Dispel myths around responsible investment, United Nations-backed research urges

Myths around responsible investment need to be dispelled, a survey of members of the South African investment community controlling more than R3 trillion has concluded.

The survey on the state of responsible investment in South Africa was conducted by the United Nations Environment Programme Finance Initiative (UNEPFI) African Task Force (ATF), Noah Financial Innovation and UNISA's Centre for Corporate Citizenship (CCC) and launched at the JSE this evening.

Interviews were conducted with principal officers from 32 pension funds controlling R975 billion (US$ 138 billion); the chief investment officers from 19 asset management companies managing R 2 320 billion (US$ 330 billion); and the chief operating officers or heads of research from 11 investment advisory service providers.

Dr Neil Eccles, Programme Manager: Noah Chair in Responsible Investment at the Unisa CCC, says the survey report concluded that the biggest need in 2007 is to dispel myths and for the simple business case to consider environmental, social and governance (ESG) issues in making investment decisions to be communicated clearly and widely.

"Responsible investment (RI) is not about philanthropy, although society and the environment in general may benefit from the outcomes. RI is not about sacrificing financial returns in pursuit of some sort of broader social good. Very simply, RI is investment that incorporates an active consideration of environmental, social and governance issues, which are widely considered to be material, into investment decision making and ownership. "

Eccles says the survey was conducted in partnership with UNEP FIs African Task Force a platform of commercial banks, development banks and asset managers that work with UNEP against the backdrop of South Africa's inclusion as a key region in a UN project to promote responsible investment in 24 emerging markets and developing countries through the framework of the Principles for Responsible Investment (PRI).

"We wanted to understand how the South African investment community integrates sustainable development and particularly environmental, social and governance (ESG) issues in investment decision making. Further we wanted to understand how investors view the evolving concept of responsible investment (RI). "

The survey report said that as much as 11% of R 2.3 trillion of assets managed by asset managers may be managed under some formal RI, or socially responsible investment  (SRI) strategy. Most of the asset managers and investment advisory service providers interviewed appeared to be reasonably well versed in RI. The overall impression from these groups was that they were poised to become more active in the RI arena should demand increase.

"On the down-side, demand seemed to be in short supply," says Eccles. "Both asset managers and advisors indicated that the lack of demand was a major barrier to the expansion of RI offerings. Ultimately, this seemed to be rooted in a general lack of demand from the investor at the end of the value chain as indicated by the low levels of demand reported for pension fund members and retail investors. "

Eccles says that given the slightly higher levels of demand experienced by asset managers from their institutional investors, it would appear on the surface that some pension funds at least have recognised a fiduciary duty to pursue RI.

"However, this demand is only marginally higher than that from pension members and retail investors. It is quite possible that a significant part of this additional demand is driven more by a spirit of philanthropy or by the empowerment financing targets in the Financial Sector Charter (FSC), than by fiduciary responsibility - the "2.5%" allocated to high risk low return investments to "give something back to society".

Eccles says a striking theme of the survey was the fiduciary responsibility paradox.

"On the one hand, most pension fund principal officers interviewed indicated that a wide range of ESG issues were at least somewhat important in 'evaluating the likely performance of investments'. On the other hand, most principal officers indicated that their general approach to RI was either to do nothing, or to put a limited proportion of assets in RI. In addition, 63% of principal officers indicated that fiduciary responsibility was important as a barrier to participating in RI."

"Perhaps part of the reason for this apparent paradox was the significant amount of confusion regarding what exactly RI is amongst pension fund managers. "

Eccles says only half of the principal officers interviewed had heard of RI and were able to give a satisfactory definition. One common misconception was that RI is simply investment that ensures that the fund is able to meet its financial liabilities. Another was that RI necessarily meant increased investment risk and more importantly, reduced return that RI was inherently bad financial investment.

"This lack of clarity on the part of pension fund principal officers leads to the opposite of a virtuous cycle:  Because pension funds do not demand advisory services on RI and ESG issues they are excluded from the advisory services. As a result, RI does not filter through to the asset managers in the form of concrete demand in mandates and policies. 

"Ultimately a lack of demand translates into a low supply, which is more often than not aimed at satisfying a philanthropic or niche requirement."

Eccles says an option of breaking the cycle by regulation to incorporate ESG issues was widely rejected by respondents.

"Certainly legislation in the form of minimum RI targets brings with it the problem of entrenching the perception that RI is necessarily high risk, low return investment, and that there is thus no business case.

"However, the results of this survey provide significant evidence that a strong business case already exists. After all, most respondents across all groups interviewed indicated that a broad range of ESG issues were likely to be at least somewhat important in evaluating the performance of investments."

The research into the state of responsible investment in South Africa represents the first outcome of the Noah Chair in Responsible Investment, sponsored by Noah Financial Innovation.

Says Raymond Ndlovu, CEO of Noah Financial Innovation, "Noah Financial Innovation has decided to make a meaningful and lasting contribution in its capacity as both an intermediary and a participant in the South African capital markets, by collaborating with UNISA, a reputable educational institution, in order to influence and foster thought leadership as well as research and advocacy in the area of responsible investment."

"The Noah Chair aims to change the attitudes and positively influence the behaviours and practices of influential professional investors, for the sustainable betterment of our society," said Ndlovu.

The involvement of the UNEP FI initiated PRI is part of the dedicated PRI Emerging Markets and Developing Countries Project, in which South Africa is one of three key regions.  The vision is to encourage responsible business practices by companies operating in the developing and emerging markets, by sending signals from investors the owners of business themselves.

"The PRI in Emerging Markets Project over the next two years will increase the activities of investors, and understanding of investment decisions integrating ESG issues," said UNEP FI head Paul Clements-Hunt. 

"The RI survey is another important component in understanding the interconnections between investment decisions and ESG issues.  Together with other studies supported by UNEP FI across the world, this survey brings the world of finance a step closer to understanding this complex but critical dynamic in Africa," said Clements-Hunt.

The research was launched at the JSE because of the synergies between the research and the JSE Socially Responsible Investment (SRI) Index.  Commenting on this link, Nicky Newton-King, Deputy CEO, JSE Limited said, "The Unisa survey represents a significant step in enhancing the debate on responsible investing in South Africa and beyond.  We applaud and fully support this and are certain that the results from this research will shed light on the culture of investing in our country and illustrate to the business community as a whole the benefits of responsible investment and non-financial risk management."