The thinking around investment and economic development in 2008, reached a pivotal turning point when the global financial crisis hit. The Covid-19 pandemic has given us a harsh reminder of the acute issues around health, while also shining the light on education, poverty, human rights, the environment and racial, gender and income inequality.
There has been a significant shift over the last decade in the way investors are thinking about the utility of their investments. Conventionally, the focus was on risk and return with little concern for sustainability or impact on people or the planet. Increasingly, investors are concerned with the effects their investments have. “Knowing what you own” has become a motto of impact investors. For conventional institutional investors we are seeing a similar trend.
According to Schroders’ Institutional Investor Survey, 67% of institutional investors believe the role of sustainable investing will become more important over the next five years and 58% believe that their corporate and internal values are the primary drivers of their sustainable investment focus.
Impact investing has transformed from a mere concept a decade ago, to a formalised investment strategy and mandate throughout the investment industry and according to the Global Impact Investing Network (GIIN), has a current estimated market size of USD 715 billion.
The Covid-19 pandemic is having a profound and lasting impact on the South African economy, and we were already in a recession before it began. Our unemployment rate hit a new high of 30.1% in the first three months of 2020, even before COVID-19 related job-losses were accounted for.
The emergency budget made it clear that government faces some tough decisions as the country teeters on a fiscal cliff. Debt servicing is likely to be nearly 21% of government expenditure, the single largest component and far weightier than allocations to health, education, and social assistance.
A paradigm shift in the way we save and invest is needed if we are going to build a sustainable and inclusive economy. It’s time to think out of the box and consider alternative investment strategies.
South African investors have experienced a persistently low-return environment for the past five years. There is unquestionably a need to revive economic growth in the country and to invigorate returns to ensure we can leave a legacy for tomorrow.
Investing for developmental impact is one such strategy that we believe can drive sustainable returns and can help tackle the imbalances that characterise our country. If we don’t, today may be a snapshot of our future and the environment we retire to.
For long-term investors, of which pension funds are the quintessential example, sustainability is an important concern. An unhealthy, unstable, and unsustainable economy cannot serve investors who have a multi-decade investment horizon, and who are concerned about the livelihoods of the next generation and beyond.
There is little point in retiring with a decent pension if the society and environment is undesirable or unliveable. Without a thriving, inclusive economy, investors and asset owners will struggle to reach the required investment returns to successfully reach the ‘golden years’.
From a public policy perspective, many stakeholders believe that impact investing can provide a public good, particularly in areas where the government lacks the resources. For pension fund trustees, the argument may be around why capital should be used to finance projects that should have been funded by government expenditure. The answer is quite simple. In South Africa, we have reached a point that if we don’t act now and make sustainable investments with positive social and environmental impacts, we are unlikely to generate stable, long-term returns.
Pension funds have done exceptionally well just by investing in traditional asset classes, so there was no compelling reason to look at alternatives. In the last five years, however, these asset classes are no longer yielding attractive real (above inflation) returns and may be preventing funds from meeting their fiduciary obligations. The Covid-19 pandemic has brought this into harsh reality, but fortunately, investing for impact does not mean forfeiting attractive returns.
An impact investing strategy offers a potentially powerful lever for retirement funds to diversify, spread their risk, and enhance returns all in a way that positively contributes to our struggling economy. Importantly, we can take advantage of the full mandate of Regulation 28, which allows up to 35% of assets under management to be allocated to alternatives, unlisted debt, unlisted equity & unlisted property.
Not only will moving even a small portion of institutional capital in South Africa have a ground-breaking effect on driving the Sustainable Development Goals (SDGs) and National Development Plan (NDP), but it will also catalyse the impact investment industry. It could be the spark that launches South Africa as a leading global player in the impact space. Just as in the past when we implemented substantial enabling policies like the Code for Responsible Investing in South Africa (CRISA) and amendments to Regulation 28 to facilitate greater consideration of ESG factors, South Africa can become a global impact industry leader.
As a first step, South Africa’s pension funds need to identify what impact, both positive and negative, their current portfolios have on society. The next step is to allocate more capital to the critical impact themes informed by the SDGs and NDP, but we can’t stop there.
We all have a responsibility to ensure that the impact objectives and targets are being met through impact measurement and management. Otherwise, investors run the risk of “impact greenwashing.”
Indeed, the Schroders survey found that 60% of institutional investors highlighted greenwashing as the biggest challenge to investing sustainably.
There is a big need to ensure transparency in how investors track, report, and publicly disclose their impact management practices and impact outcomes. The IFC Operating Principles for Impact Management seeks to address this challenge. What distinguishes the principles from previous efforts to develop an impact investing standard is the requirement of independent verification to ensure alignment with the principles. We eagerly await further developments in this space.
– Adam Bennot
Seniort Associate, RisCura