal chal­lenge is that even though SRI has been around for a long time it has no for­mal stan­dard def­i­ni­tion. In SA an of­fi­cial def­i­ni­tion is needed, par­tic­u­larly in the way it would be in­ter­preted with re­gards to broad-based black em­pow­er­ment,” Matthew says, point­ing out it doesn’t al­ways ben­e­fit those it should.

An­other is­sue that’s been iden­ti­fied is that re­search in­di­cates there’s a lack of con­nec­tion be­tween as­set man­agers in­vest­ing in SRI stocks, com­pli­ance and the mon­i­tor­ing of those stocks. Per­haps the most ob­vi­ous ex­am­ple of that dis­con­nect be­tween sus­tain­abil­ity and in­vest­ment re­turn is bank­ing group Ned­bank. While it may be the butt of many “tree hug­ger” jokes, it’s quickly es­tab­lished it­self as a thought leader in the fi­nan­cial ser­vices sec­tor, al­though that hasn’t nec­es­sar­ily yet given it a com­pet­i­tive ad­van­tage. Of SA’s Big Four bank­ing groups, Ned­bank has con­sis­tently de­liv­ered the low­est re­turn on share­holder eq­uity, an is­sue that has frus­trated an­a­lysts and in­vestors alike. When it an­nounced its in­terim re­sults re­cently it de­liv­ered a weak per­for­mance from its re­tail base, an area where it would be scor­ing were in­vestors buy­ing into its “green” vi­sion.

In fact, it could be ar­gued Ned­bank’s share price has re­ally just kept touch with its peers on the back of con­stant ru­mours of cor­po­rate ac­tion rather than its fo­cus on sus­tain­abil­ity. How­ever, Ned­bank CEO Mike Brown dis­agrees, say­ing the ben­e­fits are al­ready start­ing to come through for the group. “It’s a long-term game – but the im­pact is al­ready be­ing felt,” he said in a re­cent in­ter­view, point­ing to cost sav­ings through­out the group by work­ing more ef­fi­ciently. Brown added that the recog­ni­tion from its lo­cal and in­ter­na­tional peers was an af­fir­ma­tion Ned­bank was on the right track and said the group had adapted its vi­sion state­ment to fo­cus on be­ing “Africa’s most ad­mired bank”. Ar­eas where Brown saw gen­uine com­pet­i­tive ad­van­tage are

in mar­kets such as

clean en­ergy and car­bon cred­its, where the bank was al­ready de­vel­op­ing skills and suit­able prod­ucts.

While that sounds good over the long run, nag­ging doubts have to re­main with in­vestors who are yet to see ben­e­fits from back­ing a vi­sion adopted by for­mer Ned­bank CEO Tom Board­man and now car­ried for­ward by Brown.

But per­haps af­fir­ma­tion from the in­vest­ment com­mu­nity is on the way.

For ex­am­ple, a few years ago, an an­a­lyst, port­fo­lio man­ager or in­vestor would have been con­sid­ered some­thing of a mav­er­ick to have taken is­sue with a com­pany’s man­age­ment of an en­vi­ron­men­tal is­sue. That was left to the odd “tree hug­ger” or smaller spe­cial­ist as­set man­ager, such as Fraters (now re­named El­e­ment), which might get a bee in its bon­net about its poor han­dling of en­vi­ron­men­tal af­fairs.

That’s no longer the case, says Can­ter. “Ma­jor in­vestors – such as the PIC [Pub­lic In­vest­ment Cor­po­ra­tion] – aren’t just mea­sur­ing you, they’re get­ting in your face and en­gag­ing you on ESG is­sues.” He also be­lieves the in­vest­ment com­mu­nity is be­com­ing far more ag­gres­sive at en­gag­ing com­pa­nies about gov­er­nance is­sues.

Ter­ence Craig, CIO at El­e­ment Fund Man­agers, says ESG is still ne­glected by in­vest­ment an­a­lysts. How­ever, a look at the re­cent BP dis­as­ter high­lights why such is­sues will be­come in­creas­ingly im­por­tant over the long term.

One per­son who has had a unique view of the shift in mind­sets is Kevin James, of con­sult­ing firm Global Car­bon Ex­change (GCX). As re­cently as five years ago he says is­sues such as car­bon foot-print­ing and sus­tain­abil­ity were viewed as some­thing that fell un­der the am­bit of the mar­ket­ing depart­ment. He now doesn’t take meet­ings that don’t in­clude ei­ther the CE or chief fi­nan­cial of­fi­cer of com­pa­nies, in­clud­ing listed ones. Those in­clude the likes of Dis­cov­ery, Mass­mart, Mr Price and Avis.

Says James: “There’s been a sub­tle shift over the past few years, but peo­ple are no longer tol­er­at­ing be­hav­iour that’s so­cially ir­re­spon­si­ble. Much of it has to do with busi­ness value and mit­i­gat­ing risk.”

One fac­tor James be­lieves has added im­pe­tus to the move to­wards an in­creased fo­cus on sus­tain­abil­ity and so­cial re­spon­si­bil­ity is in­creas­ing the drive from se­nior ex­ec­u­tives who are no longer just “tick­ing boxes” but see­ing it’s a way to en­gage clients and sup­pli­ers through­out their value chains.

While Fin­week con­curs there are likely to be a stream of new in­vest­ment prod­ucts rolled out over the com­ing years that will be linked to the car­bon credit mar­ket, SRI, sus­tain­abil­ity and the en­vi­ron­ment in­vestors need to – just like Ned­bank – take a close look at the prod­uct pack­aged in­side the wrap­ping and make an in­formed de­ci­sion from there.

In con­clu­sion: If you want to do some­thing good with your money then give it to char­ity. But don’t – as Can­ter sug­gests – give up in­vest­ment re­turn for the sake of do­ing “some­thing good”.

TONY HAY­WARD

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