The UN Principles for Responsible Investment (PRI) initiative is a powerful force on the global asset management scene, boasting signatories managing a combined US$34trillion in assets.
The scale of the initiative, achieved in only seven years, emphasises the importance that environmental, social and governance (ESG) issues are assuming for asset managers and corporates. "The initiative was conceived as a back-of-an-envelope idea," says PRI executive director James Gifford, the man credited with its establishment.
In his efforts to get the initiative off the ground Gifford says he received the full backing of the UN secretary-general Kofi Annan. "In early 2005 he wrote to the world's biggest pension funds. We wanted to have the top of the investment chain engaged from the start," he says.
"A set of principles was drawn up by Mercer, academics, asset managers and NGOs," says Gifford. By April 2006 the PRI initiative was ready for launch. "We began with 50 signatories in April 2006. There are now 1200 signatories managing 20% of the global capital market's assets," says Gifford.
At the heart of PRI, says Gifford, is encouraging pension funds and asset managers to incorporate ESG issues into their investment processes and engagement with companies. "Investors can have a really big, positive impact on corporate behaviour," he says.
Adhering to sound ESG standards is not only the right thing to do morally but also makes good business sense. "Companies respecting their broader business responsibilities tend to be more resilient over time than those that do not," says Malcolm Gray, head of Investec Asset Management's socially responsible investment unit.
When it comes to a formal approach to ESG issues, SA is ahead of many developed countries and virtually all developing countries, says Gray. Formalisation in SA is on three fronts: corporates, pension funds and asset management. On the corporate front, playing a key role, says Gray, is the King 2 corporate governance code introduced in 2002 and strengthened in 2010 by the King 3 code. With the King codes has come integrated reporting by companies incorporating ESG issues. It is an area in which SA leads the world, says Gray.
Guidelines for asset managers were laid down in 2011 when SA became the second country after the UK to adopt a code for responsible investing for institutional investors. From a pension fund perspective, regulation 28 of the Pension Funds Act requires fund trustees to take ESG issues into account in their investment processes.
SA has about 40 PRI signatories, including the SA Government Employees Pension Fund (GEPF), a founder signatory. Many asset managers have had little choice but to sign. The R1trillion-asset GEPF stipulates that any asset manager managing funds on its behalf must be a PRI signatory.
"But signing is one thing. Implementing is another," says Gray. "A lot of asset managers are nowhere near to tangibly reflecting results of their commitments."Greg Barker, a director of pan-African asset management firm Sustainable Capital, a Sanlam affiliate, agrees. "It requires changing embedded mind-sets," says Barker. "It is like turning a giant oil tanker around."
In short supply are investment specialists with the requisite skills in ESG issues. "It is the biggest stumbling block in sustainable investment globally," says Barker. "You have to have two sets of skills in the same person: good asset management knowhow and sustainability know how."
"In SA there are probably enough investment specialists to fill only a small room," says Gray. "I believe we are in a five- to 10-year evolution process in responsible investing." For corporates the time horizon does not appear as generous. Corporates can no longer afford to cut corners on their ESG responsibilities, says Gifford. "Look what happened to Lonmin when things came unstuck," he says, referring to last year's devastating labour unrest on its Marikana mine.
The PRI also has in place its engagement clearing house, a platform that enables signatories to join forces when engaging with companies. About 400 PRI signatories have been involved in at least one of 1400 collaborative initiatives since the platform was launched at the end of 2006.
Among joint engagements highlighted by the engagement clearing house was one by 10 SA investors. Their engagement led to Aspen, Naspers, Sasol, Shoprite, Steinhoff and Tiger Brands introducing improvements in their sustainability reporting and policies.
Transparency is also catching up on corporates that neglect their ESG responsibilities. "Rising use of smartphones means that millions of people now carry a camera with them," says Gifford. "Incriminating photos appear instantly on social media networks like Facebook and Twitter." Swiss firm RepRisk is taking the hunt for ESG laggards to a new level, says Gifford. In addition to in-depth research into corporate ESG behaviour, RepRisk monitors thousands of formal and social media sources for any signs of things going wrong.
"Clients are notified immediately of problems," says Gifford. "It can have a serious impact on a company's share price." On future progress of the PRI initiative, Gifford says: "We have a long way to go, but I am really optimistic. We have taken ESG issues into the mainstream investment market and are making them increasingly relevant to companies at board level." Awareness of ESG issues in SA is set for a boost in October when SA hosts the annual PRI conference to be held in Cape Town. "The conference is a significant step," says Gray.