Socially responsible investment (SRI) is becoming a dominant theme in retirement investment internationally, but particularly so in South Africa because of the need to foster black economic empowerment. The issue of SRI was the subject of a panel discussion at the recent Personal Finance/Old Mutual Actuaries & Consultants seminar on retirement fund governance.
The recent publication of the Financial Services Charter, which is primarily aimed at improving the lot of black South Africans, who were seriously disadvantaged by apartheid, has given socially responsible investment (SRI) a new prominence, Derrick Msibi, Old Mutual Asset Management's executive director responsible for alternative investments, says.
Msibi and Nicky Newton-King, the deputy chief executive of the JSE Securities Exchange, were on a panel which discussed SRI at the Personal Finance/Old Mutual Actuaries & Consultants seminar on retirement fund governance.
Msibi says the Financial Services Charter requires that retirement funds and their trustees give SRI proper consideration.
He says SRI can best be defined as "the allocation of financial resources after the consideration of both economic and social criteria, with the goals of maximising the potential financial and social returns to both the investor and the investee".
Msibi says this does not mean that money is invested indiscriminately and at high risk.
With SRI, the financial criteria remain dominant and the social criteria forms an "overlay". SRI also generally forms a small portion of a retirement fund's total portfolio.
Newton-King says there is an international trend towards companies and investors embracing the principles of sustainability, which includes SRI. This includes a commitment, in all areas of commercial activity, to sustainable practices that may enhance a company's reputation and reduce business risks.
The move towards sustainability is based on the recognition of the strong interrelationship between sustainable business practices and long-term shareholder value, Newton-King says.
In South Africa in particular, she says, social responsibility has come under the spotlight because companies have to address issues such as labour practices, affirmative action and health with more vigour than foreign companies.
"It is not an esoteric debate. Investors are seeking out companies with good SRI records."
Newton-King says the focus on sustainability also means there has to be a way for investors to measure listed companies' performance in the sphere of social responsibility.
To this end, she says the JSE is developing an index, with the assistance of an advisory panel, which aims to:
- Highlight companies on the FTSE/JSE All Share index that have good sustainability practices; and
- Provide the basis for socially responsible investment products.
The index will be based on a triple bottom line approach of:
- Environmental sustainability;
- Economic sustainability; and
- Social sustainability.
Newton-King says all three themes are embedded in corporate governance, which forms the foundation for an integrated approach towards sustainability. Corporate governance will therefore be measured separately in the proposed SRI Index.
She says companies should develop and continually improve social and stakeholder relationships and demonstrate business strategies aimed at promoting social development and upliftment, both internally and externally, while taking account of diversity, black economic empowerment and health and safety.
Msibi says social criteria could include job creation, labour relations, compliance with environmental policies and corporate governance matters.
He says in making socially responsible investments, retirement fund trustees need to apply certain over-arching principles. Trustees must understand:
- Their fiduciary duties with regard to the potential risk of including socially responsible assets in the fund. Trustees cannot put members' savings at risk.
- The nature of asset classes that qualify as SRIs. Msibi says investors generally don't understand the assets that qualify as SRIs.
- Acts of voluntary compulsion, such as the Financial Services Charter, do not exonerate trustees from applying their minds to the best approach to making SRIs.
Msibi says trustees must follow a code of best practice in making SRIs. Best practice includes:
- Defining the retirement fund's SRI policy so that it ties in with the fund's overall investment policy;
- Considering the financial merits of each SRI investment;
- Getting professional investment advice;
- Developing a selection procedure for SRI asset managers; and
- Watching a fund's overall exposure to SRIs. Msibi suggests that SRIs should make up less than 10 percent of the total value of your retirement fund's assets.
Msibi says SRI requires the same portfolio investment management skills as other assets.
Trustees need to be informed and an investment philosophy must be driven by the availability of credible SRI vehicles.