Promoting responsible investment
There is a growing interest amongst investors in environmental, social and governance (ESG) issues, and a greater awareness of the role of the investment management community in promoting more sustainable and socially responsible development. While there is increasing evidence that taking an active and responsible approach to ESG issues can lead to outperformance for investors (particularly over the longer-term), SIM is not seeing a significant increase in the demand for responsible investing products from the majority of our clients. Although often constrained by our client mandate, we are trying to raise clients' awareness around the importance of responsible investing.
Sanlam seeks to encourage a shift in perceptions in the industry, supported by this increasing evidence of a link between good sustainability performance and enhanced investment returns. Our activities include engaging with the industry sector body – the Association for Savings & Investment South Africa (ASISA) – and collaborating more broadly with our business peers to conduct research and raise awareness among clients around longer-term opportunities associated with responsible investing. We believe that in the context of increasing social and environmental challenges (such as climate change) and growing uncertainty, the business case for responsible investing will become more visible.
To demonstrate our intentions of becoming a responsible investor, Sanlam is the first private asset owner in South Africa and Africa to publicly commit to the UN Principles of Responsible Investment (UN PRI), along with the Government Employees Pension Fund and the Eskom Pension Fund. SIM is already currently a signatory to the UN PRI, along with several other South African asset managers, and was a founding signatory to the Code of Responsible Investment South Africa (CRISA).
Providing for ESG issues within Sanlam Investment Management (SIM)
As a signatory to the UN PRI, SIM recognises the increasing importance of ESG issues as part of our fiduciary responsibility for our clients, with a particular focus on corporate governance. Guidelines for considering corporate governance elements (G) were developed five years ago and focused on proxy voting. SIM votes all proxies of companies where clients have investments, without abstaining. We decline approximately 10% of resolutions. Most negative proxy voting has been directed to limiting access to capital, but remuneration issues are rising with the financial crisis indicating that variable remuneration could incentivise unwarranted risk-taking.
Many social elements (S)– such as those relating to Black Economic Empowerment – are largely governed by the constitution and sector charters. We have recognised that more needs to be done to promote gender equality through our investment decisions; this will be a focus of our efforts. Environmental issues (E) have similarly not been a strong focus in our investments. Guidelines have been developed to address this area, and we are currently engaging with other organisations to rate companies on their environmental awareness and processes. A system is being developed to try and quantify environmental performance by costing externalities and bringing these costs into the valuation.
The guidelines to incorporate sustainability principles into our investment decisions were approved by the SIM Exco in 2011. While being a responsible investor is not currently seen as an issue where the business can derive material competitive advantage, we believe that the process of incorporating responsible investing principles into our investment decisions as necessary for the business to be sustainable in the long-run. In 2012 we will report on the outcomes of our efforts over the last five years and demonstrate how SIM is a responsible investor.
- Johan van der Merwe, CEO: Sanlam Investment
Our Socially Responsible Investment (SRI) funds
Sanlam is committed to developing a range of actively managed funds that bring about social and economic change through active engagement. The interest in SRI funds has not grown significantly over the last year. Although Sanlam continues to offer SRI funds, their contribution to the Group is not currently material in scale. Profitability remains at the forefront of the reasons for developing these products. We expect these products to play a more significant role in the longer term as demand increases.
SIM SRI Bond Fund
- This actively managed bond fund strives to make a significant contribution to social and economic upliftment through investments in fixed income instruments.
- The fund holds assets to the value of R48 million.
Africa Sustainability Fund
- Administered by Sustainable Capital, this fund provides long-term investors with equity exposure to African countries (excluding South Africa) within a responsible investment framework at relatively low cost. The fund is a long-only, 50-stock equity portfolio diversified across African geographies, currencies, sectors and companies. The fund forms part of the Group's international investment strategy where Sanlam International Investment Partners acquires direct shareholdings in international asset management businesses. The fund employs a Market-Value-Independent (MVI) strategy based on fundamental financial factors (revenue, operating cash flow, shareholder equity and cash dividends) and sustainability factors (company and country sustainability ratings). The country and company sustainability assessments have the net effect of aggressively up-weighting the stocks and currencies in the most sustainably managed companies and countries (and vice versa). Targeted company engagement on material sustainability risks and opportunities is initiated with selected companies where a strong business and investment case is evident.
