crisa code For responsible investing in South africa

Transcription

1 crisa code For responsible investing in South africa

2 1 Executive Summary The world has entered a period of significant change. Global economies, politics and capital markets are all affected. Key drivers of this profound and systemic change are the effects of environmental externalities, the growing level of social inequalities and the consequences of poorgovernance. These are raising concerns regarding corporate and financial practices. In this context, environmental, social and governance (ESG) issues have become material factors influencing the landscape of institutional investors. Introducing new dimensions to their long-term investment challenge, ESG considerations have led to the emergence of the concept of responsible investment (RI). This approach explicitly acknowledges the relevance of evaluating ESG factors in investment decisions in order to deliver superior riskadjusted returns on investments. Such an approach is further cognisant of the transformative role the investment industry can play in creating a more sustainable society. South Africa formalised its approach to responsible investment by introducing The Code for Responsible Investing in South Africa (CRISA) in July This code recommends the application of five key principles that support institutional investors in the practice of responsible investment. To facilitate the implementation of the prescribed principles, CRISA released a Disclosure Practice Note in January 2013, which provides a framework for the disclosure of policies and practices. Using a voluntary approach, CRISA relies on public disclosure to encourage self-regulation. CRISA expects all institutional investors and their service providers to implement the prescribed principles on an apply or explain basis and disclose publicly of their responsible investment practices. The public disclosure of these practices enables beneficiaries and other stakeholders to engage meaningfully with institutional investors and their service providers, and hold them to account. Commissioned by the CRISA Committee, the present report reviews responsible investment trends in the South African market. The research informing this report examined information that is publicly disclosed by institutional investors and their service providers to evaluate the progress made towards responsible investment. It further used case studies to point out challenges and highlight best practices. Considering the relatively short timeframe since the publication of the CRISA Disclosure Guidelines in early 2013, the research findings are generally encouraging and indicate that a growing number of institutional investors and their service providers are integrating responsible investment principles into investment practices. Significantly, leaders are emerging who are setting new industry standards and promoting a culture of responsible investment. Challenging traditional industry practices, these advocates of responsible investment place great emphasis on policy statements, active ownership practices, transparency and generating awareness amongst stakeholders. However, the findings also highlight that disclosed data are not properly comparable and that the chain of accountability is unclear. The level of accountability is especially affected by the lack of disclosure in respect of mandates to service providers. Overall, the industry is still largely characterised by a passive and selective approach to responsible investment and strong differences exist amongst categories of institutions. Broader progress is limited by a lack of clarity on what it means to integrate ESG considerations into investment decisions and the necessity of balancing short-term with long-term objectives. Promoting best practices is necessary to encourage change. The case studies developed in this research demonstrate how responsible investment practices are helping companies to promote long-term value and resilience. By coordinating their efforts with their service providers, asset owners are creating demand for responsible investment practices, promoting transparency and ensuring corporate accountability. Collaborating with industry bodies, they are improving the sustainability of the industry as a whole. Service providers can encourage change by adopting a forward-thinking approach. Asset managers can build internal capacity by investing in research and feeding data to all levels of their organisations, while asset consultants have a critical role to play in informing asset owners about responsible investment and holding asset managers to account.

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4 3 Foreword In 2006, the UN-backed Principles for Responsible Investment (PRI) was launched to encourage collaborative engagement, at an institutional level, on the incorporation of environmental, social and governance (ESG) issues in decision-making, ownership and investment practices. Following this, and in light of the 2009 King Report on Governance for South Africa, concerned stakeholders launched the Code for Responsible Investing in South Africa (CRISA) in 2011, acknowledging the significant role institutional investors can and should play in shaping the development and thus the future of South Africa. CRISA provides a framework to help institutional investors develop and implement strategies for responsible investment in the South African listed equity market. It is a voluntary set of principles designed to support the integration of long-term sustainability into the investment decision matrix. The Code furthermore supports the fiduciary duty of pension fund trustees to integrate sustainability into their investment strategies as stipulated by Regulation 28 of the Pension Fund Act. CRISA s effectiveness hinges on public disclosure of responsible investment practices. Committed organisations declare their endorsement of CRISA and evidence of this endorsement must be provided through public disclosure. Such disclosures provide the information required to make each member of the investment value chain accountable: institutional investors (the asset owners) can ensure their service providers fulfill their mandates and in turn can be held accountable by the ultimate beneficiaries. Public disclosure of an investor s responsible investment strategy also enables listed companies to engage meaningfully with institutional investors and their service providers. The endorsement and application of CRISA plays a critical role in supporting the practice of responsible investment in South Africa and in closing the loop of governance responsibility as envisioned by King III. EY was commissioned to do research in order to understand the extent to which CRISA has been effectively implemented. It provides critical insights into the levels of uptake by the South African investment community, points out encouraging progress that is being made and identifies areas for future improvement. These findings will be used by the CRISA Committee to support the further uptake of the Code, while working collaboratively to unblock barriers to the practice of responsible investment in South Africa. The CRISA Committee is encouraged by the active interest and debate regarding responsible investment to date. We look forward to encouraging more institutional investors and their service providers to endorse the Code in recognition of the important function responsible investment and ownership practices play in the development of our nation. John Oliphant Chair, CRISA Committee September 2013

