The role of institutional investors in sustainable investing

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The role of institutional investors in sustainable investing

Linda Soga Mateza! Chief Investment Officer, ! Eskom Pension & Provident Fund!

linda@eppf.co.za!

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ESKOM PENSION AND PROVIDENT FUND

!  Manage and administer the pension fund assets of Eskom, South Africa’s national power utility. !

!  Defined benefit fund. !

!  Assets under management: R80 billion (USD10 billion). !

!  South African investments (around 80%): equities, bonds, property, private equity, hedge funds, direct social investments. !

!  International investments (around 20%): equities, cash. !

!   Signatory to the United Nations Principles for Responsible Investing (UNPRI). !

!  Signatory to CRISA (the Code for Responsible Investing in South Africa).!

!

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SUSTAINABLE INVESTING: ROLE OF PENSION FUNDS

!  Investing pension fund assets in a responsible manner. !

!  Investing for sustainability – i.e. ensuring companies will continue to operate profitably and optimally into the future. !

!  Understanding that returns to investors, especially pension fund members, are not purely financial. !

!  Playing a role in addressing the developmental challenges and infrastructure backlog in African economies. !

!  Incorporating environmental, social, and governance issues

into the investment process.

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ESKOM PENSION AND PROVIDENT FUND

!  The EPPF Responsible Investment policy outlines the Fund’s commitment to: !

!   Enhance corporate governance and thus the performance of companies it owns. !

!  Play a role in the corporate restructuring and growth of the South African economy. !

!  Play a role in enhancing transformation and Black Economic Empowerment (BEE) in South Africa as a prudent fiduciary. !

!  Enhance the sustainability of the companies it owns.!

!

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SUSTAINABLE INVESTING: THE EPPF PERSPECTIVE

!  Investing for the long term. !

!  

Long-term view means ‘patient’ capital, can invest in assets with a long-term horizon. !

!  

Sustainability is key. !

!  Paying attention to: environmental, social and governance factors. !

!  EPPF definition of sustainability: !

!  

Environmental Disclosure !

!  

Disclosure on Social & Economic issues. !

!  Sustainability also addresses unique South African circumstances: !

!  

Black Economic Empowerment (“BEE”) and transformation !

!  

Board diversity and performance !

!  

Employment equity and training.

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UNITED NATIONS PRINCIPLES FOR RESPONSIBLE INVESTING (UNPRI)

!  Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes. !

!  Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices. !

!  Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest. !

!  Principle 4: We will promote acceptance and implementation of the principles within the investment industry. !

!  Principle 5: We will work together to enhance our effectiveness in implementing the principles. !

!  Principle 6: We will each report on our activities and progress towards

implementing the principles.

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CODE FOR RESPONSIBLE INVESTING IN SOUTH AFRICA (CRISA)

KEY PRINCIPLES!

1. An institutional investor should incorporate sustainability considerations, including environmental, social and governance, into its investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries.!

2. An institutional investor should demonstrate its acceptance of ownership responsibilities in its investment arrangements and investment activities.!

3. Where appropriate, institutional investors should consider a

collaborative approach to promote acceptance and implementation of

the principles of CRISA and other codes and standards applicable to

institutional investors.

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CODE FOR RESPONSIBLE INVESTING IN SOUTH AFRICA (CRISA)

KEY PRINCIPLES, CONTINUED:!

4. An institutional investor should recognise the circumstances and relationships that hold a potential for conflicts of interest and should proactively manage these when they occur.!

5. Institutional investors should be transparent about the content

of their policies, how the policies are implemented and how

CRISA is applied to enable stakeholders to make informed

assessments.

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PRINCIPLES IN PRACTICE

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TARGETED AREAS FOR EPPF: 2012

A focused engagement approach, with a scope limited to a few companies (20 stocks) or industries. !

1. Executive remuneration ^!

!   Full disclosure on remuneration structures and components on annual reports. ^!

!   Clear link between pay and performance. ^!

!   Clear alignment of executive interests with

shareholders.

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TARGETED AREAS FOR EPPF: 2012

!

2. ESG risks in selected industries ^!

!   Engaged a number of mining and construction companies. ^!

!   Voted against management proposals in cases of poor disclosure of environmental and social risks. ^!

!   AGM attendance to express discontent in cases of non-compliance. ^!

