Investors invest to make a profit. They want the best return for their buck in the shortest possible time span. Social responsibility does not usually come into play when people are deciding where to place their money.
Of course, when they think aboutsocial responsibility they immediately equate it with having to sacrifice returns.
Socially responsible investment (SRI) has not really taken off in South Africa as it has in other parts of the world.
With our record of black economic empowerment it is surprising that we lag behind in putting our money where it would best uplift communities and society at large.
Armien Tyer, managing director of Sanlam Investment, says many trustees acting as fiduciaries don’t like SRI because they believe this investment vehicle won’t maximise return.
But the experience of SRI in Europe and the United States shows that this is not a valid argument.
“The Domini Index, an SRI index that has been around for more than 10 years in the US, shows that over time pretty decent returns can be made relative to the S&P for example,” says Tyer.
The Domini offers the oldest SRI index fund, the Domini Social Equity Fund. The fund tracks the Domini 400 Social Index (DSI), which was created in 1990. The DSI 400 is made up of about half of the Standard & Poor’s (S&P) 500 companies that have passed its social and environmental screens.
The average annual returns of the US Dominin SRI index was 20,83% from 1990 to 2000 — higher than the 18,7% on the S&P 500 index.
And in Japan the first SRI index, MSI-SRI, posted more than 400% premiums over the Topix index in returns from 1993 to 2006.
These experiences show it is a fallacy that you can’t earn a respectable return and make a social impact at the same time.
The little SRI development that has taken place in South Africa has been around infrastructure, Sharia (Islamic law) and black economic empowerment.
“The national social security system is likely to increase it, but unless it becomes mandatory the amounts invested by pension funds are likely to remain small. There are very few options for consumers, although this will increase,” says Tyer.
Locally, Metropolitan’s flagship R1,4-billion African Wealth Creator — which invests in a combination of unlisted equity, listed equity, property, bonds and cash — has shown returns of about 20% for the 12 months to February, yielding a return of 22% on a three-year basis.
Portfolio manager Godfrey Albertyn says in the year to end-December the company’s SRI funds were ranked number one for balanced funds in the Alexander Forbes Âtargeted development investments (TDI) survey.
The company’s SRI investments are strongly focused on infrastructure.
Albertyn says he is encouraged by the outlook for infrastructure: “We have a number of existing, longer-standing projects, which we have invested in both directly and Âindirectly, for example the N3 toll road from Johannesburg to Durban, running through the KwaZulu-Natal Midlands.”
Investec Asset Management portfolio manager Malcolm Gray says disillusionment following the initial enthusiasm around black economic empowerment is the reason SRIs have failed to excite trustees of retirement funds in the way that private equity or hedge funds have.
The first wave of black economic empowerment saw the development of several special-purpose vehicles designed to house assets for a new generation of black owners.
“Unfortunately, not only did the timing of many of these deals coincide with the bear market from 1998 to 2003, but the funding structures were also naive in construction and resulted in very little real economic value being created for the shareholders, fund participants and beneficiaries. In fact, in many cases, they led to significant write-offs,” says Gray.
This experience appears to be clouding the real opportunity that SRIs provide to trustees who want to see their investments create real economic and social value.
Responsible investment can also be seen as an investment style or strategy that seeks to deliver competitive returns.
The integration of social, environmental and governance considerations into the investment decision-making process are proven and valid factors, which can and have delivered long-term returns.
The reputation of many businesses could be ruined by poor social or environmental practices.
Consider the resultant losses of revenue because of the loss of product integrity or a collective consumer boycott on a particular brand.
Or consider the impact poor environmental practices may have on potential increased liabilities and the resultant reduction in the quality of the balance sheet.
But the other side of this coin is the positive impact that good social or environmental practices can have on creating premium value for a specific brand (such as the Body Shop) or the opportunities that research and development may deliver in identifying new market segments or growth areas, such as energy-saving light bulbs, hybrid cars, desalination technology and so on.
‘In South Africa, the challenge for investment managers interested in SRIs is to reintroduce investors to the real benefits, both by educating trustees on their approach and its validity and by delivering sound investment performance,” says Gray.
SRI is also often confused with corporate social investment, which has a much higher profile because all corporate social spending fulfils various charter goals imposed by government.
The head of Cadiz’s social responsibility investment division, Heather ÂJackson, says a mere half a percent of all retirement assets are invested in SRI in South Africa.
In the United States, Mercer Consulting estimates that almost 16% of retirement assets were invested in SRIs last year.
How does one explain the low take-up of responsible investing in South Africa?
South Africa has a well-developed financial sector and a need for social spending. The public sector has committed to rolling out an infrastructure investment programme totalling R600-billion over the next five years.
“So the potential to make money from investing responsibly must exist.
“In fact, it could even be argued that retirement funds that do not participate in SRI are potentially excluding themselves from growth nodes in the South African economy,” argues Jackson.
A study by Unisa’s Centre for Corporate Citizenship indicates that most of the reasons for the low interest in SRI from the pension fund industry revolve around issues of understanding definitions of responsible investing and the need to believe that responsible investing will enhance financial returns.
Jackson says the evidence in South Africa across fixed interest, property and equity SRI funds indicates that, on balance, investing in SRI products does not prejudice performance relative to the mainstream peer group.
So what needs to change?
Most of the momentum behind responsible investing has been driven by individual activism.
It has been the result of the underlying pension fund contributors realising that they can collectively influence how their pension funds are being invested.
And studies show that the outcome of incorporating environmental, social and corporate governance (ESG) factors into investment decision-making and investment performance is a positive one.
“For example, corporates that integrate sound environmental awareness practices into their functional activities tend to display strong and advanced management techniques that ultimately translate into relatively strong share-price performance,” says Jackson. South Africa might be lagging behind because the majority of people were disempowered from investment knowledge for so long.
But the responsibility to subscribe to transformation targets is also largely overt.
Jackson suggests that a top-down intervention could spur local investment in SRIs.
“Top-down intervention would require that retirement funds must report on their progress in integrating ESG factors into their overall investment strategies. Without being prescriptive, this requirement was found to be a significant spur for development in the UK and Australian markets, in particular.”
Gray says responsible investment presents a number of exciting opportunities, including:
• Positively screened equity investments (such as those based on an index such as the JSE SRI Index), which seek to predetermine a universe of investments based on good social, environmental and governance practices in their day-to-day activities. This approach may well provide insights into value creation or highlight unseen risks, providing the catalysts for the creation of long-term value-creating investments.
• Infrastructure investment, which, in addition to tangible social benefits, also tends to have stable return characteristics with low correlation to other assets. They present an exciting new growth area within the broader RI space and are particularly relevant in South Africa, as we seek to ramp up our infrastructure to cope with growth and, more importantly, provide key services.
• Unlisted private equity, which is increasing in popularity. Investment can offer exposure to unique businesses that benefit from the opportunities arising as a result of social and environmental change, such as fuel-cell technology, waste management and air pollution management, or are well positioned to benefit from unique empowerment opportunities in South Africa such as housing and social infrastructure.
“Responsible investment presents an exciting and increasingly relevant approach to investment management. Wouldn’t you want exposure to an investment that not only has the ability to deliver attractive long-term returns, but also has a positive impact on the broader social fabric of our country?”