5 4 Table of contents Executive Summary 1 Foreword 3 Introduction 5 Aim of the report 5 About the research methodology 5 Compliance with disclosure framework 6 Disclosure of policies 6 Disclosure of responsible ownership practices 7 Comprehensive disclosure of CRISA implementation 8 Quality and consistency of ESG integration 9 Diversity in disclosure quality 9 Poor data comparability 9 Uncertain levels of accountability 10 Interpretation and implementation challenges 10 Assessing progress towards responsible investment (RI) 11 Progress towards responsible investment 11 The role of leaders 12 Limitations and the need for clarity 12 Establishing a new balance 12 Measuring and promoting change 12 Conclusion 13 Case studies 15 Pension fund - The GEPF: Leadership and close coordination 15 Large financial group - Sanlam: Beyond fiduciary duty, recognising the ES(G) challenge. 16 Asset manager - Old Mutual Investment Group (SA): Building capacity and managing change 17 Asset consultant RisCura: Putting CRISA and responsible investment on the agenda 18

6 5 Introduction The state of responsible investment (RI) in South Africa has evolved considerably with the introduction of Regulation 28 in the Pension Fund Act of 1956 and the release of the Code for Responsible Investing in South Africa (CRISA) in July To promote sound governance, CRISA recommends the application of five key principlesthat support institutional investors in the practice of RI. These principles require institutional investors and their service providers to incorporate sustainability considerations, including environmental, social and governance (ESG) factors, into their investment analysis and activities. Incorporate RI into decisionmaking. The CRISA 5 principles include: Manage conflicts of interest. Demonstrate active ownership. Ensure transparency on CRISA implementation and disclose policies. Figure 1: CRISA 5 principles Consider a collaborative approach to promote acceptance. Using a voluntary approach, CRISA relies on market forces to encourage self-regulation. Since 1 February 2012, all institutional investors and their service providers have been expected to implement CRISA principles on an apply or explain basis and report on their practices. To facilitate the implementation of the prescribed principles, CRISA released a Disclosure Practice Note in January 2013, which provides a framework for the disclosure of policies and practices. Aim of the report Commissioned by the CRISA Committee and undertaken by EY, this research report reviews the level of uptake and application of CRISA by institutional investors and their service providers. It quantifies and qualifies trends in the market regarding the disclosure of information in line with the guidelines provided in the CRISA Disclosure Practice Note. It provides indications on the progress made towards responsible investing and discusses possible ways of promoting best practices. About the research methodology The research informing this report used a representative sample of 47 institutional investors and service providers to assess the current application of CRISA principles. The sample was agreed upon with the CRISA committee and aimed at a broad representation of the industry. The assessment on disclosure was made based on publicly available information gathered on websites, annual reports and sustainability reports. For the purpose of the research, institutions were classified into three types and four categories: Types of institution Categories Number Asset owner Pension funds 20 Both asset owners and service providers Large financial groups (including collective investment schemes and insurance providers) 9 Service providers Asset managers Asset consultants 14 4 A series of 34 variables or questions were identified and built into a matrix in order to rate each institution s level of disclosure. These variables were based on the provisions detailed in the three elements 1 or sections of CRISA s Framework for Disclosure. The research subsequently followed a four-step approach: I. Initially, a factual and objective assessment was made based on the availability of information for public consultation. It provided a broad indication on the effectiveness of CRISA disclosure per category and per type of institution. II. Institutions disclosing information publicly were further assessed with regards to the degree and quality of ESG integration into their investment strategies, as well as with regards to how consistent their disclose was with their published policies. III. The results from both these assessments were used to evaluate the progress made towards responsible investment and to measure changes within the industry. IV. Finally a series of targeted interviews were conducted with some of the best-performing institutions to highlight good practices in each category. 1 Element 1: Disclosure of Policies. Element 2: Disclosure of Responsible Ownership Practices. Element 3: Comprehensive Disclosure of CRISA Implementation.

