Q: KEVIN JAMES: The United Nations Principles for Sustainable Investment has a large number of signatories, some of them the biggest companies in the world, with just short of fifty companies in South Africa. The recommendation to these companies is that they follow either one or all of the six approaches when it comes to playing an advocacy role with corporates or when it comes to taking decisions or investment decisions. Of the South African companies, how many of them are following these approaches in an authentic way, and if so, which are the ones that are most popular?
A: ADRIAN BERTRAND: Very briefly, the Principles for Responsible Investment is an international collaboration of investors, regulators, but also importantly, two UN agencies, the United Nations Global Compact and the United Nations Environment Programme Finance Initiative. So we’ve got strong backing from the UN General Assembly, but we also have strong backing from the global investing community. So when we talk about responsible investment, we are not talking about a niche on the side of mainstream investment. This is now how investment is happening, mainstream across the world.
PRI has close to 1500 signatories internationally, from all markets, and collectively these signatories to these six principles represent in excess of $35 trillion, which we think is about half of all investible savings in the world.
PRI has set itself a very humble goal, and that is to make global financial markets more sustainable over the long-term; quite easily done. How we are going to do that is actually working with mainstream fund managers, mainstream pension funds, your money, your retirement savings and what we are trying to assist long-term investors to do is to consider these environmental, social and governance issues, often mistakenly referred to as ‘non-financial’ issues. Any pension fund that’s been invested in Africa Bank, for example, could be seen as a social issue in terms of lending credit to people that shouldn’t qualify for it. That quickly becomes very material financial issue, if you were invested in African Bank when it was put into curatorship.
There is a wide variety in terms of the spectrum of how well companies are doing. You’ve got the JSE SRI index, you’ve got the Carbon Disclosure Project, etc. where you have definite identified leaders, and there are laggards. Although we’ve been talking about listed companies, which are your big companies, but climate change is a global risk. We don’t just need the large listed companies addressing climate change, we need small family owned businesses, and we need unlisted large private equity held companies to also be getting active.
Q: KEVIN JAMES: David, I’m going to jump to you on the same topic because Element Investment Management were one of the first signatories to the UNPRI, I think in 2006. Element was also instrumental in bringing, with John Hanks from Incite Sustainability, the Carbon Disclosure Project to South Africa which has brought, certainly in the top 100 environment, a lot of visibility into the opportunities and risks surrounding climate change, and we are one of the biggest signatories in the world after the United Kingdom in terms of the CDP, we take it very seriously. We have to – we are in a carbon-intensive economy.
Getting back to this question, as a signatory to the UN PRI, what are those forty eight or so companies that have signed up to the principles? I’ve done a bit of research in terms of the companies that you invest in, how do you apply those principles to your investment decisions? I know you have a corporate governance tool that you developed when you were at university, but on the sustainability environmental and social side, what tools do you use? Who in your organisation assesses and how do you influence the investment fund managers when it comes to taking decisions? I’ve looked at the companies you invest in. There are certain companies that I agree with, but there are certain companies that could be a little bit questionable when it comes to their sustainability or ESG credentials.
A: DAVID COULDRIDGE: In terms of principles for responsible investment, it’s about inclusivity. It’s not about screening or exclusion, and it’s using active ownership (or as the UK calls it, stewardship) to work with the leadership. You can’t do anything unless the leadership is part of the process.
In terms of integrated reporting, one of the problems is that it’s left to us as accountants and the sustainability people to do it. But if the leadership is not there, and is not part of it, it’s not going to work. So what do we do? We can’t take the SRI index, which I hope one day will be renamed to the Responsible Investment Index, because it’s not just about social issues. If you don’t get the leadership or governance issues right, you’re not going to get the social issues right.
From an investment philosophy point of view, I believe strongly in the inclusivity issue and not the exclusion, and it’s about building awareness at a leadership level so that change comes about. So in terms of what our analysts do, in terms of investing client money into an uncertain future, is try to understand the governance, the leadership of the organisation so that we get a better understanding about how confident we are going to be in terms of our earnings projection into the future. Poor governance means uncertainty about those earnings. It’s just a no brainer. Companies that focus on and integrate the material sustainability issues into their business model, into their processes, strategy, etc., materially out-perform other companies, including those which are fiddling around with the light bulbs.
The problem is, the market has not been valuing the value style, so the momentum style is out-performing the value style. There is also [the problem of] how investment managers are remunerated. They are paid a small amount based on assets under management but where most of their revenue can come from is out-performance of the benchmark. It’s probably the single greatest issue that results in investment managers possibly ignoring [responsible investment].