$4.7bn boom for US firms

RESPONSIBLE INVESTING: SA STILL SCEPTICAL

Examples like African Bank and Steinhoff show how important corporate governance issues can be.

In many markets, investors are directing large amounts of money into funds marketing themselves as “socially responsible”. According to Investment Company Institute, these funds attracted $4.7 billion in the US last year.

These inflows aren’t just coming from a niche of investors with certain ideologies. It’s becoming quite mainstream to recognise the material risks that environmental, social and governance (ESG) issues represent to companies and their shareholders.

Responsible investing has become about far more than just screening out companies that may be doing something “bad” for the environment, or have poor labour practices. It’s about being aware of how these issues might impact a company or industry and what that’ll mean for shareholder returns.

Thinking long term

Index providers like SPDJI and MSCI have come to the forefront of the industry. It makes sense for them to build indices that select and weight companies based on various factors that identify more sustainable approaches and business models.

These “socially responsible” indices are in many cases showing out-performance relative to the market. Some argue this is a cyclical phenomenon, mainly due to recent commodity price weakness and the related under-performance of commodity producers. However, proponents believe there are sound business reasons why.

Where does SA stand?

In SA, however, investors still view responsible investing with a fair amount of scepticism. This is despite a number of recent examples, such as African Bank and Steinhoff, of how important corporate governance issues can be, and that SA has its own responsible investment code.

The Code for Responsible Investing in SA (Crisa) was launched in 2011, and encourages institutional investors to integrate ESG issues into their investment decisions.

“South Africa and the UK are the only two countries that have their own codes like this,” says Duncan Theron, Gray Swan CEO. “So asset managers know that they have to apply their minds. It’s just a matter of who does it seriously and dedicates staff to it.”

While governance is an issue that most local asset managers recognise as very important, far fewer incorporate environmental and social considerations into their investment process. Only a handful actually market the fact that they consider ESG issues at all.

This is indicative of how few investors see this as an important differentiator. So is the lack of funds that have a specific “socially responsible” mandate.

“There are very few local products that fall into this category,” says Theron. “Pension funds may be able to find something local through direct private equity-type investments, but many don’t have a tolerance for private equity because of the liquidity issues.”

Changing the approach

Theron has therefore primarily had to advise clients into international equity funds with responsible mandates. Many have done extremely well.

“We have invested clients into products that have out-performed market by 3% to 4% at lower fees. It remunerates you to be responsible.”

These experiences make him believe there’s significant scope for SA managers to come up with similar offerings.