CAN YOU AFFORD TO BE A SOCIALLY RESPONSIBLE INVESTOR?
“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”.