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“I WANT MY LIFE BACK.” With these words, Tony Hayward – former CE of British Petroleum (BP) – raised the ire of stakeholders worldwide and set him firmly in the sights of United States President Barack Obama. The devastating oil spill from one of BP’s rigs in the Gulf of Mexico that cost Hayward his job – while wiping billions off BP’s market capitalisation – was held up by supporters of socially responsible investing (SRI) as an example of just what happens when companies don’t take a close look at environmental, social and corporate governance (ESG) issues.
With “sustainable investment” and “SRI” becoming popular buzzwords in the South African investment market and new funds being launched, local investors need to take a critical look at what’s thinly disguised marketing and what’s a genuine advantage for the companies they invest in.
The line that gets spun out is: “Can you afford not to be focusing on socially responsible investing?” However, Finweek challenges that, asking: “Can investors actually afford to sacrifice investment return on the back of SRI investment products? A look at the attached table shows that if investors are seeking to grow their wealth then with most of the existing products the short answer is no.
“If there’s one thing that needs to be said on this topic it’s that under no circumstances should pension fund trustees give up returns for the sake of doing social good,” says Andrew Canter, chief investment officer at FutureGrowth Asset Management. Canter, who is widely recognised as one of SA’s leading investors in the sustainability sector that operates infrastructure development and education funds, might upset a few people with that comment but he touches on perhaps the biggest sticking points in the SRI and sustainability sector: accountability.
Canter says while there may be many investors who want to “do good” with their money, it will “mess with the heads” of investors trying to manage the money if there isn’t a clear definition of what’s “good”. And that, he says, is a drawback for many of those investment products.
The closest he can find in SA is Shariah (Islamic) funds, where the guidelines are at least more consistent than those of other SRI type offerings.
That view is shared by Samantha Matthew, an investment analyst at Sanlam Glacier, who says while SRI investing has grown quite prominently it still faces a number of challenges. “A universal challenge is that even though SRI has been around for a long time it has no formal standard definition. In SA an official definition is needed, particularly in the way it would be interpreted with regards to broad-based black empowerment,” Matthew says, pointing out it doesn’t always benefit those it should.
Another issue that’s been identified is that research indicates there’s a lack of connection between asset managers investing in SRI stocks, compliance and the monitoring of those stocks. Perhaps the most obvious example of that disconnect between sustainability and investment return is banking group Nedbank. While it may be the butt of many “tree hugger” jokes, it’s quickly established itself as a thought leader in the financial services sector, although that hasn’t necessarily yet given it a competitive advantage.
Of SA’s Big Four banking groups, Nedbank has consistently delivered the lowest return on shareholder equity, an issue that has frustrated analysts and investors alike. When it announced its interim results recently it delivered a weak performance from its retail base, an area where it would be scoring were investors buying into its “green” vision.
In fact, it could be argued Nedbank’s share price has really just kept touch with its peers on the back of constant rumours of corporate action rather than its focus on sustainability. However, Nedbank CEO Mike Brown disagrees, saying the benefits are already starting to come through for the group. “It’s a long-term game – but the impact is already being felt,” he said in a recent interview, pointing to cost savings throughout the group by working more efficiently.
Brown added that the recognition from its local and international peers was an affirmation Nedbank was on the right track and said the group had adapted its vision statement to focus on being “Africa’s most admired bank”.
Areas where Brown saw genuine competitive advantage are in markets such as clean energy and carbon credits, where the bank was already developing skills and suitable products.
While that sounds good over the long run, nagging doubts have to remain with investors who are yet to see benefits from backing a vision adopted by former Nedbank CEO Tom Boardman and now carried forward by Brown.
But perhaps affirmation from the investment community is on the way.
For example, a few years ago, an analyst, portfolio manager or investor would have been considered something of a maverick to have taken issue with a company’s management of an environmental issue. That was left to the odd “tree hugger” or smaller specialist asset manager, such as Fraters (now renamed Element), which might get a bee in its bonnet about its poor handling of environmental affairs.
That’s no longer the case, says Canter. “Major investors – such as the PIC [Public Investment Corporation] – aren’t just measuring you, they’re getting in your face and engaging you on ESG issues.” He also believes the investment community is becoming far more aggressive at engaging companies about governance issues.
Terence Craig, CIO at Element Fund Managers, says ESG is still neglected by investment analysts. However, a look at the recent BP disaster highlights why such issues will become increasingly important over the long term.