- In addition to investing US$ 20 million in the fund, Sanlam also invested in the company, as we were impressed with their research and their business model. The company has been able to achieve good performance attributable to applying sustainability criteria.
Sanlam Multi Managers SRI Fund
- Sanlam Multi Managers identified an opportunity to include high-impact investments targeted at bringing real benefit to South Africa's poorer communities. A combination of high- and low-impact investments was identified as the best way to achieve a more liquid SRI fund.
Sanlam Private Investments' Shariah Fund
- The fund is an investment solution in compliance with Islamic Shariah guidelines. Based on Shariah principles, the fund has no dealings with organisations involved in alcohol, tobacco, gambling, armaments, pornography or pork products.
- The demand for the fund has been slower than expected. The sell-off of equities due largely to the US and Euro debt crises has had a negative impact on demand.
- The fund has basically performed in line with the competition and has been positive year to date and provides a more bespoke service offering.
- If National Treasury's intention to launch Sukuk (Shariah compliant bonds) is successful, the awareness around Shariah investments would increase having a positive impact on demand for this product.
Sanlam Personal Finance's Empowerment Fund
- Launched in October 2010, these retail funds allow previously disadvantaged individuals to invest in empowerment transactions
- The fund holds assets to the value of R660 000
Currently retail and big commercial clients are not demanding the integration of sustainability considerations within our investment decisions. The real pressure in this area is coming from government regulation (such as the recent amendments to Regulation 28 of the Pensions Fund Act), the Public Investment Corporation and from trade unions interested in promoting developmental capitalism. They are focusing on what we are doing to promote education, employment creation and the development of enabling infrastructure. We continue to engage with these stakeholders to develop appropriate products and approaches to meet their needs and the needs of the Group.
- Kay Lala-Sides, Strategic Project Manager: Sanlam Investment
Increasingly using proxy votes to influence remuneration
One of the most important rights of shareholders is the right to vote. We as institutional investors should ensure that our voting is consistent with the best economic interests of the company and shareholders over the long term. We consider the right to vote to be one of our most effective tools for promoting active and sound corporate governance practices.
As agents acting on behalf of our clients, we have a responsibility and fiduciary duty to fulfil client mandates, which includes the responsibility of voting on corporate issues that may affect their expectations as shareholders. This is articulated in principles 2 and 5 of CRISA, of which we became a signatory in 2011. The Financial Sector Charter, and the King Report on Corporate Governance also encourage this.
In 2006, we formed a committee, the Corporate Governance unit (CGU), to drive implementation of our governance responsibilities on behalf of clients. The first task of the CGU was to draw up a framework for voting proxies (as envisaged in principle 1 of CRISA). We vote all proxies of companies in which clients are invested, without abstaining (as addressed in principle 2 of CRISA).
Historically proxy voting has been directed to limiting access to capital. The financial crisis showed that variable remuneration could incentivise unwarranted risk-taking, and so now we also vote on company remuneration policy. There is a growing sentiment that there exists a disjunction between pay and performance and also between top and bottom earners in many companies. This has led to an increase in proxy voting related to remuneration. This can be seen in the figure below which shows reasons for declining resolutions over time. In the third quarter of 2011, for the first time, remuneration overtook capital issuance as a reason for declining resolutions.
- Richard Anderson, Senior Portfolio Manager: Sanlam Investment
Reasons for declining resolutions
Transparency is a requirement of principle 5 of CRISA. We disclose reasons for declining resolutions to clients as part of their written quarterly reporting. We also store full voting records, and disclose them to clients on request. Before declining resolutions, we contact a Board representative of the company concerned, preferably by email, to record and explain our logic, and where possible, to discuss the issue further. We do not disclose our proxy voting activity to the wider public.
Case study
Sanlam hosts the Information Management Network's second annual African Cup of Investment
Management conference
SI has proudly hosted the Information Management Network (IMN)'s Annual African Cup of Investment Management conference for the second year. IMN is a global investment forum that runs investment management conferences, designed to educate investors so they many not only survive but also thrive in investment management.
The second Annual African Cup of Investment Management conference brought together the leading players in the African institutional and retail investment communities. The objective this year was to generate robust debate on the burning issues within the investment space and to think tank solutions and the way forward. Every effort was made to pull together top quality panels and speakers. The message was that Chinese investment in Africa will continue and that African growth is underpinned by Chinese demand and Chinese growth is linked to African commodities.
