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As a retirement fund member, note that making investment decisions is difficult enough for your trustee if the fund and its stakeholders were all she had to think about.
Considerably adding to the difficulty is the clamour of advice that threatens to overwhelm her.
She is told that she should consider the principles of socially responsible investment and take into account environmental, social and governance (ESG) factors in selecting assets, and focus on infrastructure or community development, prioritising the enfranchisement of black-owned businesses.
She wonders what it means to invest sustainably or in the best interests of all South Africans.
She may feel pressure to understand political priorities and invest in line with these.
What should you be expecting of her as she and her fellow trustees act on your behalf?
The bad news for her?
She and her fellow trustees are required to invest responsibly.
The good? They are answerable only to their stakeholders, not to the outside world as well.
The responsibility
“As institutional investors, we have a duty to act in the best long-term interest of our beneficiaries.” − United Nations Principles for Responsible Investment, Signatories Commitment
The trustees of a retirement fund carry a weighty responsibility in their collective capacity as fiduciaries over the fund and its stakeholders, particularly its members and other beneficiaries.
Legal argument on the nature of this fiduciary duty abounds. At heart, however, is the trust that these stakeholders put in the actions of the members of the board.
This helps to explain why, though retirement funds are not subject to trust law, members of the board have become known as trustees.
Anybody acting in trust should surely take care to understand the nature of the confidence that others are putting in them.
This is the hard part of the responsibility for your trustee. In order to put into practice what she has devoted herself to do, she needs to understand that commitment.
She and her fellow board members must identify the stakeholders to the retirement fund – you, the members; but also all current beneficiaries and others who may have an interest in the fund, sponsoring employers, for example.
Then they must work to understand what you, as parties with an interest, might reasonably expect of the fund.
This needs to be written down: how can the members of the board agree on these priorities if they are not codified?
This represents the heart of the document that guides the trustee responsibility to act in trust − the investment policy statement.
The key to the complex investment decisions and actions that may follow is a clear, concise description of the expectations and goals of stakeholders, stating the essence of the board responsibility.
The statement must express these objectives philosophically, but helpfully as well.
Practical expression of an objective includes an acknowledgement that goals generally cannot be reached without taking some risk.
It follows that stakeholders expect the board to strike an appropriate balance between risk and reward in pursuing these objectives.
“An institutional investor should demonstrate its acceptance of ownership responsibilities in its investment arrangements and investment activities.” − Key principle #2 of The Code for Responsible Investing in South Africa, 2011
So, to demonstrate its acceptance of owner responsibilities, the fund must explain what these responsibilities are. And to do that, it must identify its stakeholders and articulate their objectives in practical terms.
The rest follows from a sound beginning
Everything else, both in the investment policy statement and in the way in which it is put into practice, follows from here.
It can be difficult to answer the questions that demand answers, intractable even.
Clearly stated stakeholder objectives, however, will help trustees to identify solutions to these challenges and even to reveal whether they are in fact relevant or not.
Is it important to consider investment returns primarily in the long term, for example, which implies that sustainability of these investments should be assessed?
Should the board take into account the environmental consequences or community impacts of the products and operations of a company?
The answers to these questions depend on whether stakeholders have an interest in these impacts.
This line of argument may suggest that the statement of stakeholder objectives covers in advance all of the questions that need to be answered in consideration of the detail.
This is not necessarily the case. In the formulation of the investment policy statement, drafters should modify the expression of stakeholder objectives where this is called for, particularly where subsequent consideration reveals a shortfall in the thinking.
What is required, however, is that the objectives lead the decisions, not the other way around.
Other elements of a sound foundation
“Investors should not knowingly leave something to governments that governments have yet to deal with effectively and that will inevitably affect the lives of beneficiaries of the investments.”− CFA Institute, ESG Issues in Investing, Guide for Investors, section 1.7
Though a statement of objectives is critical, there are other aspects of the philosophy of investment that boards may consider codifying before considering the details of the investment approach itself.
This quote from the CFA Institute expresses its view that investors have at least some responsibility to address externalities linked to ESG issues.
The institute nevertheless also expresses the alternative perspective:
“Another view is that fiduciary investors cannot be expected to take responsibility for what is beyond their control, and it is unrealistic to bring externalities within the ambit of fiduciary responsibility.” − CFA Institute, same source as previous quotation
It goes on to describe a middle ground between these two views, which appeals to the principles of stewardship that form the basis of the UK Stewardship Code.
The point is that applying a single view on issues like these to all funds may not be appropriate.
Very large funds with global portfolios, for example, have the power to impact market prices through their investment decisions and must recognise this in their statements of investment policy.
Boards could also consider expressing a set of investment beliefs. (Refer, for example, to the Marathon Club’s 2007 Guidance Note for Long-Term Investing.)
This might include attitudes to risk, to the question of active and passive investments and to the appropriateness of various incentive models for rewarding service providers.
And, of course, the investment policy statement must be consistent with all laws and regulation and should confirm this position.
Living with their convictions
Aside from these legal requirements, how the trustees of a retirement fund invest its assets is up to them.
There is no doubt that they must do so responsibly. Boards have an ethical and legal obligation to do so.
But trustees are not obliged to comply with views that are inconsistent with a carefully prepared, legally sound investment policy statement.
The trustee responsibility is crucial but limited. It ends with the fund and its stakeholders. Member, hold them to it.
PRINCIPLES FOR TRUSTEES AND OTHER INSTITUTIONAL INVESTORS TO FOLLOW:
- Act in members’ long-term interest.
- Identify all stakeholders and their goals.
- Accept ownership responsibility in relation to investing.
- Codify investing beliefs in the investment policy statement (IPS).
- Remember that the objectives in the IPS lead the decisions, not the other way around.
Rob Rusconi is an independent actuary.
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.
