Spotlight on investors’ lack of oversight in social grants fiasco
• Allan Gray and International Finance Corporation questioned about their involvement in Net1
The Constitutional Court’s decision in the most recent social grants matter was a resounding condemnation of all the players in the social grants system. All? Not quite — one player has escaped equivalent scrutiny. The investors, those who finance the operations of companies such as those involved in the distribution of grants, are significant actors in this tragic play. And yet they have remained outside the spotlight, providing tentative and in some cases deficient responses.
The two main investors in Net1, the parent company of the controversial Cash Paymaster Services (CPS), are Allan Gray and the World Bank’s International Finance Corporation. They hold a 16% and 18% stake in the shares of Net1, respectively. Both entities have been questioned about their investment in a company that is at the heart of the practice of the unscrupulous sharing of grant beneficiaries’ personal information with financial services companies.
The latter use this data to market financial services improperly (some would say unlawfully) to grant beneficiaries. Such unaffordable services are automatically deducted monthly from an individual’s grant. Both entities have also invested in Net1’s untransformed subsidiary company, CPS, whose contract with the South African Social Security Agency (Sassa) for the payments of social grants to 17-million people has been declared invalid by the Constitutional Court.
One must question this investment from a constitutional and financial position. Financial institutions such as Allan Gray and the International Finance Corporation (IFC) have been reminded as investors they are more than silent role-players in the investment, trade and human-rights matrix. Many international standards on responsible investing have established companies bear a fiduciary duty to more than just clients and beneficiaries: they bear a fiduciary duty to society.
Principles such as the UN principles on responsible investing and the code for responsible investing in SA set minimum standards for investors in assessing and managing social and governance risks in their portfolio companies. Investors are required to be active and responsible investors when making an investment decision and throughout the life span of their investment.
Allan Gray has acknowledged it could have been more fastidious in its due-diligence processes. It has undertaken to monitor Net1’s business operations regarding grant beneficiaries independently, to meet stakeholders to discuss its role in Net1 and is considering legal options to hold the CPS board accountable. The IFC has requested Net1 hire independent consultants to assess their practices as a responsible lender.
But why the reactive approach to concerns about CPS? Should investors not have properly interrogated, assessed and addressed these concerns much earlier and not only at the sharp end of a long-standing rumble about its portfolio company’s operations? How should financial institutions such as Allan Gray and the IFC operate to comply with international and national standards?
The following steps ensure portfolio companies comply with environmental, social and governance (ESG) standards:
● Incorporate ESG factors into the decision to invest;
● Be the proverbial “present landlord” or “active owner and ensure that investment complies with ESG principles; and
● Intervene and engage if they do not.
Many investors claim to incorporate ESG into their decisions to invest, but are they doing so meaningfully? To what extent were ESG factors considered when investing in the parent company of CPS, a company whose key source of profit is an unlawful contract?
Since 2014, Net1 and CPS have regularly and increasingly been accused of operating on the fringe of human-rights violations and making untold profits off the poorest people. Despite these indicators, the IFC invested a further R1.6bn in Net1 in 2016, citing the World Bank’s emphasis on grant programmes as a mechanism for alleviating poverty. The irony is stark.
Active ownership during the life span of the investment should not only be taken of the financial viability of the investment but also of the company’s ESG compliance. Red flags about an investor’s portfolio company must trigger heightened oversight by investors, especially when a company in its portfolio is the subject of a miscellany of court cases relating to humanrights and good-governance issues. Net1’s CPS is involved in a case concerning unlawful deductions from social grants; is undergoing investigation by the Competition Commission into its financial behaviour; and is the subject of extensive measures crafted by the Constitutional Court to ensure the financial protection of grant beneficiaries in the latest social grant case brought by the Centre for Applied Legal Studies on behalf of the Black Sash Trust. These cases raise clear red flags about the portfolio company’s commitment to ESG factors in their business operations.
Regarding the mechanism of robust engagement, it is not suggested investors divest from delinquent portfolio companies, although at times that may be necessary. Investors have a unique power to hold their delinquent portfolio companies to account through engagement. Investors baulk at the idea of playing a governance role, but that is precisely what active ownership entails. One cannot make a profit while citing ignorance of the conduct of one’s portfolio companies. Allan Gray has committed to such engagement; the IFC less so.
Allan Gray and the IFC have belatedly sought disclosure from Net1 and CPS on how their business activities comply with ESG principles. But the proverbial egg is scrambled. If investors had been active owners, requiring rigorous reporting and disclosure requirements, hundreds of people may have been saved the devastating realisation at month-end that their grants are scavenged by deductions for financial services they do not want.
Surely, a prudent investor should choose carefully, oversee effectively and through robust engagement hold to account its investment? The IFC’s position in this regard is a damning indictment of its human-rights compliance standards it broadcasts as the model for responsible investment.
An additional context that cannot be ignored is the global economic hegemony that continues to characterise the operations of the global north vis-àvis the global south. The IFC must be held to account for its decision to alleviate poverty by funding a company accused of being complicit in its very perpetuation and exacerbation.
RED FLAGS ABOUT AN INVESTOR’S PORTFOLIO COMPANY MUST TRIGGER HEIGHTENED OVERSIGHT
Meyersfeld is director of the Centre for Applied Legal Studies and associate professor at the Wits University School of Law; Patel is a candidate attorney at the centre. They write in their personal capacities.