09 Sep

Clarity on collaborative shareholder engagement in South Africa required

Futuregrowth Asset Management’s decision to suspend additional loans to six state-owned enterprises (SOEs) over governance and transparency concerns has sparked wide debate. However, as Futuregrowth makes clear in its 31 August statement, responsible investors, including signatories of the Principles for Responsible Investment (PRI) and the Code for Responsible Investment in South Africa (CRISA) “have a duty to ensure the entities in which [they] invest have suitable governance and decision-making structures.” Futuregrowth has now said that it should have consulted with the SOEs before issuing a public statement, but its clear legal obligation to act on its concerns over governance is articulated in a 2011 update to Regulation 28 of the Pension Fund Act that states:

“A fund has a fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities. Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character. This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment.”

Futuregrowth’s stated intention to “engage proactively with [its] industry colleagues through ASISA [the Association for Savings and Investment South Africa] so that key concerns can be communicated to the SOEs in a joint manner by the investment industry” has also been questioned. In a statement, ASISA CEO Leon Campher argued that:

“Investment managers must make their own investment decisions. ASISA is an industry body mandated by its members to deal with industry issues, which include policy, regulatory and legislative matters. The Association cannot dictate where members invest and where not. That would be considered collusive behaviour, which is not only undesirable, but also illegal.”

Minister of Public Enterprises Lynne Brown, who is the shareholder representative of various SOEs, has noted ASISA’s position, which she argued cautioned Futuregrowth from “inviting other Fund Managers to support its decision, as doing so will be deemed collusive or restrictive behaviour in terms of the Competition Act”.

Commentary on this issue has ignored the advances that have been made in South Africa with regards to collaborative shareholder engagement. It is likely that Campher and Brown are referring to the “acting in concert” aspect of the Companies Act, which may in certain situations require concert parties with significant interests to make a mandatory bid for a company they are engaging with. “Acting in concert” is defined as “any action pursuant to an agreement between or among two or more persons, in terms of which any of them co-operate for the purpose of entering or proposing an affected transaction or offer.”

Some of the uncertainty regarding collaboration stems from the Comparex case in the early 2000s, in which a consortium of asset managers, which owned more than 35% of Comparex, were accused of “acting in concert” after they notified the Comparex board that they had agreed in principle to change the composition of the board. Non-executive directors of Comparex argued that by acting in concert, these asset managers were obliged to make an offer to Comparex’s minority shareholders. In its ruling on the matter, the Securities Regulation Panel held that there was no affected transaction, so there was no obligation to minority shareholders. However, this case has subsequently, and sometimes incorrectly, been used to restrict shareholder collaboration.

Given the importance of collaborative engagement as a strategy for effective active ownership – as contained in both the PRI and CRISA principles – the PRI South Africa Network Engagement Working Group engaged the Takeover Regulation Panel over several years to gain clarity over the regulatory rules on concert parties. The engagement included discussion on issues such as whether discussing investee company shareholder resolutions, developing engagement plans or discussing governance concerns at investee companies was restricted or required specific disclosures.

A March 2010 document on “Collaborative engagement”, which was reviewed by the Executive Director of the Takeover Regulation Panel in March 2012, noted that the “clear view” was that “a concert party is not created where institutional investors simply discuss matters of mutual interest or share their views as to concerns about particular companies. A concert party is only formed where shareholders agree a common plan under which to work together.”

However, it is clear from the Futuregrowth situation that this view is yet to be fully understood or implemented. A stronger articulation in support of collaborative engagement is required from South African regulators, such as the one issued by the European Securities and Markets Authority in 2013, which included a “White List” of activities that shareholders can engage on to drive good corporate governance. Without collaborative engagement as a possible strategy to effectively address environmental, social or corporate governance issues at companies, whether private, public or state-owned, the power of investment managers to act in the best interest of shareholders will be severely diminished.