7 6 Compliance with disclosure framework Considering the relatively short period since the publication of the CRISA Disclosure Guidelines in early 2013, some findings are encouraging and indicate the growing integration of responsible-investing principles into investment practices. As such, 49% of surveyed institutions provide some form of disclosure relating to CRISA. Nonetheless, the research also highlights some shortcomings, specifically with regard to monitoring and control structures. The assessment further points to varying practices and degrees of accountability across all types and categories of institution. Disclosure of policies With regards to Element 1 of the Framework for Disclosure, the research found that close to 40% of the institutions reviewed publish the three recommended policies relating to: The incorporation of sustainability considerations. The manner in which the institution discharges its ownership responsibilities (including proxy voting). The means to identify, prevent and manage conflicts of interest. More than 80% of the disclosed information was available on the institutions websites or other readily accessible platforms, as recommended in CRISA. 100% 80% 60% 40% 20% 0% Overall average Pension funds Large financial groups Asset managers Asset consultants Available Not available Not applicable Where investment activities and decisions are delegated to a service provider by mandate, the institutional investor is required to disclose, at a minimum: The extent to which disclosure (or aspects thereof) has been delegated to a service provider. Details of its mandate to the service provider. Details of the processes and procedures on how it selects and monitors application by its service provider(s) of CRISA in respect of those investment decisions and activities that have been delegated via the mandate. Figure 2: Availability of policies per category Figure 3: CRISA: Minimum disclosure requirements for institutional investors However, less than 20% disclosed the structures in place to control and ensure the effective implementation of CRISA, including the extent to which disclosure had been delegated to a service provider. It is important to note that while pension funds tend to rely the most on service providers such as asset managers, less than 10% of these asset owners provide details on the mandate to service providers and most use a multi-manager strategy, making any assessment of CRISA disclosure very difficult. Figure 4: Disclosure of structures, controls and mandates to ensure implementation 80% 60% 40% 20% 0% Disclosure on structures and controls to ensure implementation Description of extent to which disclosure has been delegated to a service provider Disclosure No disclosure Not applicable 19% 72% 9% 17% 74% 9%

8 7 Disclosure of responsible ownership practices In respect of Element 2 of the Framework for Disclosure, 36% of institutional investors and service providers reviewed disclose their proxy voting results. However, only 11% do so more than once per year, as recommended by CRISA. Furthermore, large discrepancies were found between types and categories of institution. Only 20% of pension funds disclose proxy voting results, while nearly 60% of large financial institutions and asset managers do apply this principle. With regards to engagement practices, only 30% of surveyed institutions provide a summary of their activities and less than 11% disclose the nature of their engagements or the progress made. Pension funds and large financial institutions perform especially poorly on the disclosure of engagement activities. 100% 80% 60% 40% 20% 0% Disclosure of voting results Disclosure of vote results per resolution Disclosure of overall engagement activity Disclosure on the nature of each engagement Disclosure No disclosure Not applicable Figure 5: Proxy voting and engagement activity

9 8 Comprehensive disclosure of CRISA implementation The results emanating from Element 3 of the disclosure framework reveal a selective commitment towards responsible investment in general and the application of CRISA in particular. Whilst close to 50% of institutions provide a general description of their approach to CRISA, either on their website or in their annual or their sustainability reports, only about 30% provide details on how the CRISA principles are applied. Less than 10% provide an explanation for not applying certain principles. 0% 20% 40% 60% 80% 100% General descriptionof approach to CRISA implementation Description of stakeholder engagement Details of mandate regarding CRISA application with service provider(s) Details of processes in place to monitor application by service provider(s) Details regarding each principle s application Details on principles not applied Description of monitoring actions - qualitative and qualitative Forward looking commitments, including key performance indicators, targets and... Direct disclosure Through service provider Through business unit On request Not available Figure 6: CRISA implementation: general overview Moreover, it is important to point out that only about 20% of pension funds provide details about the level to which their CRISA obligations are outsourced to service providers. Very few disclose the type of mandate and the processes in place to monitor the application of CRISA by service providers. 55% of large financial institutions provide explanations as to how CRISA is applied within their organisation, while the other 45% make no reference to implementation. The institutions providing explanations indicate that disclosure tends to be delegated to their asset management business units but is rarely enforced in other divisions. Any further outsourcing by asset managers to other service providers is not disclosed, nor are the requirements specified. 100% 80% 60% 40% 20% 0% Pension funds Financial groups Asset managers Extent to which disclosure has been delegated to a service provider Details of mandate regarding CRISA application with service provider(s) Details of processes in place to monitor application by service provider(s) Figure 7: Disclosure of delegation to service provider(s) per category(not applicable to asset consultants) Overall, our findings in this section highlight that whilst close to half of the institutions surveyed disclose some information as recommended by CRISA, most have adopted a selective approach to compliance. Furthermore, there are strong differences between categories. As such, asset managers tend to be more compliant with disclosure requirements while only 30% of the pension funds reviewed provide any information at all. CRISA requires that the disclosure by institutional investors should be made public in order that it is readily accessible to all stakeholders, including companies and the ultimate beneficiaries. Figure 8: CRISA Practice Note on Disclosure

