Pension funds have power to insist on responsible practices
September 15, 2009
 By Allan Greenblo
There have been so many false starts to "shareholder activism" in South Africa that the concept carries the oomph of a tattered cliché. Successive King codes and the aborted financial sector charter have contemplated behind-the-scenes "engagement" with companies by institutional investors. Whether purported or real, this sort of exchange is by its nature unseen, and it is rarely divulged so its effectiveness is not apparent.
Too often seen, at least in the estimation of the companies he irritates, is shareholder activist Theo Botha, but this lone ranger is not taken as seriously as he might deserve because he carries no clout.
Then, of course, there's the Public Investment Corporation (PIC); but the state-owned asset manager is inclined to shoot from the hip, without apparent policy consistency, except for voting routinely and ineffectually against directors' unfettered authority to issue new shares. And there's the odd fund manager, Element Investment Managers being a notable example, that courageously pushes in the public space; but the rebranded Fraters is a smallish outfit, usually campaigning in isolation.
Where, however, are the pension funds? Where are they in using their influence - as the largest category of beneficial investors in JSE-listed companies - to promote the environmental, social and governance (ESG) components of corporate activity, the much-heralded "sustainability" of companies both in their own operations and in their broader stakeholder responsibilities?
At long last, a pension fund has taken the lead. It happens to be the largest in the land. With over R700 billion of assets under management, more than 1 million contributing members, big toes in dozens of listed companies and the imprimatur of the government, which appoints half of its trustees, none dare ignore the Government Employees Pension Fund (GEPF).
The first neon-lit sign that it intended a more active stance was when it became a founding signatory of the UN Principles for Responsible Investment (PRI) in 2006. As the world's 21st largest fund, the GEPF voluntarily committed itself to promote integration of ESG components into the investment mainstream.
The second sign, in recent months, is the transfer of GEPF assets from the PIC to registration in its own name. The third, allied to it, is setting up the organisational capability for PRI implementation. From new offices in Pretoria, separate from the pensions administration, newish appointments Maemili Ramataboe as principal officer and John Oliphant as head of investments have spearheaded formulation of a responsible investment policy.
There are compelling reasons to anticipate that it won't be another false start. For one thing, the GEPF's sheer size and legitimacy are sufficient to make companies cringe. For another, its muscle is complemented by money. South African institutional fund managers will know what's good for them if they want to compete for slugs of the GEPF's external asset management.
Of course, there's also friendly persuasion of companies being monitored by PRI co-signatories, who have formed a network to encourage the principles' adoption. Yet, if this friendly option fails, as a former US president once noted in a different context: "Once you've got them by the balls, their hearts and minds quickly follow."
To get traction, the GEPF's focus will be on hearts and minds by stimulating PRI awareness among such a wide band of stakeholders as the government, organised labour and the business community. Its programme will be under way within weeks.
Other pension funds, earnest about their business, would do well to listen. Then sign on. It should be wholly consistent with the investment policy statement that funds are obliged to compile. For they are in a powerful position, as asset owners, to shove ESG in the right direction.
There's mountainous evidence that companies that adhere to ESG best practice are the best performers over the long term, and pension funds are about the long term. Socially responsible investment and corporate sustainability go hand in glove.
PRI is broader than socially responsible investment. It comprises guidelines to better align investors with the broader objectives of society, and isn't prescriptive. It seeks to integrate ESG standards into the investment mainstream.
"We must put ESG into a South African context and identify the issues that concern us," Oliphant urges. "For example, we must look at companies' policies that impact on the provision of clean water, on their approach to HIV/Aids, and on their implementation of employment equity."
Further, he notes, business and society co-exist. Why then, he asks, is there not more passion about responsible investment? "There's too much focus on financial instruments and too little on the real economy."
On this score, the network of PRI co-signatories will need to motivate regulatory reform (although they'd better be cautious about collusion in voting at shareholder meetings following the 2003 ruling of the Securities Regulation Panel on the Comparex matter).
Regulation 28, which defines prudential limits for pension funds' portfolios, allows a maximum of 2.5 percent to be invested in "other assets", including derivatives. After filling their boots with conventional assets like listed equities and bonds, little is left for venturing into the unconventional.
A difficulty is in the trouble it takes for pension funds to find appropriate "other assets" that will show them a risk-adjusted return. Once upon a time, an investment in fledgling MTN was considered high risk. Look at it now. Not too long ago, shopping malls in poorer townships and rural communities were considered non-starters. Now, some are showing secure returns higher than retail mega-complexes in the affluent suburbs.
Seek and they will find, might be the watchword. Oliphant, alive to possibilities for enhancing job creation, rolls off possibilities. Lending money for the purchase of taxis is one. Fitted with trackers, he suggests, the assets are easy to find and manage.
Pension funds should be looking for the dual impact of financial return and social impact. But the preponderance of trustees still seem, either through lethargy or fear of stepping outside their fiduciary duty, to stray little from their comfort zones. Well, check what the blue chips have been doing to their funds' performance. Investment in commodities, to name a popular category, isn't exactly risk free.
The succinct point is that "responsible investment", as opposed to any other investment, need not imply sub-optimal returns. In fact, the contrary often holds. The more institutional investors focus on ESG adherence, the more likely it becomes that companies, the larger and particularly the smaller, will find it easier to raise capital by complying with the standards.
It's also likely that, as the GEPF gets into full swing, pension funds will increasingly use the JSE's SRI index as a performance benchmark. To the extent that they do, more companies will strive to meet the index criteria. The impact then compounds.
To do well by doing good is the tantalising mantra of responsible investment. That is the carrot. In the background, where unions have been screaming for stronger fund focus on job creation and similar real priorities, there lurks the stick of prescribed assets that Cosatu threateningly waves.
Which is it to be?
Allan Greenblo is editorial director of Today's Trustee (www.totrust.co.za), a magazine primarily for trustees of retirement funds. This is the cover story in its latest edition.
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