John Oliphant, Chair of CRISA, shared his experiences in the development of responsible investment and the way forward in South Africa with business journalist Bruce Whitfield and EY Senior Researcher, Jess Schulschenk, on 02 April 2012. The video interview is included above, and reflections from both this and the longer research interview are given below. These findings were made possible by the Gordon Institute of Business Science (GIBS) and form part of the ongoing Corporate Governance Research Programme with the Albert Luthuli Centre for Responsible Leadership (University of Pretoria) supported by Ernst & Young.
The discourse on responsible investment has evolved considerably from the concept of socially responsible investing to broader sustainability issues and long term investments. The launch of the UNPRI in 2006 anchored much of the recent thinking on responsible investment and with the launch of the CRISA code in 2011, responsible investment has started to become a lot more practical in South Africa. CRISA aims to provide institutional investors with guidance on what they need to do in order to ensure that they become active owners of capital and owners of companies.
John Oliphant, Head of Investments and Actuary for the Government Employee Pension Fund (the largest pension fund in Africa) and Chair of the Code for Responsible Investment in South Africa (CRISA), shared some background on the development of responsible investment in South Africa. South Africa was the second emerging country to establish a national, investor-led United Nations Principles of Responsible Investment (UNPRI) network in May, 2009. This was in a move to progress from the UNPRI being primarily a marketing tool, to becoming a tool for action.
When King III came out for public comment, there was a strong feeling that King III was not going to work so long as companies can voluntarily opt out of the apply or explain approach. King III would not work unless the asset owners of companies became active owners – companies would need active shareholders holding them to account. The UNPRI network felt that there was insufficient guidance in South Africa for institutional investors on how to behave, and act as active owners of assets. The King Committee held to the apply or explain principle, so a move was made to develop a code for institutional investors.
The CRISA committee was formed with the backing of the IoDSA and other industry bodies looking to have directors held accountable. As elected Chair of CRISA, Oliphant is encouraged by how productive the committee has been to date. He also shared what he felt was the the challenge of producing ‘an uncompromised code’ that was not driven by the various roleplayer’s agendas.
The CRISA code was launched in July 2011 and became effective on 01 February 2012. The code provides a simple but strong message on the principles of responsible investing for South Africa. An important inclusion in CRISA is that investors should identify and publicly acknowledge when they are conflicted.
“I think after we put that code through there was a greater acceptance. I also realised that it was an important principle because it encourages transparency and you don’t try to hide anything under the carpet. We said let the system be that transparent so that we can all be held accountable. Also, the principles are all about having a policy around active ownership”.
An important, but challenging principle is that policy should be disclosed publicly. This stems from the code being voluntary, so there is no way of holding an investor accountable if you don’t know what their intentions are. Ultimately, the code doesn’t describe a responsible investment policy but it rather asserts that there should be a policy on active ownership in place. In this way, the “code caters for everybody in the spectrum, you need to have a policy that people are aware of and states what your position is”.
Oliphant had been involved in giving comment on the drafting of the Pension Funds Act which places strong emphasis on environmental, social and governance (ESG) issues: “There is a principle now in regulation 28 that states trustees must apply their mind on the ESG issues and once you start having elements of things like that in the regulations, it creates a space for people who are smart enough to sue trustees. And once that can happen, I think it will also ignite more attention. We talk about them seriously and it came about at the right time, because now all the trustees are scratching their heads on what does this principle mean, what should we be doing. And then immediately there is the CRISA code that says how you can go about it. So that is the unique thing about the South African context not seen anywhere else in the world”.
Oliphant shared further how this process is really just beginning. Considerable education and training movements as well as the development of templates and support systems are underway with other industry bodies. He is looking forward to the point when “you have asset managers more actively involved and trustees more actively involved [as] then you start seeing companies being more encouraged and engaged”.
The challenge of King III is that it assumes that South African investors are active. Oliphant sees CRISA as a compliment to King III’s apply or explain approach – “You obviously need an active shareholder base to ensure they engage with entities they invest in. CRISA provides a framework for some investors to be able to engage with entities, it's got requirements, a policy on active ownership, they need to expose that policy to the public and I think in the coming years we will see active shareholders actually tabling special resolutions and AGM’s”.
Essentially it’s about risk, and sustainability
Oliphant sees responsible investment as big picture thinking. Referring to the recent BP oil spill saga of 2010, “That had a big impact on the environment but also a big impact on the share price of BP which had a big impact on the savings of people and their pension funds so what we are saying is that all these things that are considered to be soft issues are actually systematic risks for pension funds and we believe that as investors we should engage more to ensure that our long term investments are sustainable in the long term”.
Companies are producing extensive reports, but investors aren’t paying sufficient, if any, attention to them. Asset managers aren’t paying attention to the reports as clients have not started to ask for responsible investing. Responsible investing needs to go all the way back to the source and society at large has a greater role to play in this. Until the manner in which analysts are rewarded for their investment making decisions changes, there may remain little incentive to fundamentally change the nature of the investment sector. This calls for new systems of incentivisation.
Oliphant placed strong emphasis on the need for collaboration across the private and public sectors going forward. Whilst engaging with companies behind closed doors has a place, he sees publically available information as an important measure of not only transparency, but to drive changes in behaviour. Getting asset owners actively engaging on issues of responsible investment is going to be key. The industry bodies behind CRISA have ambitious plans ahead to initiate the types of awareness raising required to get asset owners actively engaged. Finally, Oliphant called for greater education, training and awareness around responsible investment in South Africa, especially considering the critical role of the media to the CRISA code’s survival.