Pension fund trustees can and should be aware of the powerful position they hold in ensuring that responsible investment in South Africa generates not only financial returns but also meaningful social and economic outcomes, while preserving environmental sustainability.
As investors become increasingly focused on the impacts of environmental and social issues, we’re seeing new terms flooding the sector: Environmental, Social and Governance.
More about Investor activism
Investor activism refers to the actions taken by investors to engage with their investee companies on both financial and non-financial matters. Traditionally, they do this through public campaigns, attending company Annual General Meetings (AGMs), being vocal and voting on key matters, and presenting shareholder resolutions to deal with important ESG issues.
In doing so, investors can encourage corporates to think beyond mere short-term profits but also to consider their long-term sustainability and overall impact on society.
Investor activism can take different forms depending on the type of investment instrument.
Equity investors buy shares in a company and, in doing so, become part owners of the company. This means that they benefit financially when the company does well, through dividends and capital appreciation in the value of the shares. But it also means that as part owners of the business, they are partly responsible for ensuring that the company is a good corporate citizen in terms of how it is governed, how it treats its staff, how it impacts the community within which it operates and what its environmental footprint is.
Shareholders are becoming increasingly aware of these issues and are using their power to demand greater accountability and transparency from companies.
One form of shareholder activism is simply exercising the right to vote on important matters. But as a minority shareholder an investor may not be able to materially influence the outcome of the vote. So shareholder activism in that case could take the form of attending the AGM and being vocal about contentious matters - and asking the “hard” questions around the company’s corporate practices, particularly if investors identify practices that they believe to be unsustainable, harmful or against the principals of good corporate governance.
If these efforts prove unsuccessful, the only remaining form of shareholder activism may be to “vote with your feet” by choosing to divest in the face of pervasive issues that are not adequately addressed by the company.
Bondholder activism is a lot less commonly understood than shareholder activism. Bondholders provide debt funding to companies (or governments). They do not have an ownership stake in the investee companies, and as such cannot necessarily vote on matters relating to how the company is run. As the providers of large amounts of debt capital needed to fund the operations or growth of these entities, bondholders are nonetheless able to effect change in the borrowers’ behaviour in the following ways:
- Firstly, they can vote with their feet, by walking away from bonds of companies or entities that have pervasive issues.
- They can negotiate for specific protections in their loan agreements, which require the borrower to uphold certain standards of governance, that demand transparency on important matters or that outright prohibit certain actions. A simple example of this would be requiring a State-owned Entity to adopt a Conflicts of Interest policy to prevent the risk of tenders going to the directors’ friends or family.
- Bondholders, much like shareholders, can also hold their investee companies accountable through direct engagement with management or by being vocal in the public domain on matters that they believe require attention.
Investor activism can also include the way that investors engage with market regulators and other capital markets participants (such as the stock exchange) to promote safer, more transparent capital markets for investors. An example of this would be a South African investor pushing for more stringent requirements for companies wanting to list their shares or bonds on the JSE. As Futuregrowth, we have exercised bondholder activism through our constant engagement around strengthening the JSE debt listing requirements.
What can you do as a pension fund trustee?
People who invest directly in the stock/bond market can be investor activists on their own behalf: they can choose not to invest in a company that they know treats its employees unfairly or is a huge emitter of greenhouse gases, for example. The challenge, however, is that many people do not invest directly in the market. For most people, a large part, if not all, of their savings are invested in a pension or provident fund which is managed on their behalf by an asset manager.
As an asset manager, we are the custodian of large amounts of capital that we invest on behalf of our clients. Given that we are entrusted with this responsibility, we have a fiduciary duty to deploy that capital to sustainable investments that will yield positive financial returns, but also to entities that are responsible corporate citizens. We essentially hold the key to keeping our clients’ investments accountable for maintaining high environmental, social and governance standards.
But there is a step before the involvement of the asset manager – and that involves the employee-elected pension fund trustee. The trustee is the first link in a chain that stretches from the workplace, through several levels of advisors, to an investment in a company that may go on to thrive or fail, either through its financial performance or through the effect it has on the environment or the society within which it operates. In terms of the law, trustees have an immense responsibility: their fiduciary duty is equivalent to a director’s responsibility in a company.
In terms of Regulation 28 of the Pension Funds Act trustees are obliged, in their investment decision-making, to appropriately consider ESG factors which may affect the sustainable long-term performance of a fund’s assets. They are also required to have an investment policy statement which clearly sets out their approach to ESG issues.
Be a responsible investor
But, as a trustee, why not take this a step further – why not become an Investor Activist in the execution of your fiduciary duty? Equipped with what you now know about ESG integration, responsible investing and investor activism, hold the asset managers you are considering allocating funds to, or have already allocated funds to, accountable to the highest possible standards.
Pension fund trustees are urged to be aware of their capacity and potential to ensure that responsible investment in South Africa generates not only financial returns but also meaningful social and economic outcomes, while preserving environmental sustainability. Consider how you can use your fiduciary responsibility to contribute to a fairer society, a healthier environment and a more inclusive economy –for a future that matters to you and your beneficiaries.