How to build an inclusive South Africa

The recent World Economic Forum (WEF) gathering in Davos has once again reminded us of our exasperating potential, staring into the many failings our mirror holds up to us.
  
According to the WEF’s Inclusive Development Index, South Africa ranks just 69 out of 103 countries.

The recent report notes: “South Africa has yet to develop a more inclusive growth model, providing better employment opportunities to a larger share of its population.”

There are early buds that SA could be entering a path of renewal. The business sector at large finally found its teeth to push back on state capture in the wake of Nenegate and has found its collective power to influence change.

Now we need a shift similar to what happened when anti-apartheid sanctions movements began, converting to pro-SA investing strategies in the early 1990s.  

Far from settling for an “uneasy alliance” between government and investors, we need to find ways to embrace and implement strategies that promote an inclusive growth model for the country as a whole.

This involves creating a conducive regulatory environment, promoting better governance in all entities, designing mandates that promote sustainable investing and finding more ways to innovate and implement positive public-private partnerships across more sectors.

Innovative partnerships

Our experience in working with National Treasury’s Jobs Fund programme has not been without its challenges, but ultimately both partners are left feeling enriched with new knowledge and a positive track record to leverage new partnership models. 
 
Our first fund has created almost 10 000 sustainable jobs and has delivered excellent risk-adjusted returns for our investors.

This partnership has succeeded because it was designed to align interests – we persuaded the Jobs Fund to provide a portfolio guarantee, giving our clients an inducement to embrace some unusual (but not inherently riskier) credit risk, while Treasury was keen to see its guarantee leveraged to crowd in private sector funding for investments into expanding corporates that were also job creating. 

It also turns out that most of the sectors that are looking for this expansion capital are in economically inclusive sectors such as affordable housing, public transport and financing for small and medium-sized enterprises (SMEs). Imagine if we could stimulate more of these strategies across our investment industry.
 
Against the backdrop of the National Development Plan’s (NDP's) vision and consequent critical actions, the South African economy has enormous unmet infrastructure demands and a growing need to stimulate job creation and reduce inequality.

Notwithstanding the understandable jaundiced experience of having exposure to the debt of state-owned enterprises in recent years, as investors and asset owners it is imperative that we find ways to intentionally adopt more sustainable investment strategies.  

Rethinking investment strategies

Recent developments in the ruling ANC have revived the potential of a social compact of sorts between investors (business) and government to meet the NDP goals.

It has become simultaneously more possible and more urgent to create strategies that engage with investing in our real, productive economy with a view to providing much-needed infrastructure and innovative solutions to the many backlogs we face in education, health and housing, to name a few.
  
Considering such proactive investment strategies is not a soft option. It does not in any way preclude sound investing principles or suggest more risk or suboptimal returns.

Rather, well-considered opportunities that solve many of our social challenges are tapping into the part of our economy that is poised for growth. There are many more successful Calgros and Transaction Capitals to be built that were initially viewed as risky propositions.
 
Our experience has been to lend to specialist non-banking intermediaries like Transaction Capital that in turn have developed flourishing business models that lend to SMEs such as SA Taxi.

SA Taxi captures the market that has often been rejected by banks, because rather than treating the loan as asset-backed finance, they fund taxi ownership as a stand-alone business based on a sophisticated taxi route tracking ability. 

Savings mandates are intrinsically about providing for a future plan, and it should be beholden on custodians and investors to ensure that these mandates are sustainable and a part of an inclusive growth strategy that delivers suitable returns while minimising the considerable downside of the future environment we currently invest for. 

As a major stakeholder in the private sector, the savings industry commands a considerable endowment which could play a game-changing role if it could be motivated to invest in more inclusive growth strategies, whilst not deviating from the underlying savings mandate. 

Impact investing

The opportunity set for meaningful investing is already there. Investment strategies that focus on investing in such much-needed social and environmental infrastructure (called impact investing) have been shown in many studies to offer compelling risk-adjusted investment returns.

Moreover, full fiduciary responsibility encompasses investing on a sustainable basis for the benefit of all beneficiaries and stakeholders, and recognises that this is necessary, scalable and rooted in law.  

SA finds itself as one of the world leaders with respect to the framework for responsible investing. We have led the way with King IV, and asset owners can subscribe to the Codes for Responsible Investing (CRISA).

Regulation 28 for pension funds has an explicit requirement to integrate long-term sustainable investment strategies into their investment approach. 

National Treasury is currently formulating policy for Sustainable Finance as part of a global initiative, led by the International Finance Corporation, amidst widespread recognition that from both a good governance and NDP-inspired investment strategy, our savings industry has both the need and the ability to be a central part of improving SA’s future.  

As it stands, pension fund fiduciaries are clearly required through Regulation 28 to integrate long-term sustainable investment strategies into their investment approach.

However, there is no concomitant guidance from the Financial Services Board (FSB) via circulars or guidance notes.

Trustees and consultants place large store on such guidance to give both substance and practical help in implementing new requirements. And without such guidance, it is often easier to ignore or postpone the principle of sustainable investing.

This is an area which the FSB is engaging industry bodies on, but has been fraught with key staffing changes. 

‘Tremendous opportunity’

The opportunity presents for the various stakeholders, representative industry bodies in the savings industry as well as government, policymakers and regulators to explore how to optimise or create a conducive environment for investment strategies to better align to the NDP objectives.

Already, the Association for Savings and Investment SA (Asisa), representing close to R10tr across 127 organisations, states the following:

“We recognise that in order to achieve our long-term goal of ensuring that our industry remains relevant and sustainable, we need to deliver solutions that are in line with the needs of our country, taking into consideration global and local developments and challenges…

“The national priorities for our country are detailed in the National Growth Plan and the NDP. The NDP is government’s proposed roadmap to eliminating poverty and reducing inequality by 2030.”

So it seems that there is no intention to forge an “uneasy alliance” between investors and government objectives.

The benefits to be had from unlocking the sustainable investing model are tremendous and we need to ensure that the regulatory environment is conducive, that asset owners are designing mandates that promote sustainable investing, and that we innovate and reinforce positive public-private partnerships across many sectors.

And of course, make sure that the REIPPP (renewable energy independent power producer) programme is back on track.  

Finally, our industry requires a collaborative and practical effort to encourage asset managers to develop more investment solutions and products that offer quality exposure to inclusive growth opportunities, while simultaneously having the custodians of our collective savings signal the demand for such solutions. 

Heather Jackson is head of impact investing at Ashburton Investments.

This article is part of our February 2018 Collective Insight supplement, which appeared in the 15 February edition of finweek. To download the entire supplement, click here. Buy and download the magazine here.