One person who has had a unique view of the shift in mindsets is Kevin James, of consulting firm Global Carbon Exchange (GCX). As recently as five years ago he says issues such as carbon foot-printing and sustainability were viewed as something that fell under the ambit of the marketing department. He now doesn’t take meetings that don’t include either the CE or chief financial officer of companies, including listed ones. Those include the likes of Discovery, Massmart, Mr Price and Avis.
Says James: “There’s been a subtle shift over the past few years, but people are no longer tolerating behaviour that’s socially irresponsible. Much of it has to do with business value and mitigating risk.”
One factor James believes has added impetus to the move towards an increased focus on sustainability and social responsibility is increasing the drive from senior executives who are no longer just “ticking boxes” but seeing it’s a way to engage clients and suppliers throughout their value chains.
While Finweek concurs there are likely to be a stream of new investment products rolled out over the coming years that will be linked to the carbon credit market, SRI, sustainability and the environment investors need to – just like Nedbank – take a close look at the product packaged inside the wrapping and make an informed decision from there.
In conclusion: If you want to do something good with your money then give it to charity. But don’t – as Canter suggests – give up investment return for the sake of doing “something good”.
BP | The signs were there
SPEAKING ABOUT THE oil spill in the Gulf of Mexico, Terence Craig, chief investment officer at Element Investment Manager, says many warning signs were already there and that highlights the need for proactive analysis by both investors and analysts. “As investors we have to consider ‘low’ probability/high impact scenarios in our analysis – and we try to include those in our research by building a range of valuation sensitivities to possible events,” Craig wrote in a recent note to clients.
He pointed out research had shown that over the past five or so years BP had been pinned with around 760 safety violations and US$140m in fines. By contrast, competitors such as ConocoPhillips and Sunoco had been charged with just eight violations. “It appears shareholders and analysts should have been focusing more on BP’s safety standards and procedures to prevent such a disaster, as there seemed to be plenty of warning signs – particularly relative to other oil companies,” he says.
What’s important to note for shareholders is that, for an extended period, BP’s share price was able to shrug off those fines and violations until the oil spill in the Gulf of Mexico. Apart from the brand damage that’s been done and the loss of a key executive, the impact on BP is likely to be felt for many years – including the ongoing costs of litigation.
Sustainability | As a competitive advantage
WHILE THERE’S STILL some “soft and fluffy” attached to sustainability within companies that fail to measure it, there’s a handful that have scored by using it as a differentiator. Claus Lippert, MD of Merensky Timber, says being an early adopter of international standards in the sustainability sector has already delivered for them. “That’s put us ahead of the curve when it comes to things such as accreditation,” says Lippert, pointing out that this has helped them secure export contracts to Europe, North America and was opening up opportunities in Asia as well.
Kevin James, MD of Global Carbon Exchange, concurs the advantages are not just being felt by big business. He says major South African retailers have adopted stricter guidelines when it comes to a focus on sustainability and that’s filtering through the supply chain. Smaller companies looking to supply those retail giants are now taking proactive steps to show they’re responsible businesses.
James also notes pressure is now being brought to bear on industrial companies. “Most of them are feeling the pinch in terms of access to scarce resources – which effectively could become a threat to their financial sustainability over time. Over and above the issue of natural resources required to produce their products, most are seeing rising costs and dwindling supply of energy and water as being the two most pressing issues.”
Brigitte Burnett, head of sustainability at Nedbank, agrees there’s pressure on external suppliers to meet their requirements about issues such as water and energy usage. “If their environmental impact is too great, we’ll turn them away [as suppliers],” she says. Nedbank has also been conducting research into the ways its clients can contribute towards specific causes, such as arts and culture, sports, youth and the environmental. It launched its Affinity product range in 2008 and has since donated more than R100m to various causes simply by having its clients use its products or services.
A key challenge Burnett has identified is the lack of viable and sizeable projects within SA that consumers can contribute to – particularly carbon credits, where Nedbank is trying to establish a market leading position. She says South African companies contribute towards projects in India, China and even Kenya but don’t help similar projects closer to home.
STERLING WATERFORD CARBON CREDIT NOTE (CCN) | Change of climate for carbon credit notes?
IF INVESTORS ARE increasingly paying attention to environmental issues, then the JSE’s only genuine “green” listing – the Sterling Waterford Carbon Credit Note (CCN) – is certainly not confirming such a trend (yet). Trade in the CCN is scarce and Sterling Waterford had a tough job getting the instrument listed despite its first note (which launched in April 2005 and matured in June 2008) spinning an enviable return of 250% in rand and 140% in US dollars.