10 9 Quality and consistency of ESG integration The assessment of the quality with which environmental, social and governance (ESG) factors have been integrated into investment strategies, and the consistency of the disclosure, provides further insights into the market s readiness for responsible investment. The following research findings are considered especially significant. Diversity in disclosure quality Within the group of institutions that provide disclosure on CRISA, the quality of ESG integration and compliance varies from good to poor, from strategic and core to minimal and incomplete. This pattern of diversity in the quality of disclosure is seen both across and within categories. 79% 18% 3% Strategic Compliant Incomplete or no information Figure 9: Overall quality of information disclosed Across categories, leaders emerge who have invested in resources and research to understand sustainability and how to best apply it to their business model and investment culture. Responsible investment is part of their positioning and the disclosure is broadly covered and comprehensively accessible. These institutions are creating new market expectations and changing the competitive landscape. Some institutions disclosing information have selected a compliant attitude, applying a tick-box approach without investigating how the integration of ESG principles might affect the way they do business. In these instances, responsible investment is rhetorical but not substantive. Disclosure amongst these institutions could be understood as a strategy for status quo. The majority of institutions provide very incomplete or no information. Their integrated reports may offer some information on sustainability commitments and practices, but in a manner that is entirely disconnected from CRISA disclosure requirements. Overall, an average of 18% of disclosed information is qualitatively aligned with CRISA guidelines and consistent with published corporate policies. 100% 80% 60% 40% 20% 0% Pension funds Financial groups Asset managers Asset consultants Strategic Compliant Incomplete No public access Figure 10: Quality of information per category of institution Poor data comparability Assessing institutions is rendered difficult by the poor comparability of data, language inconsistencies and the confused use of terms. Disclosed policies and practices are often not comparable because their format, content and intentions are too dissimilar. This can be attributed to the considerable diversity in the quality of the disclosure and differing approaches to the integration of ESG factors. Thus, while institutions can be technically compliant, the spirit and style in which they disclose information are often not analogous. Furthermore, in some cases misleading language is used, reflecting a poor understanding of CRISA. Close to 20% of institutions claimed to be CRISA signatories on their websites, yet failed to disclose any further information on its application. Others indicated in their annual reports that they were CRISA-compliant but no further information was accessible either on their website or on other public platforms. Most of all, there appeared to be significant confusion between terms such as Principles for Responsible Investment (PRI), CRISA, socially responsible investment (SRI), corporate social responsibility (CSR), Shari ah funds and even black economic empowerment. Sustainability reports or website sections dealing with sustainability issues and CRISA reporting tend to focus on activities which are not necessarily related to responsible investment. These include supporting transformation initiatives (for example, supporting a black asset management firm ), funding community projects (for example, allocating funds to a foundation), or reducing the carbon footprint of their organisation (for example, having offices in a green building and monitoring the use of paper and water). Other institutions refer to PRI but not to CRISA, and disclose according to PRI principles alone (to be discussed further in the following section).

11 10 Uncertain levels of accountability Two main factors lead to a perception of poor accountability: the difficulty in finding and accessing information, and the high level of unmonitored outsourcing. Apart from a few exceptions, information regarding CRISA disclosure is generally hard to find. In the asset owners category, 75% of surveyed pension funds do not have a website. Large financial institutions, which incorporate several business units, do not generally provide specific CRISA disclosure per activity, such as collective investment schemes or retirement fund activity. While approximately 50% of asset managers and asset consultants provide information on websites or other publicly available mediums, information is generally spread across different online locations. Information is not comprehensively accessible: time and dedication is required to track down disclosure elements. The second factor affecting accountability is the high level of outsourcing to services providers and the lack of clarity regarding mandates. With the exception of one institution, all others failed to provide clear details about delegation, monitoring and control mechanisms in place to ensure the implementation of their policies by service providers. While the CRISA Disclosure Note clearly states that the ultimate responsibility for ensuring complete disclosure lies with the institutional investor as owner of the assets to which the disclosure pertains, around 90% of surveyed asset owners delegate most of the disclosure to their service provider (or to one of their business units in the case of large financial institutions). The lack of clarity regarding mandates combined with the high level of delegation dilutes responsibilities and is not conducive to effective and comprehensive public disclosure. Interpretation and implementation challenges For certain categories of institutions, such as asset consultants and large financial institutions, interpreting how to implement CRISA disclosure across their activities can be a challenge. While CRISA applies to asset consultants under mandate from an institutional investor, many disclosure requirements listed in the practice note are not readily applicable. Specifically, asset consultants fall outside the mandate with regards to the disclosure of responsible ownership practices and proxy voting. Generally, disclosure is limited to a general description of their approach to CRISA (for 50% of the reviewed institutions) while their activities focus on providing ESG research, training and guidance. No details are available on how any asset consultants apply the five CRISA principles in relation to their institutional investor clients. In respect of large financial institutions, implementation configurations vary widely. Some companies have one policy for the entire business. In 80% of these cases, there are no details as to how CRISA is applied within the group. Other large financial institutions have no consolidated approach and in most cases only one of their divisions discloses information. Thus, an institution incorporating a fund, asset management and a consultancy division may have only one business unit disclosing information. No indication that CRISA is applied to other divisions is provided, highlighting the need for a more consistent approach to the implementation of the guidelines.