!   Meetings with management to seek revision of

policies or practices.

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TARGETED AREAS FOR EPPF: 2012

3.  Board diversity and Black Economic Empowerment ^!

!   Engage with the nominations committees of ALSI 40 companies to increase gender and racial

representation. ^!

!   Actively vote against directors who hold many board positions. ^!

!   Monitor board independence and King III

stipulations.

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TARGETED AREAS FOR EPPF: 2012

4.  General corporate governance weaknesses!

!   Vote against management proposals that undermine good governance codes and standards. ^!

!   Meet with management to seek revision of non-

compliant policies or practices.

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TARGETED INVESTMENTS

•  Impact investing through the Fund’s Socially Desirable Investments portfolio.!

•  Dedicated 2% of the total Fund assets.!

•  Targeted investments to benefit previously disadvantaged individuals living below a defined Living Standard Measure. !

•  Focus on:!

1.  Social infrastructure (e.g. health and education).!

2.  Affordable energy.!

3.  Low-income housing.!

4.  Support Black-owned small and medium enterprises (SMEs).!

!

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THE SOUTH AFRICAN MINING INDUSTRY

!   The South African platinum mining industry is the 3rd largest in the world. !

!   Labour dispute led to strike action at Lonmin’s Marikana mine in August 2012.!

!   3,000 mine workers downed tools and held protest marches. !

!   Strike action lasted for 6 weeks, costing an estimated 50,000 oz of lost production. !

!   Incidents of violence and loss of life occurred during the strike. !

!   Impact of strike action on other industries: platinum, iron ore and gold mining; transport and security industries. !

!   Copycat demands of the miners’ R12,500 salary demand (equivalent to USD 1,500 per month) are spreading through the economy. !

!   The cost base of South African labour, particularly in the mining

industry, might have to increase permanently.

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THE SOUTH AFRICAN MINING INDUSTRY

The Marikana incident highlighted: !

!   the existing inequalities in South Africa. !

!   the state of mine workers’ living conditions. !

!   underlying social tensions in post-apartheid South Africa.!

!   the importance of social factors to sustainable business operations.!

WHAT ROLE CAN RESPONSIBLE INVESTORS PLAY TO AVERT SUCH SITUATIONS IN THE FUTURE?!

SOCIAL ISSUES CAN BECOME FINANCIAL ISSUES, WITH LASTING REPERCUSSIONS. !

INVESTORS CAN NOT AFFORD TO BE COMPLACENT.

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THE SOUTH AFRICAN MINING INDUSTRY

What role can responsible institutional investors play? !

!   Insist on sustainability reporting; set targets and hold management accountable. !

!   Ensure that management adheres to best practice in socially responsible investing.!

!   Demand ‘triple bottom-line’ (profit, people, planet) reporting, and monitor progress.!

!   Make labour relations and remuneration a key focus area, as platinum mining in South Africa is labour-intensive. !

!   As large shareholders, ask the difficult questions at AGMs and through engagement with management.!

!   Engage government and labour unions on labour policy issues.!

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CHALLENGES FACING INSTITUTIONAL INVESTORS

!  Capacity to implement responsible investment policies. !

!  Skills and resources required for policy implementation and ongoing monitoring. !

!  Opportunity cost of not investing in non-compliant companies which may perform well in the short term. !

!  Complicated due diligence processes. !

!  Lack of cohesion among institutional investors. !

!  Ultimately, the responsibility and fiduciary duty to deliver on

investment mandates for the benefit of pension fund members. !

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CONCLUSIONS

•  Sustainable investing is conscious and responsible investing.

•  Environmental, Social and Governance issues are not peripheral or secondary.

•  ESG issues have direct and indirect financial

consequences.

The role of institutional investors in sustainable investing

The role of institutional investors in sustainable investing

ESKOM PENSION AND PROVIDENT FUND

! Manage and administer the pension fund assets of Eskom, South Africa’s national power utility. !

! Defined benefit fund. !

! Assets under management: R80 billion (USD10 billion). !

! South African investments (around 80%): equities, bonds, property, private equity, hedge funds, direct social investments. !

! International investments (around 20%): equities, cash. !

! Signatory to the United Nations Principles for Responsible Investing (UNPRI). !

! Signatory to CRISA (the Code for Responsible Investing in South Africa).!

!