Sterling Waterford director Greg Paterson-Jones notes: “Our timing was awful, with our marketing coinciding with the onset of the global financial crisis. With the market refusing to take any risk, we really battled to close investors – especially among institutions. Our road show took place in the same week Lehman collapsed.”
Sterling Waterford’s second CCN attracted investment of only around R80m on listing in late 2008 – which would rank the instrument, in terms of size, alongside some of the small investments on the JSE’s AltX market.
Paterson-Jones says while Sterling Waterford’s first CCN attracted a few institutions, the take-up of the second CCN was mainly by smaller hedge fund specialists and specialised investment companies. The slack demand for the CCN is quite ironic – especially in a time of market turmoil. The instrument isn’t correlated to market movements and – for local investors – it offers a rand hedge, because the underlying investment is priced in euro.
On paper, the CCN is the perfect foil for market turmoil. Paterson-Jones reckons the market hasn’t quite cottoned on to CCNs. “Local investors, for the most part, simply don’t understand CCNs. There’s also an overriding sense of conservatism in the market. At times like these, people tend to avoid anything with an ‘exotic’ connotation.”
Is it perhaps a case of being too far ahead of the curve? Paterson-Jones says there’s considerable value in Sterling Waterford being “first to market” with CCNs on the JSE. “SW has established a brand… perhaps even stolen a march on possible competitors.” He notes there’s great longer term potential – pointing out trading value in all European Emissions Instruments (or “carbon,” as the market calls it) are equivalent to around 50% of the JSE’s total trading value.
But Paterson-Jones concedes that until SA has a deregulated power generating market and a regulated domestic capping of emissions, there’s limited scope to build more interest in carbon instruments. “At the moment we only have a few local companies, such as Sasol, Omnia and Sappi that have their own emission reduction projects. It’s not top of mind for the rest of the market, as it is in Europe.”
Despite sluggish interest in the second CCN, Paterson-Jones stresses Sterling Waterford will be looking at continuing to issue new notes. “In a bull market, listing a CCN is very viable for the issuer, as the volume that can be placed is larger. In a bear market it’s marginal for the issuer, despite the positive return profile. However, as long as the notes continue to provide good returns and a useful market hedge, we’ll continue to offer them.”
Naturally, demand for upcoming issues could be determined by the performance of the maturing CCN (it matures at year-end 2012). With regard to the current CCN listing, Paterson-Jones says while performance has been flat there’s every chance of an up-tick near the end of the note’s four-year term on the back of physical demand from companies at the end of the compliance period.
MARC HASENFUSS
With “sustainable investment” and “SRI” becoming popular buzzwords in the South African investment market and new funds being launched, local investors need to take a critical look at what’s thinly disguised marketing and what’s a genuine advantage for the companies they invest in.
The line that gets spun out is: “Can you afford not to be focusing on socially responsible investing?” However, Finweek challenges that, asking: “Can investors actually afford to sacrifice investment return on the back of SRI investment products? A look at the attached table shows that if investors are seeking to grow their wealth then with most of the existing products the short answer is no.
“If there’s one thing that needs to be said on this topic it’s that under no circumstances should pension fund trustees give up returns for the sake of doing social good,” says Andrew Canter, chief investment officer at FutureGrowth Asset Management. Canter, who is widely recognised as one of SA’s leading investors in the sustainability sector that operates infrastructure development and education funds, might upset a few people with that comment but he touches on perhaps the biggest sticking points in the SRI and sustainability sector: accountability.
Canter says while there may be many investors who want to “do good” with their money, it will “mess with the heads” of investors trying to manage the money if there isn’t a clear definition of what’s “good”. And that, he says, is a drawback for many of those investment products.
The closest he can find in SA is Shariah (Islamic) funds, where the guidelines are at least more consistent than those of other SRI type offerings.
That view is shared by Samantha Matthew, an investment analyst at Sanlam Glacier, who says while SRI investing has grown quite prominently it still faces a number of challenges. “A universal challenge is that even though SRI has been around for a long time it has no formal standard definition. In SA an official definition is needed, particularly in the way it would be interpreted with regards to broad-based black empowerment,” Matthew says, pointing out it doesn’t always benefit those it should.
Another issue that’s been identified is that research indicates there’s a lack of connection between asset managers investing in SRI stocks, compliance and the monitoring of those stocks. Perhaps the most obvious example of that disconnect between sustainability and investment return is banking group Nedbank. While it may be the butt of many “tree hugger” jokes, it’s quickly established itself as a thought leader in the financial services sector, although that hasn’t necessarily yet given it a competitive advantage.