29 Apr

Why South Africa needs a Responsible Investment civil society network

On 14 April in London, over 59% of shareholders voted against the £13.8m remuneration package for BP CEO Bob Dudley. BP had reported record losses of USD6.4bn and retrenched 4,000 employees in the preceding financial year. Dudley’s 20% pay rise was only one of the contentious issues on the agenda. Activists also used the AGM to focus attention on BP’s controversial plans to undertake exploration in the Great Australian Bight. One of the most vocal groups highlighting these issues was the charity ShareAction, which argued that BP had failed to uphold the commitments on climate change and environmental issues made at its 2015 AGM.

ShareAction was originally set up in 2005, with support from civil society, as FairPensions, which ranked major UK pension funds on responsible investment. The group now aims to “transform the investment system and unlock its potential to be a force for good” by demanding “reform in the ways large investors make decisions and account for them”. It does this by:

  • campaigning to improve corporate behaviour by helping investors to engage with companies on issues such as corporate lobbying on climate change, factory farming and corporate tax, and by pressuring pension funds on climate change action;
  • building and supporting networks of foundations, faith groups, unions and NGOs to take action in the investment system;
  • assisting shareholder activism by, for example, training individuals to engage directly with companies as part of an “AGM Army”; and
  • Providing expert policy and research to promote best practice in the investment industry. Recent surveys include Asset Manager Voting Practices: In Whose Interests? and a ranking of responsible investment practices at nine pension providers.

ShareAction is now launching a new network of civil society organisations working towards sustainable capital markets in Europe.

An organisation like ShareAction is perhaps what is missing from the South African responsible investment community. South Africa is regularly promoted, especially when compared to its emerging market peers, as a leader in the field. This is due to various positive interventions, including changes to Regulation 28 of the Pensions Fund Act – to support the adoption of a responsible investment approach by giving “appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character”. The launch of the JSE SRI Index in 2004 and the creation of the Code for Responsible Investing in South Africa (CRISA) in 2011 are also viewed as ground-breaking.

But progress appears to have stalled. There are some asset managers that seem to be taking responsible investment seriously, but most asset managers and owners, including pension funds, do not seem to have made it much further than developing a responsible investment policy. The fact remains that the majority of investors in a pension fund scheme will not know whether or not their fund manager supports responsible investing practices. Even if they do, there is little to no information available about how such practices are implemented: for example, very few fund managers report publicly on their engagement with company management around ESG issues.

The bottom line is that despite South Africa’s much-lauded initiatives around responsible investment, there is very little evidence to show that these initiatives have translated into actual changes in corporate behaviour and impacts, especially in relation to the environment, climate change, and social factors. Individual investors also do not necessarily realise that, as the ultimate beneficiaries or owners of those funds, they have power over how those funds are invested or managed on their behalf. A local organisation based on the vision of ShareAction, “of an investment system that truly serves savers and communities, and protects our environment for the long term” would go some way in rebalancing the situation.

There are a number of ways in which a civil society organisation modelled on ShareAction could boost transparency and accountability in the South African business and investment community, not just in responsible investment. These include:

  • Supporting NGOs: there are numerous NGOs working across the country to improve corporate accountability and address social and environmental rights. Some groups such as the Centre for Environmental Rights (CER) have developed capacity to ensure that where their work has investment implications, this is brought to the attention of investors. However, not all of these NGOs are able to adequately convey the relevance of their work to investors. Furthermore, although there are areas of overlap, often the work is not coordinated. By understanding the investment system, it will be possible to ensure that the results of NGO programmes are brought to the attention of the relevant investor audience and that the outcomes can be used to drive change.
  • Boosting transparency of asset managers: Despite many of South Africa’s largest asset managers marketing themselves as being signatories to the PRI or supporters of CRISA, it is extremely difficult to determine which fund managers actually are acting on these commitments and which are simply “greenwashing”. This is evident from a 2013 report commissioned by the CRISA Committee that found shortcomings in the application of CRISA and varying degrees of accountability across institutions. In many cases, asset managers prefer to engage with companies on issues affecting responsible investing behind closed doors, with little evidence of this driving any meaningful change.

    Independent surveys and research are necessary to benchmark asset managers on responsible investment performance and transparency on issues such as policies, voting practices and engagement strategies. This will support best practices and encourage improvement by asset managers who are “talking the responsible investment talk” but not actually taking any responsible investment action.