Case study
Sanlam hosts the Responsible Investment Roundtable COP-17 Side Event
Sanlam, together with the NBI, hosted the Responsible Investment Roundtable COP17 Side Event in Durban in December. Attended by responsible investment thought leaders, practitioners and investors, the event was highly successful at building on the dialogue around the role of investors in promoting sustainable investment, in companies and in climate change investment. The RI Roundtable was delivered in an inclusive way that drew comment from a range of stakeholders, and in the format of the event using an open forum with the audience. The seminar assessed progress made by the institutional investment industry, at both international and local level, in incorporating ESG issues into investment decision making and ownership practices and to address challenges in implementing these responsible investment codes and principles.
The RI Roundtable drew the following new insights:
- Climate finance is an under-represented theme and/or category with institutional investment managers, with some investment exposure coming indirectly through underlying investee companies.
- Pressure is growing globally for all countries and sectors, including investment and finance industries, to start limiting emissions. With the world's population reaching seven billion, institutional investors understand that competing demands for key resources such as food, water, land and energy will fuel tensions and commodities prices.
- While investors were active in different collaborative investment initiatives, the actual impact of over-arching climate positive initiatives is mostly by encouraging issue concentration and network building, while the investment results were mixed.
- Globally at least US$11 trillion is invested using ESG factors, and some analysts predict that this could top US$25 trillion by 2015. SinCo estimates at least US$ 450 bn is in emerging markets. Locally, a top 10 global market is the US$125 billion in Sub-Saharan Africa 4 invested with ESG policies, dominated by GEPF and its asset manager, the Public Investment Corporation (PIC), managing 92% of its US$131 bn. A fraction – US$5,5bn – is invested with ESG-branding. Some 80% of institutional and retail investment is still to fully appreciate the sustainability meta-theme.
- Climate finance risks include Litigation Risk, from investors challenging failure of investment firm to manage against mandates and/or fully consider material risks; and Reputation Risks, including where a company has identified and addressed current and future legislative and regulatory risks of the markets where it operates but has been weak in communicating to investors.
- Carbon is one of several ESG factors that will become increasingly material to investors. Sustainable investment can help manage carbon risk by using ESG information to measure and adjust for the negative (and positive) externalities generated by portfolio investee companies, projects and investment vehicles.
- The need to support a climate-positive investment approach within the context of a developing country context, which underpinned much of the COP17 debates around accountability, limits and the financial and economic costs to be borne in mitigating and adapting to climate change. The transition to a low-carbon economy will create investment winners and losers.
- Gaps exist with the majority of pension/retirement funds still to take action, some efforts by asset managers are mostly using a "check-box" methodology, the communication around responsible investment is weak and leads to misunderstanding, and challenges exist around improving information, expertise and the practice of investment management globally, in emerging markets, in Africa and SA.
- Investment practitioners will need new tools and information to include ESG factors in their decisions as part of a more advanced investment approach, which goes beyond climate change finance 5 . Long-term investors need to get smarter for sustainable performance in a more inclusive, climate-resilient economy marked by greater volatility and globalization. Or the portfolio risks will play out, hurting investment performance putting their clients' savings at risk.
- Many investors do consider ESG-related risks in their analysis when they include an assessment of regulations, litigation, or political risks, but many investors are less comfortable mapping scenarios of probability for the risks.
Financing empowerment and investing in infrastructure
Sanlam sees itself as having an important role to play in infrastructure financing in South Africa in particular. Government's need to access private sector capital will create more opportunities to establish Private Public Partnerships (PPPs). Sanlam is positioned for increasing engagement with government to establish PPPs in the future.
The draft Financial Sector Charter (FSC) includes provision of finance for, or investment in, transformational infrastructure in underdeveloped areas, agricultural development of emerging black farmers, low-income housing and black SMEs, and BBBEE financing. For all BBBEE and infrastructure financing, our investment mandate requires that the target risk and return considerations and investment merits must supersede all other investment considerations when determining investment viability. With regard to BBBEE, all investee companies must demonstrate that black staff will benefit from Sanlam RSA's investment.
The liquidity squeeze following the financial crisis has limited the amount of capital available, thereby affecting our ability to fund BBBEE and infrastructure investments. A positive result is that fewer BEE transactions have unravelled: a symptom that we would have expected to see due to the recent market volatility.
accessed 8 December 2011....(back to text)