Of SA’s Big Four banking groups, Nedbank has consistently delivered the lowest return on shareholder equity, an issue that has frustrated analysts and investors alike. When it announced its interim results recently it delivered a weak performance from its retail base, an area where it would be scoring were investors buying into its “green” vision.
In fact, it could be argued Nedbank’s share price has really just kept touch with its peers on the back of constant rumours of corporate action rather than its focus on sustainability. However, Nedbank CEO Mike Brown disagrees, saying the benefits are already starting to come through for the group. “It’s a long-term game – but the impact is already being felt,” he said in a recent interview, pointing to cost savings throughout the group by working more efficiently.
Brown added that the recognition from its local and international peers was an affirmation Nedbank was on the right track and said the group had adapted its vision statement to focus on being “Africa’s most admired bank”.
Areas where Brown saw genuine competitive advantage are in markets such as clean energy and carbon credits, where the bank was already developing skills and suitable products.
While that sounds good over the long run, nagging doubts have to remain with investors who are yet to see benefits from backing a vision adopted by former Nedbank CEO Tom Boardman and now carried forward by Brown.
But perhaps affirmation from the investment community is on the way.
For example, a few years ago, an analyst, portfolio manager or investor would have been considered something of a maverick to have taken issue with a company’s management of an environmental issue. That was left to the odd “tree hugger” or smaller specialist asset manager, such as Fraters (now renamed Element), which might get a bee in its bonnet about its poor handling of environmental affairs.
That’s no longer the case, says Canter. “Major investors – such as the PIC [Public Investment Corporation] – aren’t just measuring you, they’re getting in your face and engaging you on ESG issues.” He also believes the investment community is becoming far more aggressive at engaging companies about governance issues.
Terence Craig, CIO at Element Fund Managers, says ESG is still neglected by investment analysts. However, a look at the recent BP disaster highlights why such issues will become increasingly important over the long term.
One person who has had a unique view of the shift in mindsets is Kevin James, of consulting firm Global Carbon Exchange (GCX). As recently as five years ago he says issues such as carbon foot-printing and sustainability were viewed as something that fell under the ambit of the marketing department. He now doesn’t take meetings that don’t include either the CE or chief financial officer of companies, including listed ones. Those include the likes of Discovery, Massmart, Mr Price and Avis.
Says James: “There’s been a subtle shift over the past few years, but people are no longer tolerating behaviour that’s socially irresponsible. Much of it has to do with business value and mitigating risk.”
One factor James believes has added impetus to the move towards an increased focus on sustainability and social responsibility is increasing the drive from senior executives who are no longer just “ticking boxes” but seeing it’s a way to engage clients and suppliers throughout their value chains.
While Finweek concurs there are likely to be a stream of new investment products rolled out over the coming years that will be linked to the carbon credit market, SRI, sustainability and the environment investors need to – just like Nedbank – take a close look at the product packaged inside the wrapping and make an informed decision from there.
In conclusion: If you want to do something good with your money then give it to charity. But don’t – as Canter suggests – give up investment return for the sake of doing “something good”.
BP | The signs were there
SPEAKING ABOUT THE oil spill in the Gulf of Mexico, Terence Craig, chief investment officer at Element Investment Manager, says many warning signs were already there and that highlights the need for proactive analysis by both investors and analysts. “As investors we have to consider ‘low’ probability/high impact scenarios in our analysis – and we try to include those in our research by building a range of valuation sensitivities to possible events,” Craig wrote in a recent note to clients.
He pointed out research had shown that over the past five or so years BP had been pinned with around 760 safety violations and US$140m in fines. By contrast, competitors such as ConocoPhillips and Sunoco had been charged with just eight violations. “It appears shareholders and analysts should have been focusing more on BP’s safety standards and procedures to prevent such a disaster, as there seemed to be plenty of warning signs – particularly relative to other oil companies,” he says.
What’s important to note for shareholders is that, for an extended period, BP’s share price was able to shrug off those fines and violations until the oil spill in the Gulf of Mexico. Apart from the brand damage that’s been done and the loss of a key executive, the impact on BP is likely to be felt for many years – including the ongoing costs of litigation.
Sustainability | As a competitive advantage
WHILE THERE’S STILL some “soft and fluffy” attached to sustainability within companies that fail to measure it, there’s a handful that have scored by using it as a differentiator. Claus Lippert, MD of Merensky Timber, says being an early adopter of international standards in the sustainability sector has already delivered for them. “That’s put us ahead of the curve when it comes to things such as accreditation,” says Lippert, pointing out that this has helped them secure export contracts to Europe, North America and was opening up opportunities in Asia as well.