  • Driving change in asset owners: Asset owners, the large institutional investors such as pension funds and insurance companies, are essential to the implementation of responsible investment practices. Asset owners, on behalf of their members, establish the investment mandates that asset managers should apply. Despite the changes in Regulation 28, asset owners continue to disregard responsible investment strategies in their mandates. Research is needed to establish how asset owners are fulfilling their fiduciary duty in this area.

    The need for further changes was reflected in the PRI’s 2015 report Fiduciary duty in the 21st century that recommended that the Financial Services Board clarify compliance with Regulation 28; asset owners prepare a public annual report on how they have implemented SRI commitments; and ESG-related competence on pension fund boards be improved.

  • Giving individual investors a voice: A PRI survey in 2015 found that, out of 1001 respondents in South Africa, 77% agreed that “it is important that companies their pension fund is invested in do not pay CEOs too high a salary” and 51% “consider it ‘very’ important that the companies their pension fund is invested in do not contribute to the burning of fossil fuels which link to climate change”. However, the investment community argues that a barrier to responsible investment is the lack of demand. It is possible that there is demand but that asset owners and managers are not paying attention, but there is currently no simple way for individual investors to communicate their viewpoints to pension firms and explore how to translate their moral standpoints into their investments. Greater public awareness is needed for this barrier to be overcome.

    ShareAction has been extremely successful in supporting individuals in another area: raising issues it feels are important at company AGMs. AGMs are an important arena to hold boards and executives to account and to ensure that they are acting in the best interests of stakeholders, including on ESG issues. South African AGMs are notoriously humdrum affairs, with many asset managers not bothering to attend and executives seldom required to answer difficult or challenging questions. With many asset managers apparently ignoring even basic tenets of corporate governance, perhaps it is time to support individuals who want to make a stand?

03 Mar

Tobacco free portfolio options in South Africa: hard to get away from BAT

British American Tobacco has been in the news again recently over allegations that it is involved in corporate espionage in an effort to disrupt competitors in South Africa. BAT holds around 85% of the South African cigarette market. According to Eyewitness News, a whistle-blower’s affidavit that forms part of a complaint to the Competition Commission claims that BAT used a network of spies and corrupt law enforcement agents to undermine competition. The complaint has been brought by the Fair-Trade Independent Tobacco Association (Fita), the body representing small, local tobacco producers. Secret payments from BAT to informants in South Africa are under investigation in the UK.

BAT also faces allegations relating to its business conduct in other countries such as Uganda and Kenya, including making payments to undermine anti-smoking regulations. There are now calls for the US Department of Justice to investigate possible contraventions of the US Foreign Corrupt Practices Act. BAT has denied all allegations and has appointed law firm Linklaters to investigate the East African allegations.

While the media has regularly published updates on BAT’s alleged behaviour, there has not been a major outcry even though BAT is, for example, a constituent of the Dow Jones Sustainability Index that recognises companies for their sustainability practices, and forms part of the new FTSE/JSE Responsible Investment Index. The lack of reaction by investors in South Africa may in part be due to the fact that the allegations are caught up in a long-running and complex political battle within the South African Revenue Service (SARS). However, it is noticeable that the voices of the asset managers who have signed up for the Code for Responsible Investing in South Africa are missing from the coverage. The tendency of funds to engage behind closed doors and weak transparency means that it is difficult to assess the efficacy of any engagement strategies.

However, as local business commentator Bruce Whitfield has pointed out, it is incongruous to focus on allegations of corporate espionage when investment managers make so little of the fact that BAT makes a product that has such serious negative implications for its customers’ health. Despite the risks associated with investing in tobacco, BAT, which listed on the JSE in 2008, appears to have almost revered status in the investment community in South Africa. BAT accounts for a high percentage of the assets of many of the funds managed by many of the country’s largest retirement or “Reg 28” funds. These funds appear to find BAT’s business model attractive and praise its defensive, high-quality earnings growth. But as a result, if you are investing in a pension in South Africa you are highly likely to hold BAT in your portfolio. In some cases, the exposure increases due to holdings in Reinet, of which BAT makes up around 70% of net asset value.

