04 Aug

Fiduciary duty in the 21st century – South Africa Roadmap

The UNEP/PRI/Generation Foundation South Africa Roadmap [pdf] report is part of the Fiduciary Duty in the 21st Century initiative that aims to bring an end to the debate over fiduciary duty and environmental, social and governance (ESG) issues considered by responsible investors. The Roadmap, which is based on consultation with industry, provides various recommendations on how to ensure institutional investors integrate ESG factors into their investment decisions.

Unfortunately, given that it makes some important recommendations, the Roadmap has not received much media attention in South Africa. It correctly identifies many of the challenges facing the adoption of ESG integration in South Africa, despite the change to Regulation 28 and other interventions: These include:

  • Capacity constraints: capacity issues affect both asset owners and the FSB, which is seen as the “key regulator for advancing ESG factors in pension schemes”.The lack of a permanent, well-resourced secretariat of the Code for Responsible Investment in South Africa (CRISA) is also seen as a barrier to CRISA’s effectiveness. The Kigoda Responsible Investment Ranking 2017, which found considerable variation in the implementation of CRISA’s principles among ten of South Africa’s largest asset managers, supports this.
  • Knowledge gaps: although awareness of ESG has increased, there are still considerable gaps in knowledge about how to implement ESG practices. Trustee training is seen as essential to fill these gaps.
  • Structural issues: South Africa’s fragmented pensions sector means that investment consultants are extremely influential, but there is insufficient guidance on how trustees should interact with consultants.

Fortunately, there are already indications that steps are being taken to address some of these barriers. KudosAfrica, for example, has partnered with the ASISA Academy to deliver a BATSETA-approved Responsible Investing Fundamentals workshop for trustees. Chairman of CRISA John Olifant has also indicated that CRISA is “activating plans to have a dedicated secretariat to support the work of the CRISA committee.”

However, while the Roadmap’s framework to drive ESG integration in South Africa should be welcomed, it is necessary to note the lack of asset owner participation in the stakeholder interview process. The lack of ESG activity from asset owners is a perennial problem. Also worrying is that the FSB also did not participate in the interview process. Finally, when the list of South African interviewees is compared to those who, for example, contributed to the UK Roadmap [pdf], the lack of NGO voices in the South Africa Roadmap is very apparent. Hopefully, with the imminent launch of a shareholder activist NGO in South Africa, other voices from outside industry will be included in these initiatives in future

The South Africa Roadmap’s recommendations

1. Regulatory guidance:
a. The South African Financial Services Board (FSB) should:

i. provide practical guidance to enhance the impact of Regulation 28 on the investment practice of South African pension schemes and actively monitor progress in scheme practice;
ii. review the implications of the size and structure of pension schemes on governance quality.

b. The FSB should review investment manager mandates to ensure that they reflect the expectations for investment practice set out in Regulation 28.
c. South African industry associations and the FSB should provide practical guidance to trustees on interaction with investment consultants on ESG integration.

2. Enhanced stewardship:
The Code for Responsible Investment in South Africa (CRISA) should be supported with more resourcing and a permanent secretariat to enable its work on stewardship and responsible investment in South Africa.

3. Investor education:
ESG issues should be a core competency in the National Qualification Framework for trustee training. Training and accreditation groups and industry organisations, such as Batseta and the Association for Savings and Investment South Africa (ASISA), should collaborate to provide training and raise market awareness of ESG investment approaches.

4. Corporate governance and reporting:
South African stakeholders, including the FSB and the Johannesburg Stock Exchange (JSE), should review the quality of the reporting of material ESG factors following the report of the international Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

30 May

Kigoda Responsible Investment Ranking 2017

Kigoda Consulting has launched the Kigoda Responsible Investment Ranking 2017, which uses the Code for Responsible Investing in South Africa’s five principles and its practice recommendations to independently assess whether ten of the largest asset managers in South Africa have the policy frameworks and governance structures in place to implement sustainable and responsible investment, and to adequately disclose information on their responsible investment performance. These ten managers account for around two-thirds of total assets under management in South Africa by asset managers, including multi-managers. The Kigoda Responsible Investment Ranking 2017 is based solely on publicly disclosed information.

A copy of the executive summary of the Kigoda Responsible Investment Ranking 2017 is available here.


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.