SUSTAINABLE INVESTING: ROLE OF PENSION FUNDS

! Investing pension fund assets in a responsible manner. !

! Investing for sustainability – i.e. ensuring companies will continue to operate profitably and optimally into the future. !

! Understanding that returns to investors, especially pension fund members, are not purely financial. !

! Playing a role in addressing the developmental challenges and infrastructure backlog in African economies. !

! Incorporating environmental, social, and governance issues

into the investment process.

ESKOM PENSION AND PROVIDENT FUND

! The EPPF Responsible Investment policy outlines the Fund’s commitment to: !

! Enhance corporate governance and thus the performance of companies it owns. !

! Play a role in the corporate restructuring and growth of the South African economy. !

! Play a role in enhancing transformation and Black Economic Empowerment (BEE) in South Africa as a prudent fiduciary. !

! Enhance the sustainability of the companies it owns.!

!

SUSTAINABLE INVESTING: THE EPPF PERSPECTIVE

! Investing for the long term. !

Long-term view means ‘patient’ capital, can invest in assets with a long-term horizon. !

Sustainability is key. !

! Paying attention to: environmental, social and governance factors. !

! EPPF definition of sustainability: !

Environmental Disclosure !

Disclosure on Social & Economic issues. !

! Sustainability also addresses unique South African circumstances: !

Black Economic Empowerment (“BEE”) and transformation !

Board diversity and performance !

Employment equity and training.

UNITED NATIONS PRINCIPLES FOR RESPONSIBLE INVESTING (UNPRI)

! Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes. !

! Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices. !

! Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest. !

! Principle 4: We will promote acceptance and implementation of the principles within the investment industry. !

! Principle 5: We will work together to enhance our effectiveness in implementing the principles. !

! Principle 6: We will each report on our activities and progress towards

implementing the principles.

CODE FOR RESPONSIBLE INVESTING IN SOUTH AFRICA (CRISA)

KEY PRINCIPLES!

1. An institutional investor should incorporate sustainability considerations, including environmental, social and governance, into its investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries.!

2. An institutional investor should demonstrate its acceptance of ownership responsibilities in its investment arrangements and investment activities.!

3. Where appropriate, institutional investors should consider a

collaborative approach to promote acceptance and implementation of

the principles of CRISA and other codes and standards applicable to

institutional investors.

CODE FOR RESPONSIBLE INVESTING IN SOUTH AFRICA (CRISA)

KEY PRINCIPLES, CONTINUED:!

4. An institutional investor should recognise the circumstances and relationships that hold a potential for conflicts of interest and should proactively manage these when they occur.!

5. Institutional investors should be transparent about the content

of their policies, how the policies are implemented and how

CRISA is applied to enable stakeholders to make informed

assessments.

PRINCIPLES IN PRACTICE

TARGETED AREAS FOR EPPF: 2012

A focused engagement approach, with a scope limited to a few companies (20 stocks) or industries. !

1. Executive remuneration !

! Full disclosure on remuneration structures and components on annual reports. !

! Clear link between pay and performance. !

! Clear alignment of executive interests with

shareholders.

TARGETED AREAS FOR EPPF: 2012

!

2. ESG risks in selected industries !

! Engaged a number of mining and construction companies. !

! Voted against management proposals in cases of poor disclosure of environmental and social risks. !

! AGM attendance to express discontent in cases of non-compliance. !

! Meetings with management to seek revision of

policies or practices.

TARGETED AREAS FOR EPPF: 2012

3. Board diversity and Black Economic Empowerment !

! Engage with the nominations committees of ALSI 40 companies to increase gender and racial

representation. !

!  Manage and administer the pension fund assets of Eskom, South Africa’s national power utility. !

!  Defined benefit fund. !

!  Assets under management: R80 billion (USD10 billion). !

!  South African investments (around 80%): equities, bonds, property, private equity, hedge funds, direct social investments. !

!  International investments (around 20%): equities, cash. !

!   Signatory to the United Nations Principles for Responsible Investing (UNPRI). !

!  Signatory to CRISA (the Code for Responsible Investing in South Africa).!

!  Investing pension fund assets in a responsible manner. !

!  Investing for sustainability – i.e. ensuring companies will continue to operate profitably and optimally into the future. !

!  Understanding that returns to investors, especially pension fund members, are not purely financial. !