Fund name BAT percent of portfolio (January 2016)
Allan Gray Balanced Fund 7.5%
Investec Absolute Balanced Fund 5.9%
Stanlib Balanced Fund 4.19%
Foord Balanced Fund 3.8%
Coronation Balanced Plus Fund 3.1%
Old Mutual Balanced Fund 2.2%

Unfortunately, there are very few options available to individuals who, for moral or investment reasons, do not want to hold BAT in their retirement portfolios. Compare this to Australia where over 30 large pension funds now implement tobacco free mandates. This is largely due to the success of the Australia-focussed Tobacco Free Portfolio campaign, which has identified that the total social cost of smoking far outweighs the revenue raised from tobacco sales. In 2015, a Global Task Force for Tobacco Free Portfolios was established but it appears that the message has not yet reached South African asset managers.

Until it does, investors looking to eliminate tobacco from their retirement portfolios will have to choose either one of the Shari’ah funds, which also exclude companies that generate revenue from alcohol, gambling, pornography and weapons, or be satisfied with finding a fund that only holds a low percentage of its portfolio in BAT. However, investors should also, where possible, make enquiries about tobacco-free alternatives from their financial advisors and/or pension fund trustees.

03 Feb

Sustainable investment options for your Tax Free Savings

South Africans have until the end of February to make their first annual contribution of R30,000 as part of a R500,000 lifetime contribution limit to a Tax Free Savings Account (TFSA) scheme. Savetaxfree.co.za has a useful directory of tax-free investments. Unfortunately, as can be seen from AfricaSRI’s list of funds, there are very few focussed sustainable investment funds available in South Africa for individual or retail investors. Several of the providers of TFSAs are signatories to the Principles for Responsible Investment and the Code for Responsible Investing in South Africa, which means that they should theoretically be integrating sustainability factors, such as environmental, social and governance issues, into their investment decisions. However, it is still difficult to dissect the marketing material and determine which providers are actually taking steps towards implementing their responsible investment commitments.

Shari’ah funds

One option is to invest in one of the growing number of Islamic finance or Shari’ah funds. As the CFA notes, Islamic finance shares characteristics with SRI in terms of its objectives and methods. Shari’ah funds use negative screening to exclude from their portfolios companies that generate income from sales of alcohol, pornography, gambling, weapons or pork products. There are several Shari’ah funds available for TFSAs. These include the Element Islamic Balanced Funds, the Kagiso Islamic Balanced and Islamic Equity funds, Old Mutual Albaraka Balanced and Albaraka Equity funds, and the various Oasis funds.

Exchange Traded Funds

For those interested in low-fee Exchange Traded Funds (ETFs), there are two SRI options available via platforms such as EasyEquities. These are Nedbank’s Bettabeta Green ETF (BGREEN) and Newfunds Shari’ah Top40 ETF (NFSH40). The Newfunds Shari’ah Top40 ETF tracks the FTSE/JSE Shari’ah Top 40 index of the 40 largest and most liquid Shari’ah-compliant firms. The BGREEN ETF tracks the Nedbank Green Index, which is calculated on liquidity and, drawing on data from the Carbon Disclosure Project (CDP), environmental criteria. Eligible companies from the JSE Top 100 are determined from their CDP’s disclosure scores, while companies with better CDP performance (evidence of actions contributing to climate change mitigations, adaptation and transparency) are given higher weightings. The BGREEN ETF initially outperformed the All-Share Index and the JSE Top 40, but recent performance has lagged.

New SRI indices?

Unfortunately, for those looking for international exposure, only five DB x-trackers ETFs are available and none of these are based on ESG screens. In 2015, Old Mutual launched two ESG index funds, one based on the MSCI World ESG Index, the other on the MSCI Emerging Markets ESG Index. These are only available to institutional investors. UBS Global Asset Management recently found that ETFs tracking SRI indices outperformed the parent indices over the past five years. Hopefully in coming years South Africans will also be able to add SRI-based ETFs to their TFSAs.

04 Jan


Welcome to AfricaSRI – a guide to sustainable and responsible investing in sub-Saharan Africa! We hope you find the information useful. Please contact us with any additional information or questions.