A new approach to social responsibility investments

For many trustees of retirement funds, socially responsible investing (SRI) is becoming an increasingly popular investment strategy that integrates the funds financial objectives with social, governance and environmental objectives.

However, while SRI investment strategies are beneficial to society as a whole, in the long term, there are some specific costs that are carried by the investors in the form of a less efficient portfolio. This is a result of a number of factors such as higher fees, lower returns and lower diversification associated with SRI.

In response to these challenges, OMAC Actuaries & Consultants have introduced an innovative methodology, where trustees are able to measure their funds contribution toSRI without having to invest in and incur most of the costs of investing in a stand alone SRI portfolio.

According to Windall Bekker, investment consulting manager at OMAC Actuaries & Consultants, this methodology uses a multi factor model that analyses the underlying holdings of the fund to create a weighted SRI score and then ranks different funds within each universe o­n a sustainability score basis. “The factors that we analyse are broadly categorised into environmental, social and governance factors combined with a BEE score unique to domestic portfolios.

“Our methodology enables us to use quantitative, qualitative and social responsibility ratings to screen potential managers according to our client’s unique needs. For example, where clients have a greater social responsibility mandate from members we are able to analyse and recommend managers by increasing the importance of the SRI rating relative to quantitative and qualitative rating. Where clients have a lesser social responsibility mandate from members we are able to analyse and recommend managers by decreasing the importance of SRI rating relative to quantitative and qualitative rating.”

Cost involved in SRI

According to Bekker, lower returns associated with SRI are often a direct consequence of investing in holdings where risk and returns are not the o­nly consideration. Investors balance the returns with factors such as governance, environment and in the South African context black economic empowerment (BEE).

He says higher fees are a consequence of managers needing to conduct additional research into the universe of investments that make up the SRI world. “The SRI universe is dynamic in nature and needs to be constantly monitored for changes. SRI compliant stock can also be less liquid and as a consequence the greater bid offer spread when trading can also impact o­n higher fees.”

Bekker adds that the process of systematically excluding investments and even market sectors based o­n SRI factors can inadvertently create an under-diversified portfolio. “These under diversified portfolios can be more significant in a relatively small market such as South Africa where there are relatively few traded counters compared to developed markets.”

Trustees also face difficulties in defining what social responsibly factors are important to the retirement fund members. Some members might regard environment as being important whereas others might regards BEE as the key SRI factor. These divergent SRI needs can make it difficult for trustees to reconcile the fund members SRI requirements to the underlying investments.

“We believe that our new social responsible investing methodology will enable trustees to overcome most of the costs associated with a stand-alone SRI fund, while at the same time being flexible enough to meet each client’s individual needs by providing an o­ngoing measurement of the funds contribution to society,” concludes Bekker.