12 11 Assessing progress towards responsible investment (RI) Encouragingly, the research results indicate that a growing number of institutional investors and their service providers are integrating responsible-investing principles into their investment practices. Leaders have also emerged who place great emphasis on responsible investmentand the integration of ESG factors; they set the benchmark for the industry. However, broader progress is limited by a lack of clarity on what it means to integrate ESG factors into investment decisions, the necessity to balance short-term with long-term objectives and the poor measurability of changes. Progress towards responsible investment In South Africa,a majority of companies either support CRISA disclosure or endorse the United Nations supported Principles for Responsible Investment (PRI) initiative, or both. South Africa has a particularly high number of PRI signatories compared to international benchmarks. Close to 60% of the surveyed companies are PRI signatories while more than 50% disclose on CRISA. Considering the short period that has elapsed since the implementation of CRISA, this number highlights the significant progress made by the industry towards responsible investment. It is important to further note that 87% of surveyed asset managers are PRI signatories and close to 60% support CRISA disclosure. Most institutions point out in their policies that responsible investment is part of a strategy to deliver better risk-adjusted returns to the ultimate beneficiaries. Thus many acknowledge that taking into account financial and non-financial risks leads to a better evaluation of a company s future performance. 100% 80% 60% 40% 20% 0% General average Pension funds Financial groups Asset managers Asset consultants CRISA disclosure UN-PRI signatories Figure 11: CRISA disclosure and PRI signatories

13 The role of leaders In each category, leaders have emerged who challenge traditional industry practices and promote a culture of responsible investment. Most of these leaders are the larger institutions within their category. These leaders place great emphasis on policy statements, active ownership practices, transparency and generating awareness amongst stakeholders. Most are actively involved in promoting acceptance of CRISA and responsible investment within the industry, aligning investment mandates and communicating their expectations on how ESG factors should be integrated into investment strategies. However, many of these leaders remain hesitant to file shareholder resolutions dealing specifically with ESG considerations or to participate in collaborative engagement initiatives. They prefer to collaborate informally, through meetings and correspondence. The research further indicates that even leaders in responsible investment are not yet prepared to go as far as to revisit relationships with service providers that fail to meet expectations for integrating ESG factors into investment strategies or applying CRISA disclosure requirements. Limitations and the need for clarity For the rest of the sample, broader industry progress towards responsible investment is limited by a lack of clarity around the meaning of sustainability and the integration of ESG factors. The shift from passively considering ESG factors to actively integrating them into the corporate fibre of the business calls for a concerted effort to improve knowledge on what is expected regarding sustainability and the integration of ESG factors into investment decisions. Standard definitions, clear monitoring actions and in-depth knowledge are needed in order to move the industry forward. Currently, most institutions have developed their own definitions of responsible investment based on specific interpretations of sustainability and what it means to integrate ESG factors. These customised definitions fit within existing practices and do not challenge their investment culture. The research only came across one institution using the CRISA definition of sustainability to inform its understanding of responsible investment. This selective approach is largely responsible for the diversity in disclosure quality. A more structured and formalised approach to sustainability and responsible investment will be required to make practices more comparable and to encourage change. Establishing a new balance Progress is further impeded by the necessity to balance short-term imperatives with long-term objectives. Most reasons put forward for not applying certain CRISA principles or limiting the scope of responsible investment in a portfolio relate to market immaturity, lack of stakeholder readiness or incompatibility with short-term return objectives. Conventional performance expectations are still driving most investment decisions. The industry requires a shift in thinking about sustainability, moving from concerns about cost implications to the recognition of financial benefits. It appears that most institutions still find the benefits of incorporating responsibleinvestment debatable and difficult to measure, especially as the sustainability reports of South African companies are not audited. Thus more reliable ESG information for companies under considerationalong with more knowledge about what responsible investment means is needed to move the industry in the right direction. Measuring and promoting change Beyond the need for a more formalised approach and greater consistency in responsible investment practices, changes in investment practice need to be more measurable, both within categories and across the industry. The variety of strategies for the integrationof ESG factors and responsible investment approaches prevent comparison and limit the measurability of changes. Some institutional investors determine a fixed percentage of their portfolio to be invested according to ESG principles, the rest being managed in a traditional way. Other investors claim to apply ESG considerations across their entire portfolios. Whilst the first strategy permits greater measurability, its overall impact is limited. On the other hand, while the second strategy could potentially have more impact, it is more difficult to measure. Accurate measurement would require further reporting on changes in asset allocations, following the introduction of ESG considerations. Thus, as different strategies coexist, practices are hard to compare and the progress towards responsible investment is difficult to quantify. In short, managing the transition to responsible investment will require greater measurability of practices. 12 In order to avoid any misunderstanding in CRISA, the terminology sustainability and ESG are used in order to indicate an understanding of governance in its wider sense, encompassing behaviour that supports sustainable development. Sustainability means the ability of a company to conduct its operations in a manner that meets existing needs without compromising the ability of future generations to meet their needs. Sustainability includes managing the impact that the business has on the life of the community, the broader economy and the natural environment in which it operates. It also includes the converse, namely considering the effect that the society, the economy and the environment have on business strategy. Sustainability includes economic and ESG considerations. Figure 12: CRISA definition of sustainability