!  Playing a role in addressing the developmental challenges and infrastructure backlog in African economies. !

!  Incorporating environmental, social, and governance issues

!  The EPPF Responsible Investment policy outlines the Fund’s commitment to: !

!   Enhance corporate governance and thus the performance of companies it owns. !

!  Play a role in the corporate restructuring and growth of the South African economy. !

!  Play a role in enhancing transformation and Black Economic Empowerment (BEE) in South Africa as a prudent fiduciary. !

!  Enhance the sustainability of the companies it owns.!

!  Investing for the long term. !

!  Paying attention to: environmental, social and governance factors. !

!  EPPF definition of sustainability: !

!  Sustainability also addresses unique South African circumstances: !

!  Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes. !

!  Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices. !

!  Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest. !

!  Principle 4: We will promote acceptance and implementation of the principles within the investment industry. !

!  Principle 5: We will work together to enhance our effectiveness in implementing the principles. !

!  Principle 6: We will each report on our activities and progress towards

1. An institutional investor should incorporate sustainability considerations, including environmental, social and governance, into its investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries.!

2. An institutional investor should demonstrate its acceptance of ownership responsibilities in its investment arrangements and investment activities.!

3. Where appropriate, institutional investors should consider a

4. An institutional investor should recognise the circumstances and relationships that hold a potential for conflicts of interest and should proactively manage these when they occur.!

5. Institutional investors should be transparent about the content

1. Executive remuneration ^!

!   Full disclosure on remuneration structures and components on annual reports. ^!

!   Clear link between pay and performance. ^!

!   Clear alignment of executive interests with

2. ESG risks in selected industries ^!

!   Engaged a number of mining and construction companies. ^!

!   Voted against management proposals in cases of poor disclosure of environmental and social risks. ^!

!   AGM attendance to express discontent in cases of non-compliance. ^!

!   Meetings with management to seek revision of

3.  Board diversity and Black Economic Empowerment ^!

!   Engage with the nominations committees of ALSI 40 companies to increase gender and racial

representation. ^!

!   Actively vote against directors who hold many board positions. ^!

!   Monitor board independence and King III

4.  General corporate governance weaknesses!

!   Vote against management proposals that undermine good governance codes and standards. ^!

!   Meet with management to seek revision of non-

•  Impact investing through the Fund’s Socially Desirable Investments portfolio.!

•  Dedicated 2% of the total Fund assets.!

•  Targeted investments to benefit previously disadvantaged individuals living below a defined Living Standard Measure. !

•  Focus on:!

1.  Social infrastructure (e.g. health and education).!

2.  Affordable energy.!

3.  Low-income housing.!

4.  Support Black-owned small and medium enterprises (SMEs).!

!   The South African platinum mining industry is the 3rd largest in the world. !

!   Labour dispute led to strike action at Lonmin’s Marikana mine in August 2012.!

!   3,000 mine workers downed tools and held protest marches. !

!   Strike action lasted for 6 weeks, costing an estimated 50,000 oz of lost production. !

!   Incidents of violence and loss of life occurred during the strike. !

!   Impact of strike action on other industries: platinum, iron ore and gold mining; transport and security industries. !

!   Copycat demands of the miners’ R12,500 salary demand (equivalent to USD 1,500 per month) are spreading through the economy. !

!   The cost base of South African labour, particularly in the mining

!   the existing inequalities in South Africa. !

!   the state of mine workers’ living conditions. !

!   underlying social tensions in post-apartheid South Africa.!

!   the importance of social factors to sustainable business operations.!

!   Insist on sustainability reporting; set targets and hold management accountable. !

!   Ensure that management adheres to best practice in socially responsible investing.!

!   Demand ‘triple bottom-line’ (profit, people, planet) reporting, and monitor progress.!

!   Make labour relations and remuneration a key focus area, as platinum mining in South Africa is labour-intensive. !

!   As large shareholders, ask the difficult questions at AGMs and through engagement with management.!

!   Engage government and labour unions on labour policy issues.!

!  Capacity to implement responsible investment policies. !

!  Skills and resources required for policy implementation and ongoing monitoring. !

!  Opportunity cost of not investing in non-compliant companies which may perform well in the short term. !

!  Complicated due diligence processes. !

!  Lack of cohesion among institutional investors. !