ESG can no longer be ignoredDate Released: Mon, 5 September 2011 15:48 +0200
By Jon Duncan, Environmental, Social and Governance Analyst at OMIGSA.
We recently became the second country next to the UK to develop our own set of responsible investing criteria for institutional investors.
The Code for Responsible Investing in South Africa (CRISA) was launched in Johannesburg on 19 July 2011. This voluntary code draws on the 2006 United Nations-backed Principles for Responsible Investment (UNPRI) and the King Report on Corporate Governance (King III).
CRISA is targeted at institutional investors (i.e. the asset owners) like pension funds and insurance companies who have the clout to influence both investment managers, via fund mandates, and the companies of which they are large shareholders. CRISA provides institutional investors, and their managers, with a framework for integrating environmental, social and governance (ESG) issues into investment and ownership decisions.
A core principle of the code is the consideration and pricing of material ESG risks and opportunities in investment decisions — this approach is different from ethical, targeted or socially responsible investing, which aims to align the investment universe with the investors’ desired ethical or social outcomes, for example, excluding companies that generate profits from gambling or perhaps focusing only on investments of a socially-transformative nature (e.g. affordable housing).
Further to the above, the CRISA principles urge asset owners to formulate approaches to incorporate ESG considerations into ownership processes, to support the uptake of the principles in the industry and to publically disclose their policies and processes to stakeholders (see the details of the five CRISA principles below).
Another important catalyst for asset owners to start incorporating ESG considerations into their investment decisions is the recent changes to Regulation 28 of the Pension Funds Act (effective 1 July 2011). The new regulations incorporate a set of investment principles which state that pension funds should “give appropriate consideration to any factor which may materially affect the sustainable long-term performance of the fund’s assets, including factors of an environmental, social and governance character”.
Building sustainable processes at OMIGSA
At OMIGSA, we believe sustainability is a mega trend that is reshaping the competitive landscape in every industry. Companies that are able to anticipate changes and innovate early, are reaping the benefits of improved operating efficiency, better risk management, new growth and a stronger license to operate.
As a result, we believe integrating ESG into our analysis provides important insight into the long-term value of companies. We are in the process of integrating these considerations into our investment research and analysis to better support our assessment of companies’ fair value. Additionally, we are actively incorporating ESG issues into our engagements with investee companies as well as into the manner in which we fulfil our proxy voting responsibilities.
Fortunately, the new code provides us with a tool to apply pressure on listed companies to produce integrated annual reports that provide detail on casino en ligne francais avec bonus the sustainability-related risks and opportunities.
We look at the quality of these reports as one of several tools for selecting and screening potential investments. Integrated reports provide us with insight regarding management’s level of understanding of the nature of its long-term sustainability risks and/or opportunities. If a company has no sustainability report, it immediately sends up a red flag for our analysts.
A critical issue is to assess the extent to which a company can clearly articulate and demonstrate a depth of understanding of ESG risks and opportunities. I’m interested in not only the scale of the risks/opportunities and how quantifiable they may be, but also in the quality of management’s approach to addressing them.
As an example, during our analysis process we may look for environmental impacts that are currently externalised, like carbon emissions, water pollution, waste management, etc., but which may have an economic price in the future.
Identifying these issues and putting a price on them allows us to incorporate aspects of ESG risks/opportunities into our fair value calls. By the same token, we also look at key ESG themes and trends in order to identify companies that are best positioned to act as potential service or solution providers, for example, companies offering sustainable agriculture systems, low cost housing, innovative nutrition solutions and renewable energy.
The investment landscape is changing — responsible investment is no longer just a buzz-word but rather a permanent feature that will play an important role in the creation of sustainable long-term value.
As a long-term investor, we welcome this shift in focus as we believe that companies with sound ESG performance will be better positioned to deliver sustainable returns to shareholders over time. Further to this we believe that a responsible investment approach not only makes sound business sense but that it’s also the right thing to do as a custodian of our collective long-term future.
The Code for Responsible Investing in South Africa (CRISA)
The Code for Responsible Investing in South Africa (CRISA) gives guidance on how the institutional investor should execute investment analysis and investment activities and exercise rights so as to promote sound governance. There are five key principles:
An institutional investor should incorporate sustainability considerations, including environmental, social and governance, into its investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries.
An institutional investor should demonstrate its acceptance of ownership responsibilities in its investment arrangements and investment activities.
Where appropriate, institutional investors should consider a collaborative approach to promote acceptance and implementation of the principles of CRISA and other codes and standards applicable to institutional investors.
An institutional investor should recognise the circumstances and relationships that hold a potential for conflicts of interest and should proactively manage these when they occur.
Institutional investors should be transparent about the content of their policies, how the policies are implemented and how CRISA is applied to enable stakeholders to make informed assessments.