14 13 Conclusion As argued in the CRISA Practice Note, public disclosure is a key element in making CRISA effective. Public disclosure of responsible investment practices enables beneficiaries and other stakeholders to engage meaningfully with institutional investors and their service providers, and hold them to account. This report shows that the level of CRISA disclosure by institutional investors and their service providers is growing. Progress is being made towards a culture of responsible investment and leaders are emerging who are setting new industry standards. However, the industry is still largely characterised by a passive and selective approach to responsible investment and strong differences exist between institutional categories. Furthermore, the potential for change is limited by the lack of clarity around key terms and definitions, leaving too much room for interpretation and status quo. As CRISA is a voluntary code, conditions need to be in place to allow market forces to encourage self-regulation. A more standardized approach to disclosure might be required to improve the comparability and measurability of data, thus allowing market forces to drive accountability.

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16 15 Case studies The following case studies provide some insights into the practices of organisations that, within their category, clearly disclosed their progress towards the CRISA disclosure requirements. The aim of these case studies is to share best practices with regards to responsible investment and the integration of ESG factors, identify challenges and indicate possible ways forward for the industry. Pension fund -The GEPF: Leadership and close coordination The Government Employees Pension Fund (GEPF) is the largest pension fund in Africa. With more than R1.2-trillion in assets under management as of the 31 March 2013, the GEPF is also the largest investor in the South African economy, with significant holdings in government bonds, corporate bonds, listed equity, unlisted equity, and property. The GEPF pursues a responsible investment strategy across its investment portfolio, actively integrating ESG issues into investment analysis as a way to promote the long-term value of investments and to preserve the interests of members and pensioners. As pointed out by Adrian Bertrand, the GEPF s ESG manager, The GEPF believes that investments are vulnerable to ESG risks and that a diversified but predominately passive investment strategy increases this vulnerability. In response, we have adopted a responsible investment strategy that actively integrates ESG issues. We believe this approach will promote the long-term value of the GEPF s investments and is consistent with our fiduciary responsibilities and the interests of the GEPF s members and pensioners. Integrated approach to active ownership A key aspect of the GEPF s approach has been to seek an integrated approach to active ownership with its main asset manager, the Public Investment Corporation (PIC). The GEPF and the PIC have established an ESG Working Committee to coordinate their efforts in encouraging the integration of ESG issues. Bringing the two organisations together, the ESG Working Committee has been instrumental in aligning voting positions, agreeing on engagement strategies and developing tools to improve the assessment of investee companies on their ESG performance. As such, an ESG assessment matrix has been developed in a joint venture with the Centre for Corporate Governance in Africa at the University of Stellenbosch Business School, which is today in its fifth assessment year. Furthermore, the ESG Working Committee ensures that external fund managers managed by the PIC adopt the principles of CRISA. Mandated to invest 90% of its assets in South Africa, the GEPF favours an active engagement strategy and seeks to effect change from within. Combining formal and informal efforts, the GEPF s engagement strategy serves to signal concerns and understand how these can be managed. This strategy helps the ESG working committee to manage the risks and opportunities presented by ESG issues, drive change and push companies to behave more responsibly. Leadership role in the industry Leading by example, the GEPF is playing a pivotal role in mainstreaming responsible investment in South Africa. The first South African asset owner to be a PRI signatory, the GEPF is also a key participant in various international and local ESG-related initiatives. Its Principal Executive Officer, John Oliphant, serves as Chairman of the CRISA Committee, and the GEPF has also been a main participant in the Sustainable Returns Project for Pension Funds. This initiative aims at providing guidance for the retirement industry with regards to the integration of ESG considerations. This roadmap towards responsible investment addresses specific pension fund concerns in order to allow theseasset owners to move the industry forward in a consistent and coordinated manner. In 2012 and 2013, the GEPF also participated actively in other ESG-related initiatives, such as: The Global Real Estate Sustainability Benchmark, to align its property investments with international environmental best practices. The Emerging Markets Disclosure Project, to encourage greater ESG disclosure in emerging market companies. The International Integrated Reporting Committee Pilot Programme, to guide the reporting of quality material information by JSE listed companies. The Carbon Disclosure Project and water disclosure project, to address carbon and water risks openly at both a company and portfolio level. Collaborating with WWF on carbon and water footprints, to assess its investment strategy s exposure to these footprints. Moving the market While most asset owners have been slow to adopt responsible investment practices, the GEPF is showing how it can be done and why it is in the long-term benefit of its members and pensioners. By guiding the rest of the pension fund industry, the GEPF is further instrumental in putting pressure on asset managers to reflect on their own investment strategies, take ESG issues seriously and invest in analytical resources. Through their integrated relationship with the PIC, the GEPF has demonstrated how policies alone are not enough and must be complemented by clear mandates and coordination between asset owners and asset managers. Asset owners, such as pension funds, can drive the market demand for responsible investment, stimulating a cycle of knowledge creation and new practice development. Going forward, the GEPF and the PIC intend to better coordinate their effort with external asset managers. Starting in 2014, the GEPF will more formally monitor the reporting on policies, engagement practices and voting, including reasons for not implementing certain principles. Beyond policies and lip service, the GEPF and the PIC have made clear their intentions to see asset managers taking the implementation of responsible investment seriously.

