“These are unprecedented times,” currently seems to be a catchphrase. The COVID-19 pandemic has easily outstripped previous crises in its impact on the global economy, and on the livelihoods of millions of people worldwide. The South African economy, which was already struggling before the crisis, is certainly no exception.
The International Monetary Fund (IMF) recently slashed its outlook for global growth, forecasting a contraction of 4.9% for 2020, while the Organization for Economic Cooperation and Development (OECD) and the World Bank are more pessimistic, predicting 6% and 5.2%, respectively. The World Bank forecasts that South Africa’s growth rate will contract by an alarming 7.1% in 2020. Recent data shows that the country has already entered a recession: South Africa recorded its third consecutive quarter of negative economic growth, with GDP falling by 2% for the first quarter of 2020. These figures do not yet reflect the impact of the lockdown. It is expected that second-quarter figures will make for stark reading.
And so, in these unprecedented times, can investors be expected to pay any attention to Environmental, Social and Governance (ESG) considerations? Arguably, they should be paying more attention, particularly to the S. South Africa’s unemployment rate hit a new high of 30.1% in the first three months of 2020, even before the COVID-19 related job-losses were accounted for. The emergency budget made it clear that the government faces some tough decisions as the country teeters on a fiscal cliff. Gross national debt will reach an estimated R4 trillion by the end of this fiscal year, and government’s debt servicing cost will spiral upward to 5.4% of GDP. To put this into context, debt servicing is likely to amount to nearly 21% of government expenditure, the single largest component and far weightier than allocations to health, education and social assistance.
Public-private partnerships are now more important than ever. There have been some developments in this regard, with many South African pension funds undertaking investments into infrastructure- and energy-related funds (the E in ESG). There has also been an increased focus on governance (the G in ESG) when it comes to where and how institutional investors deploy their money. Social considerations (the S) have been taken into account, but for the most part the focus is on the low-hanging fruit, as it were, in targeting asset managers who have gone some way on the transformation scale. BBBEE credentials have taken centre stage here. And, they are important, but they are not the only aspect of socio-economic change that investors can target. We believe that there are areas that have not yet received the attention they merit, and which require a fillip from institutional investors. Some of these are job creation, education, gender empowerment and equity. In saying this, we can’t ignore that a handful of asset managers have created funds that are tailored to focus on exactly these aspects. We easily think here of Ashburton with their Jobs Fund, Old Mutual with their Schools Fund, Victus Global (which focuses on transforming agriculture in Africa, with a particular emphasis on gender equity) and the newly-launched Maia Capital, which focuses on social infrastructure, clean technology and financial inclusion, all overlaid with a gender-equity lens. But, beyond investing in targeted funds, which is also necessary, we feel that responsible investing requires these aspects to be included in a holistic assessment of all intended investments.
Pension funds can afford to hold South African asset managers to high standards of accountability. We don’t advocate that every South African asset manager launches a targeted social-impact fund. It is a complex undertaking and requires a specific skill set. We do feel, however, that as part and parcel of a decision to allocate capital, trustees should pose a basic set of questions to their asset managers, and even to other service providers (consultants, auditors, administrators, custodians) who they deal with. The as definitive set of questions has yet to be formulated, and there should be some flexibility so that pension funds can focus on a particular social target, with the aim of making a meaningful difference with dedicated resources and focused investment. Examples of questions, ranging from the most basic to some more complex, could be:
- What is the percentage of female ownership/management/investment staff/support staff in the business?
- What is your intention regarding gender empowerment goals? And what is your strategy to achieve your intention?
- How do you engage with investee companies to ensure that they are moving toward empowerment goals?
- How are you engaging with investee companies to ensure skills transfer within companies?
- How are you encouraging skills transfer within your own company?
- What education initiatives do you support?
- How are you engaging with the broader community to ensure skills transfer?
- Does the company employ graduates and trainees?
- Does the company support job creation initiatives and how?
- Do you measure any negative socio-economic impacts generated by investee companies, and potentially address them in engagements with management?
- Do you strive to educate investors and trustees in a broader sense?
- How do you measure the social impact of your investments? Which impacts are measured?
This is certainly not an exhaustive list, but it does illustrate that institutional investors can and must take broader socio-economic aspects of their investments into account. Paying lip-service, or targeting only one area, should no longer be an option, particularly not in an economy that will struggle to shrug off the deep impact of COVID-19.
It would be remiss if we did not consider the important topic of prescribed pension fund assets. It is a widely publicised topic and is surrounded by much debate. In the latest news South Africa’s ruling party, the ANC, contemplates possible amendments to Regulation 28 of the Pension Fund Act to allow direct investment in infrastructure. While the ruling party has commented that the issue of prescribed assets is not on the table at this stage, the point to be made here is about that investors need to be proactive about ESG impacts. In this way, the changes, and the intentions behind targeting social, infrastructure, and related investments not only make sense from an investment perspective (generating the required return while fitting into their risk-profile), but also make sense from a personal ethical and moral standpoint.
– Fran Troskie
Investment Research Analyst, RisCura
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