Ethical investing: It pays to be nice


A little over two decades since the listing of South Africa’s maiden responsible investment (RI) fund, ethical, social, environmental and socioeconomic considerations appear to be playing an escalating role in the decision-making process of moneyed institutional and individual investors. 

Resisting customary advice that calls for the separation of sentiment and investment judgments, investors are opting to support funds that demonstrate a certain corporate conscience – and it appears this approach may increasingly be making business sense. 

According to Suzette Viviers, a professor in the department of business management at Stellenbosch University, who has undertaken extensive research on the subject, on balance, the risk-adjusted returns from RI funds perform on par with conventional funds; even outperforming them in certain cases.

“It makes intuitive sense that companies which proactively manage environmental, social and governance (ESG) risks are going to avoid fines, carbon taxes, have more motivated employees and more loyal clients – who may even be prepared to pay premiums for greener products and services. 

“If they place pressure on suppliers across the supply chain to follow their lead, it can only lead to improved returns. This might also explain the growing interest in ESG indexing,” she comments. 

RI, on the one hand, allows investors to invest according to the tenets of their beliefs or ethics, employing a self-referential framework and taking a stand on what they do not want to own. This form of negative screening is described as “ethical investing”

As such, investors refrain from investing in companies that produce “undesirable” products or services, such as alcohol, tobacco, gambling and pornography, or companies operating in “undesirable” industries, such as nuclear energy and defence, and in “undesirable” countries. 

In the South African context, about a fifth of funds that were created between 1992 and 2012 can be classified as ethical funds. 

Investors that apply purely RI strategies, on the other hand, are typically motivated by a desire to improve ethics and corporate social responsibility and ensure fair labour practices within the companies in which they invest

“Most RI fund managers focus on social issues. Of late I have also noticed an increasing focus on environmental issues, particularly those centring on climate change mitigation. I think the focus on social infrastructure development should remain, but more attention should be given to environmental considerations, especially water. As far as I’m aware, very little attention is being given to this critically important resource in South Africa,” she advances.

Responsible investment principles

Leading the charge for RI, the United Nations-backed Principles for Responsible Investing (PRI), launched in 2006, lays out a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice.

The PRI finds local application through the Code for Responsible Investing in South Africa, or CRISA, which provides guidance on how the institutional investor should execute investment analysis and exercise rights so as to promote sound governance.

CRISA applies to institutional investors such as pension funds and insurance companies as the owners of assets, as well as their service providers, including asset managers and consultants. 

“The code aims to put in place the checks and balances needed to make this voluntary framework successful. As long-term investors with fiduciary duties, we simply cannot afford to ignore the importance of integrating sustainability issues, including ESG, into long-term investment strategies. As institutional investors we have the ability to influence and encourage the companies in which we invest to apply sound governance principles and to care for the environment in which they operate,” comments CRISA chairperson John Oliphant.

Paradigm shift

The success of active, responsible investment, he tells finweek, requires a paradigm shift in the manner in which shareholders perceive their power of influence over the investee companies.

Oliphant likens the responsibilities of an institutional investor in an investee company to that of a homeowner.

“As an institutional investor, you need to accept that you own a portion of a company. If you buy a house, you need to do maintenance, be cordial with your neighbours and pay municipal bills – you have certain responsibilities,” he asserts.

“The same is true for institutional investors. Responsible investing, by its nature, requires institutional investors to demonstrate an acceptance of ownership responsibility in the company in which they hold shares.”

He further calls for the cognition of changing ownership structures in the South African economy that have swung majority ownership of JSE-listed companies into the hands of the working class.

“There is a new wave of ownership. Many years ago, companies were owned by wealthy families, such as the Oppenheimers. These companies are now essentially owned by the workers who are members of pension funds, but the existing system of governance has failed to recognise this.

“We need a paradigm shift in shareholder activities that awakens the sleeping giants [the workers], who are the real owners of the companies. The debate around inequality can also be changed if shareholders realise that they have a say,” Oliphant argues.

This requires enhanced mechanisms through which provident and pension fund members can collectively ensure that trustees remain accountable and that the members’ will is exercised.

Shareholder activism

Responsible investment efforts in SA have also been known to take the form of robust shareholder activism, in which an investor leverages public or private mechanisms to raise their concerns around the governance of the investee company to initiate change. 

Known to evoke the discontent of many a listed firm, shareholder activists commonly call attention to perceived poor governance or fund management in a public forum, publicly calling often visibly uncomfortable CEOs and chief financial officers to account for questionable decision-making. 

Public mechanisms include the filing of shareholder resolutions, asking questions at AGMs, voting against resolutions and stimulating public debate on issues of concern. 

This form of shareholder influence is particularly noisy in a country such as SA, where there remains a strong preference for private negotiations between investors and investee companies. 

Private efforts to initiate changes to corporate policies and practices include writing letters, engaging in private negotiations, initiating legal proceedings, and usually, as a last resort, divesting, says Viviers. 

Having extensively researched local shareholder activism, Viviers explains that an individual shareholder can have notable influence on the investee company if the activist has a clear goal, researches the company thoroughly prior to the AGM, holds normative power and exhibits individual, pragmatic and societal legitimacy. 

“He or she should also be assertive and be willing to apply his or her own resources. While I can understand that investors want to preserve relationships with investee companies, the problem with private activism is that it is too opaque. 

“Other shareholders and lenders who can’t access management due to their size are left totally in the dark as to which issues are raised, how management responds to these issues, whether management undertakes to transform and whether they are held accountable for making good on their promises,” she asserts.

The 'Botha sting'

Despite claims that shareholder activism can assist in the acceleration of local socioeconomic transformation, Viviers believes the South African market may not yet be prepared for the public activism approach. 

Prominent South African activist shareholder Theo Botha first pursued this tack in 2002 after discovering that life insurance firm The Sage Group, in which he had invested, was posting considerable losses in the US that it refused to disclose to its South African shareholders. 

After Botha reported this to the JSE and disseminated the information to the press, the company’s share price took a knock and it was subsequently delisted from the local bourse before being acquired by Momentum in 2004. 

Botha has since taken on several listed behemoths and has often found himself an unwelcome guest at many an AGM. 

According to a study by Viviers, a quarter of all issues raised by Botha centred on remuneration, particularly around the lack of clarity on remuneration policy; a justification of the size and composition of remuneration packages in light of poor financial performance; a failure to link pay to performance; and the faulty reporting of certain payments. 

“His efforts in highlighting unsatisfactory accounting, financial and ESG practices have earned him a reputation as a corporate watchdog – a ‘terrier’ to be more specific. The so-called ‘Botha sting’ has been shown to result in a significant decrease in the target company’s share price directly after his public criticism,” she asserts. 

Although most shareholder activism in South Africa takes place behind closed doors, there seems to be a growing awareness among asset owners and managers of the importance of engagement, Viviers adds, much to the chagrin of company executives with a predilection towards notions of independence. 

This is a shortened version of the cover story that originally appeared in the 8 December edition of finweek. Buy and download the magazine here.


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