Through the maze

For the benefit of their retirement-fund clients, what steps can reasonably be expected of asset managers and consultants to ensure they comply with the UN Principles for Responsible Investment (where they’re signatories) and the Code for Responsible Investing in SA (now underpinned by King IV)? Then too with Regulation 28 under the Pension Funds Act with its requirement to consider environmental, social and governance (ESG) criteria in making and remaining in investments (also see elsewhere in this TT edition)?

These issues are brought into sharp relief as a consequence of the Constitutional Court judgment on the SA Social Security Agency and the publicly- listed Net1 which administers the social grants. Asset manager Allan Gray, a signatory to the UN PRI, is the biggest single shareholder in Net1 after the International Finance Corporation which is supposed to be the world’s standard bearer for responsible investment (RI).

Here is a dramatic instance of RI implementation having failed. But what are investors and potential investors reasonably supposed to do where a company already bears the IFC imprimatur and where the contentious abuse of a database by a subsidiary is carefully concealed? Where should reasonable investigation end and forensic investigation begin?

Any number of investors could have been caught short in the manner of Allan Gray, singled out for the “materiality” of its Net1 stake. But from the specific to the general, other investors can be as easily trapped even where smallish interests in investeee companies are subsequently exposed for RI censure.

What sort of resources, in terms of time and personnel, should be devoted to RI research? In the research, would there be a difference in the resources applied for larger investments? Having considered that the outlook for a share is bullish, would a decision be made to disinvest or not to invest for reason of a company’s non-compliance with King IV?

To get a handle on the practicalities, and to assist in guidance for robust treatment of CRISA, TT canvassed a random cross-section of industry views. There was broad consensus on the latter two questions – little difference in resources for larger investments on the second; engagement with companies or proxy votes on the third – so space limitations allow snapshot responses mainly to the first.

Shainal Sukha, an independent consultant: It is important for asset managers to be consistent and clearly to articulate their ESG approach to asset consultants and asset owners. Inconsistency will open them to criticism that they treat ESG integration as a marketing benefit rather than a genuine risk- management tool. It doesn’t help that G is the overriding factor and then having to explain why they’re invested in a FirstStrut, African Bank or Net1. Asset managers should seek appropriate ESG disclosure from company managements and keep a record of their engagements. If disclosures are inadequate, the next steps should be articulated i.e. engage further or disinvest. Doing nothing is not an option.

May these perspectives help to encourage CRISA awareness, not only to stimulate its credibility but also strengthen adherence to its widely lauded principles.

source: www.totrust.co.za