Kevin James, MD of Global Carbon Exchange, concurs the advantages are not just being felt by big business. He says major South African retailers have adopted stricter guidelines when it comes to a focus on sustainability and that’s filtering through the supply chain. Smaller companies looking to supply those retail giants are now taking proactive steps to show they’re responsible businesses.
James also notes pressure is now being brought to bear on industrial companies. “Most of them are feeling the pinch in terms of access to scarce resources – which effectively could become a threat to their financial sustainability over time. Over and above the issue of natural resources required to produce their products, most are seeing rising costs and dwindling supply of energy and water as being the two most pressing issues.”
Brigitte Burnett, head of sustainability at Nedbank, agrees there’s pressure on external suppliers to meet their requirements about issues such as water and energy usage. “If their environmental impact is too great, we’ll turn them away [as suppliers],” she says. Nedbank has also been conducting research into the ways its clients can contribute towards specific causes, such as arts and culture, sports, youth and the environmental. It launched its Affinity product range in 2008 and has since donated more than R100m to various causes simply by having its clients use its products or services.
A key challenge Burnett has identified is the lack of viable and sizeable projects within SA that consumers can contribute to – particularly carbon credits, where Nedbank is trying to establish a market leading position. She says South African companies contribute towards projects in India, China and even Kenya but don’t help similar projects closer to home.
STERLING WATERFORD CARBON CREDIT NOTE (CCN) | Change of climate for carbon credit notes?
IF INVESTORS ARE increasingly paying attention to environmental issues, then the JSE’s only genuine “green” listing – the Sterling Waterford Carbon Credit Note (CCN) – is certainly not confirming such a trend (yet). Trade in the CCN is scarce and Sterling Waterford had a tough job getting the instrument listed despite its first note (which launched in April 2005 and matured in June 2008) spinning an enviable return of 250% in rand and 140% in US dollars.
Sterling Waterford director Greg Paterson-Jones notes: “Our timing was awful, with our marketing coinciding with the onset of the global financial crisis. With the market refusing to take any risk, we really battled to close investors – especially among institutions. Our road show took place in the same week Lehman collapsed.”
Sterling Waterford’s second CCN attracted investment of only around R80m on listing in late 2008 – which would rank the instrument, in terms of size, alongside some of the small investments on the JSE’s AltX market.
Paterson-Jones says while Sterling Waterford’s first CCN attracted a few institutions, the take-up of the second CCN was mainly by smaller hedge fund specialists and specialised investment companies. The slack demand for the CCN is quite ironic – especially in a time of market turmoil. The instrument isn’t correlated to market movements and – for local investors – it offers a rand hedge, because the underlying investment is priced in euro.
On paper, the CCN is the perfect foil for market turmoil. Paterson-Jones reckons the market hasn’t quite cottoned on to CCNs. “Local investors, for the most part, simply don’t understand CCNs. There’s also an overriding sense of conservatism in the market. At times like these, people tend to avoid anything with an ‘exotic’ connotation.”
Is it perhaps a case of being too far ahead of the curve? Paterson-Jones says there’s considerable value in Sterling Waterford being “first to market” with CCNs on the JSE. “SW has established a brand… perhaps even stolen a march on possible competitors.” He notes there’s great longer term potential – pointing out trading value in all European Emissions Instruments (or “carbon,” as the market calls it) are equivalent to around 50% of the JSE’s total trading value.
But Paterson-Jones concedes that until SA has a deregulated power generating market and a regulated domestic capping of emissions, there’s limited scope to build more interest in carbon instruments. “At the moment we only have a few local companies, such as Sasol, Omnia and Sappi that have their own emission reduction projects. It’s not top of mind for the rest of the market, as it is in Europe.”
Despite sluggish interest in the second CCN, Paterson-Jones stresses Sterling Waterford will be looking at continuing to issue new notes. “In a bull market, listing a CCN is very viable for the issuer, as the volume that can be placed is larger. In a bear market it’s marginal for the issuer, despite the positive return profile. However, as long as the notes continue to provide good returns and a useful market hedge, we’ll continue to offer them.”
Naturally, demand for upcoming issues could be determined by the performance of the maturing CCN (it matures at year-end 2012). With regard to the current CCN listing, Paterson-Jones says while performance has been flat there’s every chance of an up-tick near the end of the note’s four-year term on the back of physical demand from companies at the end of the compliance period.
MARC HASENFUSS
