Responsible investing comprises small portion of industry assets
While responsible investing has gained momentum globally, in South Africa progress appears to have stalled
Signing the internationally recognised Principles for Responsible Investment allows your organisation to publicly demonstrate its commitment to responsible investment, and places it at the heart of a global community seeking to build a more sustainable financial system, according to the United Nations Principles for Responsible Investment (Unpri).
There are currently 34 asset manager Unpri signatories in South Africa.
“The power to influence and bring about change in the industry is largely driven by asset owners, so it is disappointing to note that only eight South African asset owners are signatories,” says the ninth annual BEE.conomics survey published by 27four Investment Managers, released last week.
So while responsible investing has gained momentum globally, in South Africa progress appears to have stalled. Furthermore, although a number of funds subscribe to principles of responsible investing, this has not resulted in a meaningful redistribution of resources, opportunities or ownership in South Africa.
Fatima Vawda, managing director of 27four Investment Managers, contends that asset owners need to develop their own environmental, social and governance (ESG) strategy to apply in their investment decision making, which should be communicated very clearly to all stakeholders.
“Secondly, once these expectations have been communicated to their asset managers, they need to make sure those asset managers have processes in place that will meet their ESG expectations. However, the asset owners need to put monitoring mechanisms in place to ensure alignment with the agreed ESG policies and practices.
“There is excellent literature and best practice available on how to implement ESG factors into investment decision making and monitor them through the Unpri that has developed a global dialogue on best practices of responsible investment,” explains Vawda.
According to the BEE.conomics survey, one area where active management can really justify their fees is going to be through active ownership and engagement with investee companies to unlock value.
“The fees for being a signatory of the Unpri are extremely high but this is offset by the resultant benefits, which is access to global best practice.”
Reporting on the extent to which firms employ ESG factors into investment decision making, the BEE.conomics survey says unlike the Unpri, which is a global organisation, the Code for Responsible Investing in South Africa (Crisa) is a local initiative that requires no membership fees or annual reporting requirements.
“Recently Crisa has lost some traction, which also speaks to the willingness of local firms to take responsible investing more seriously. Only 58% of firms subscribe to the code.
“Only 60% of asset managers have a proxy voting policy in place, and this is down from the 63% recorded last year. While the increase in private equity participants and the exclusion of some listed players would have had an impact on the data, private equity firms should be active owners, continually engaging with management and the board to unlock value in companies. This does not preclude them from having a policy in place that sets out the stance they should adopt that aligns their view to global good governance. Very few asset managers are comfortable with having their votes published and open to public scrutiny. Until asset owners take their voting rights more seriously and exercise good corporate citizenship, it is unlikely that the majority of asset managers will do this of their own accord.”
The survey reports that as the asset management industry has evolved, far fewer asset managers procure investment research from stockbrokers. ESG is one research area where stockbroking firms could differentiate themselves as a value-add to clients and to generate revenue.
Only 40% of managers are utilising specialist data, but this number is up from the 37% recorded last year. This could indicate that managers are beginning to realise the value of having this specialist data when making investment decisions, as the market has become less thematic and more of a stock-pickers market.
There has been a marked increase in the number of managers who are doing very little when it comes to engagement, but encouragingly there has also been a sharp rise to 29% in the number of companies participating in more than eight engagements, according to BEE.conomics.
“It takes time and resources to engage with the management of companies and access to management can often be a hindrance to smaller firms who are not large shareholders. However unlocking value in a small-cap stock that cannot necessarily be owned by larger fund managers is as important as trying to engage the management of a large-cap stock, and this is an area where analysts and investment managers can build a name for themselves.
“Almost 16% of firms do not even bother to consider ESG factors in their investment process, whereas 70% use it when engaging with company management. Negative screening is a blunt tool within responsible investing and only 16% of managers utilise negative screening in their processes. For 49% of firms ESG factors are considered in their risk management processes and as a tool to manage portfolio risk through exposure to factors which may negatively impact valuations.”
The survey reports that this year almost 18% of managers are running mandates that have a specific ESG focus. This number is up from previous years but it still comprises a very small portion of industry assets.
“Product development is often driven by demand from clients and as such the demand from institutions or even the retail investor for specific ESG funds is low,” says the BEE.conomics survey.
“The power to influence and bring about change in the industry is largely driven by asset owners”