17 16 Large financial group - Sanlam: Beyond fiduciary duty, recognising the ES(G) challenge. Sanlam is a large financial services group, providing financial solutions to individual and institutional clients. These solutions include individual, group and short-term insurance, personal financial services, insurance investment management, asset management, stockbroking, employee benefits, risk management and capital market activities. While Sanlam s investment management division, SIM, had been a PRI signatory since 2009, the Sanlam Group was the first in its category to become a PRI signatory in 2011 in its capacity as an asset owner. According to Francois Adriaan, head of Group Corporate Affairs, this strategic decision has been key in instigating an internal process for understanding responsible investment. This year will be our first year of reporting and the process is still in its infancy. However our commitment to PRI has initiated a learning journey that is encouraging the group to ask difficult questions about its future business and its role within the South African economy, says Adriaan. Recognising the challenge and asking questions The Sanlam Group recognizes that its process towards responsible investment is still in an early and fragile phase. Spearheaded by pioneers in the organisation who are placing responsible investment issues onto the agenda of the Social, Ethics and Sustainability Committee, the current focus is on thinking through issues, agreeing on principles and developing policies. Implementation, cultural shift and change management will follow as the industry itself becomes more attuned to responsible investment. Key questions need to be answered first, specifically around what it means practically to integrate ESG considerations into investment practices. While the industry in general, and the Sanlam group specifically, are clear about fiduciary duty and governance (G) related considerations, environmental (E) and social (S) issues remain a question mark. Environmental and social data provided by companies are considered inconsistent and difficult to evaluate. Furthermore, the time and the resources required to take them into account are not always associated with short or medium-term financial benefit. Environmental and social risks or opportunities are sometimes considered as too remote and not quantifiable enough, thus conflicting with short to medium term business returnsrequirements. not only take ESG factors into consideration but also help prevent negative environmental and social outcome from occurring, thus playing a positive role in the South African society. Creating change The Sanlam Group further recognizes the external challenges that lie ahead. Changing Sanlam Group s practices is not enough, as few companies will move alone. To drive significant change, a systematic approach is needed at public, private and civil society levels. Referring to a double layer of action, Adriaan emphasises that the work done by both governmental institutions and industry bodies needs to be coordinated to enable a broader industry shift. Efforts specifically need to be focused on enabling more standardised reporting of environmental and social considerations, on developing evaluation matrixes, and providing inputs into laws. As with fiduciary duties, responsible investment guidelines need to speak the language of financial institutions and facilitate the emergence of comparable and measurable practices. Acknowledging the role of asset owners to create market demand for responsible investment, Sanlam Group supports the work of CRISA and welcomes industry-led initiatives, such as the Responsible Investment & Ownership Guide, to integrate ESG considerations into the retirement industry s investment mainstream practices. It would welcome similar initiatives in the insurance industry to exert further peer group pressure. Building from SIM s work Until now, responsible investment policies and practices as well as CRISA disclosure requirements had been driven by SIM, Sanlam s investment management division. The next step for Sanlam Group is to build on SIM s work and evaluate how it applies to their whole business, to its relationship with SIM and to multi-managed assets. For SIM, having the Group more extensively included increases the credibility of responsible investment policies and improves its own capacity to implement responsible investment practices. As pointed out by Richard Anderson, chairman of the SIM Corporate Governance Unit, This could lead to a more dynamic management of responsible investment-related issues and better implementation practices. Whist managing Sanlam s assets, SIM would be guided by a clear client mandate with respect to responsible investment. Sanlam Group is therefore adopting a forward-thinking approach to get ready for the market. Its focus is on coming to terms with new concepts, such as sustainability, and analysing how future trends will affect its product development. Significantly, instead of diluting the concept, it is using the CRISA definition of sustainability to define its future position. The group s current focus is on how to establish a common language between ESG advocates and financial practitioners. If processed correctly, future product development could

