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Impact Investing

06 May 2014 Lisa Kusters, Investment Solutions

Lisa Kusters, Research Analyst at Investment Solutions, discusses sustainability and how it is gaining traction in the investment arena.

Sustainable growth can be achieved on a "win-win” basis. In a developing economy, there are investment opportunities that, as an end goal, produce competitive returns but at the same time address economic and social up-liftment. As a country faced with inequality and high rates of unemployment and poverty, South Africa presents a number of innovative investment opportunities that can be targeted to the development of communities. This type of investing is known as Impact or Socially Responsible Investing (SRI). Examples of SRI projects are those that provide infrastructure development, including electricity supply and services such as health care and retail to disadvantage communities. Investors benefit from good returns and the economy benefits from the flow of capital or money that passes hands.

Where does the SA asset-management industry stand?

This is an appealing concept, but where does the SA asset-management industry stand relative to the rest of the world regarding capital allocated to such investments? From a global perspective, sustainability seems to be gaining traction in the investment arena. Research by the Forum for Sustainable and Responsible Investment reveals an increase of more than 380% in professionally managed assets following SRI strategies in the US from 1995 to 2010. Because of this growth, nearly $1 out of every $8 under professional management in the US at the end of 2010 was involved in some SRI strategy. In Europe, the SRI market increased from €2.7 trillion in 2007 to €6.7 trillion at the end of 2011 (2012 SRI Survey). From an SA perspective, research by Dr Stephanie Giamporcaro and Prof Suzette Viviers shows that, at the beginning of January 2013, of the 30 investment managers that were signatories to the United Nations Principles for Responsible Investment (UNPRI), only 24 offered SRI funds. With only 60 products marketed as SRI, they argue that this is marginal compared with mainstream investments.

It is not only about SRI

Responsible Investing (RI) practices have gained popularity in South Africa and the strategies employed are not limited to Impact Investing or SRI. The local industry uses terms like – SRI, RI and Sustainable Investing to describe how they employ responsible investing practices in their investment decision making. Locally, asset managers are moving towards becoming more responsible investors overall by integrating Environmental, Social and Governance (ESG) considerations into their investment processes. The challenge with this is that it is difficult to assess and measure the actual environmental and social impact of their decisions or engagements.

Strong advocates of RI place greater emphasis on active ownership of shares, believing engagement to be fundamental in facilitating change at company level, rather than the approach of excluding "unfriendly” shares on the basis of their ESG rating.
 
Asset managers, because of their size, are in an influential position to engage and to vote proxies on the investor’s behalf. In this regard, Investment Solutions believes the Code for Responsible Investing in South Africa (CRISA) and Regulation 28 will be pivotal in promoting acceptance of ownership because companies need to be held accountable for their actions.

According to the 2013 Investment Solutions RI survey, most (70%) local and global managers surveyed said they explicitly incorporated RI to some degree in their investment processes. How they did so differed, but for the most part, this was swayed towards governance. When local asset managers were asked to rate the importance of E, S and G in their investment processes, governance was rated most critical at 60%, with environmental and social factors at 20% each. Asset managers struggle to quantify the financial effect of the E and S and site poor access to information as well as un-reliable and inconsistent data provision as reasons.

Conclusion

Although there seems to be increasing demand for RI strategies across the spectrum, some challenges remain – for example, understanding and assessing the social impact, liquidity concerns around unlisted investments and scepticism around performance. Investors need to shift from chasing short term gains to pursuing long term sustainable returns earned ethically and responsibly. Only then will we see a shift in the allocation of capital.

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