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* Negative (exclusionary) screening: Avoiding investments in morally undesirable companies and countries. Such investors often base their screens on their religious convictions and hence avoid investments associated with tobacco, alcohol, gambling, armaments and pornography.
* Positive (inclusionary) screening: Investing in companies deemed good corporate citizens - ie, companies that value their stakeholders and place a high premium on corporate governance. In SA a great deal of emphasis is placed on broad-based black economic empowerment issues as well as the development of social infrastructure.
* Best-of-class screening: Combining positive and negative screening strategies.
* Shareholder activism: Actively engaging with a management board on environmental, social and corporate governance (ESG) considerations through dialogue, by filing resolutions, voting at annual general meetings and divesting from companies that fail to transform.
* Cause-based (targeted) investing: Supporting particular causes (such as empowerment or social infrastructural development) by investing in it.
In my doctoral research, which was partly funded by the National Research Foundation, an RI fund was defined as "...any local collective investment scheme that employs a screening, shareholder activism and/or cause-based (targeted) investment strategy".
The salient features of all RI unit trusts established in SA up to 31 March 2006 are indicated in Table 1, whereas Table 2 provides more details on other pooled (non-unit trusts) and segregated RI funds.
Figure 1 indicates that the first RI funds in SA were founded in June 1992. In the period leading up to the emerging market crisis (August 1998) a further 17 RI funds were established locally.
Many of those funds were structured as empowerment-orientated special purpose vehicles (SPVs) in line with the new Government's RDP programme and empowerment initiatives (De Cleene & Sonnenberg, 2004:6). However, the SPV structure proved unsustainable in the aftermath of the emerging market crisis and resulted in large-scale losses suffered by several RI funds (Bridge 1999; Hirsh 2005).
As a result of these losses institutional investors became very reluctant to adopt RI as a viable investment strategy (Visser 2005:30; Bacher 2004:4; Thomas 2004). A total of eight RI funds were discontinued in years to come, some as a result of poor financial performance and others due to a lack of interest.
The most important barrier to growing the RI in SA is the perception that RI involves a financial sacrifice. Rigorous international and local research indicates that perception is unfounded, as RI funds tend to outperform broad market indices and conventional funds over the long run (Statman 2000:30; Bauer, Koedijk & Otten 2005:1755; Bauer, Otten & Rad 2006:33; Viviers 2007). Cause-based (targeted) investments can furthermore offer good diversification benefits, as they typically display low levels of correlation with listed securities.
Other barriers to RI include fiduciary responsibilities and the lack of RI skills and expertise among local asset managers and advisory service providers. Such barriers aren't unique to SA's RI sector, as a report by the World Economic Forum has identified them as important obstacles to the adoption of RI among global institutional investors (Mainstreaming Responsible Investment 2005:5).
The availability and costs of data on companies' ESG performance also poses a potential barrier to RI in SA, as well as uncertainty as to what exactly RI entails.
Greater awareness of and growth in the number of RI funds launched since 2004 can be attributed to a number of local and international factors, such as:
* The introduction of empowerment legislation, sector charters and scorecards, particularly the Financial Sector Charter.
* Sustained stakeholder advocacy, particularly by local trade unions and NGOs.
* The establishment of stock market indices, such as the Dow Jones sustainability and Islamic indices, the FTSE4GOOD indices and the FTSE/JSE SRI index.
* The far-reaching consequences of corporate scandals.
* More RI research becoming available - eg, the Freshfields Bruckhaus Deringer report on the legal framework for the integration of ESG issues into institutional investment.
* The launch of the United Nations Principles for Responsible Investment.
Despite those drivers and the Government Employees Pension Fund's commitment to becoming a more active shareholder, much remains to be done to stimulate greater demand for RI in SA. In essence, a rebranding process that has the support of all major public and private pension funds, the National Treasury, trade unions and professional investment associations should be undertaken.
That rebranding process should address the negative perceptions regarding the risk/return profile of local RI funds and the lack of skills and expertise in the local sector. In doing so the words of German philosopher Arthur Schopenhauer (1788-1860) should be in mind, namely that "...there are three steps in the revelation of any truth: in the first it is ridiculed; in the second, resisted; in the third it is considered self-evident".
It's my firm view that RI in SA is set to grow in future, particularly in terms of shareholder activism and cause-based (targeted) investing. The repositioning of the brand and the development of new and innovative products is also bound to attract greater international interest.
With thanks to professor Johan Bosch, NMMU; professor Eon Smit, University of Stellenbosch Graduate Business School; professor Arie Buijs, Utrecht University.
Dr Suzette Viviers
VIVIERS, who obtained her doctorate at the Nelson Mandela Metropolitan University (NMMU) (previously the University of Port Elizabeth), lectures at the university in Financial and Investment Management and does research into the areas of responsible investment, corporate social responsibility and business ethics.