18 17 Asset manager - Old Mutual Investment Group (SA): Building capacity and managing change Part of Old Mutual PLC, a leading international longterm savings company, Old Mutual Investment Group SA (OMIGSA) is a multi-boutique investment business with assets of over R522 billion under management. Through its independent investment boutiques, it offers clients an array of investment offerings, styles and asset classes. A PRI signatory, Old Mutual Investment Group s approach is to incorporate ESG factors into its investment and ownership decisions as a way to support the delivery of superior risk-adjusted returns for its clients. According to Jon Duncan, Old Mutual Investment Group s head of Sustainability Research and Engagement, Old Mutual Investment Group believes that forward anticipation has the potential to support more resilience and better long-term competitiveness. Our strategy is to implement responsible investment principles across all asset classes. Thus, responsible investment guidelines are applicable to all Old Mutual Investment Groupboutiques and the asset classes that they manage. Creating an internal network of influence Key to the emergence of this approach has been the internal process of building awareness and capacity. The Responsible Investment Committee (RIC) provided the platform for this process to take place. Chaired by the CEO of Old Mutual Investment Groupwith representation from the various boutiques and key line functions, the RIC enabled a company-wide debate around ESG issues, allowing the different business activities to come to terms with the concepts, to think through issues and to discuss positions. Duncan points out that while this process took time, it was essential in building consensus and enabling implementation. The RIC is formally mandated to coordinate the group approach to responsible investment and reports to the Executive Committee. The various boutiques are responsible for implementing the guidelines, as well as providing annual feedback on their progress towards implementation. They must identified what it means for their respective activity and investment philosophy, andreport on the possible implementation steps. Gathering information, developing business cases and building knowledge To support the process of building capacity and developing a better understanding of ESG issues, Old Mutual Investment Group is investing in research and feeding data to all levels of the organisation. Information is gathered from brokers and analysed in line with the South African context. ESG experts are invited to present to boutiques and fund managers. The resulting information and knowledge is then used to support a deeper understanding of the implications for forward projections and portfolio construction. The goal is for ESG considerations to fall within the routine analysis that a good manager performs in evaluating investments and structuring product offering. As the industry moves towards responsible investment, Old Mutual Investment Groupexpects more asset owners to stipulate in their mandates to asset managers that responsible investment principles are considered. They anticipate that the process will be accelerated when asset consultants become more active in helping asset owners to develop responsible investment policies. Therefore, Old Mutual Investment Group believes that building ESG factors into its own products and practices today will be a strategic asset enabling them to increase their competitiveness in the medium to long term. Change management Whilst many of the building blocks for responsible investment have been put in place within the organisation, Old Mutual Investment Group recognises that the process is still in its early phase. Time must be allowed to manage organisational change and for investment and engagement practices to evolve. The focus is on advisory work, business case development and knowledge building with no expectation yet of clear change in asset allocation. As Duncan explains, The current focus is to ensure a systematic incorporation of ESG factors across investment and ownership practices. Ensuring this foundation is in place is an important step in enabling the emergence of investment ideas and products that capture the sustainability tailwinds. Managing change also includes influencing, from within, Old Mutual in its capacity as an asset owner. Unless asset owners understand the long term sustainability risks and exert pressure on asset managers with regards to responsible investment practices, business as usual will be allowed to continue, recognises Duncan.