What happens when the secret environmental injustices of corporate citizens become public knowledge - when carbon emissions, acid mine drainage, oil spills and land degradation make the news headlines? How do regulators react to high-profile corporate failures caused by directors’ lack of integrity and accountability? After the creation of triple-bottom line reporting, King III, sustainability reporting and multiple environmental, social and governance (ESG) assessments, will regulators continue to respond with more voluntary reporting requirements?
Recent scandals, both local and international – i.e. the likes of Tongaat Hulett, Steinhoff and Follie Follie, the Greek-based international company, have created increased interest in sustainability credentials, as they highlighted that a focus on financial performance alone has monetary and non-monetary consequences. Investors and the public at large have been unnerved as the smokescreen of a responsible organisation disappears to expose the corrupt and insincere representations for what they are. As a result, an increasing number of stakeholders, from employees to customers, are demanding that organisations meet their part of the implicit social contract in a substantive way. In other words, organisations need to start walking the walk.
South Africa has not been left behind the global trends. In 2012, the JSE became a founding signatory of the Sustainable Stock Exchanges Initiatives (SSEI) together with four other stock exchanges at the UN Global Compact’s Corporate Sustainability Forum held in Rio de Janeiro, Brazil. As part of this, the JSE pledged to promote sustainable finance in the South African market and committed to the vision of creating a world where capital markets align with public policy goals on sustainable development.
Since that decision seven years ago, what has this meant for the capital markets? Instead of the co-ordinated response we might have expected from an initiative started by the UN, we have seen a plethora of standards and indicators being introduced. These include international standards, such as the Global Reporting Initiative which lists 36 modular standards to address energy and water use and labour practices. The UK has gone further by incorporating ESG requirements into their pension laws. These changes, published in June 2019, now require trustees to set policy on how they consider factors, other than those of a financial nature, that could have a material impact on their investments. Trustees must implement the ESG requirements by 1 October 2020. In the US, although there are no formal policies in place, sustainable investment strategies have been a driver of increased ESG consciousness amongst corporates. The total assets under management using ESG-related strategies in the US grew from $8,7 trillion at the start of 2016 to $12,0 trillion by the end of the first quarter of 20181.
Against this background, South Africa has been a relative laggard. Since the momentous decision in 2012, changes in local regulations have been limited to small changes in the King Code and the adoption of the “2030 Transform our World” agenda in 2015. In the same year, we also joined the global inter-agency programme, “Partnership for Action on the Green Economy (PAGE),” sponsored by the UN. What is certain, considering the global trend, is that more will be required on the local front.
Although we might bemoan the lack of substantive change, one positive offshoot from the increased focus on ESG reporting, has been detailed information on these matters for all stakeholders. Asset managers in particular, now have unquestioned access to information that would previously have only been available on request and sometimes denied. This ranges from more comprehensive information on remuneration to details on information that corporates previously did not consider to be important enough to communicate, such as water consumption, carbon emissions and mining fatalities.
As asset managers, we have a responsibility to use all of this information in the interest of not only our clients, but also the society in which we all live. Importantly, we need to filter through reams of sometimes irrelevant and self-promoting information to find the corporates that truly incorporate ESG into their corporate character. At the same time, we have to ensure that we do not fall into a similar trap when we evaluate potential investments. In other words, investing in a sustainable manner should be more than a box-ticking exercise.
Asset managers have responded in a number of different ways. Some have developed “negative screening,” which is the exclusion of certain industries or companies on the basis of ESG factors from the investment universe. Others use the services of specialist firms to rank their investments based on ESG scores to achieve a targeted score for their portfolios. Another approach has been to analyse the ESG factors in detail and take companies to task where they fall short.
What is 36ONE’s approach?
Responsible investing is a consistent theme that underlies 36ONE’s investment decisions. Due to the limited investment universe in South Africa, we follow a two-pronged approach in respect of ESG factors:
Corporate governance
We place great emphasis on high standards of corporate governance for the companies in which we invest. Where there is a determinable weakness in respect of the governance for a specific company, it often has a negative outcome on our investment decisions (i.e. we avoid the potential investment altogether). The reason for our emphasis in this regard, is that weak corporate governance is often synonymous with increased social and environment risk.
Social and environment issues
In respect of social and environmental issues, we engage with management both publicly and privately where we believe our involvement can drive an improvement at the respective companies. Although there might be areas of overlap (for example, the failure of an organisation to address environmental issues could result in wider social considerations), to address the risks effectively we look at the different components of ESG separately rather than lumping the risks together. For all of the ESG matters, we support shareholder resolutions aimed at improving standards of corporate responsibility. We engage with management where we believe the current standards are insufficient and also support shareholder resolutions designed to achieve this. In addition, if we believe a shareholder resolution is not in the best interests of stakeholders, we vote against it.
1 US Sustainable, Responsible and Impact Investing Trends Report, 2018.