Retirement investors are required to “consider” Responsible Investing (RI) criteria when making their day to day investment decisions. There are however currently no detailed regulations to enforce such requirements.

The industry is taking initiative and is working together on sharing ideas and setting guidelines and frameworks that can be used to successfully implement RI.

GraySwan is a PRI Signatory which means that we have undersigned the United Nations backed Principles for Responsible Investment (UNPRI). Signatories promise to uphold the six principles that require them to act with the highest integrity and highest effort on environmental, social and governance (ESG) issues and also to expect the same from other service providers to their clients. GraySwan thereby forms part of a growing global network of investment peers who participate in online and live in-person events, forums and initiatives focussed at integrating ESG factors into the investment decision-making process. GraySwan also supports the Code for Responsible Investing in South Africa (CRISA) with the same vigour which is in line with UNPRI but aimed at the South African investment community.

Executive Summary

There are many initiatives locally and globally aimed at assisting the industry on how to include RI in the investment decision-making process. Initiatives are also there for investors to get involved in topical issues to make a difference by expecting more from service providers and companies on environmental, social and governance issues. As the investment landscape evolves, the frameworks and guidelines produced by these initiatives might become regulated in future. Industry participants therefore have a vested interest to get involved during these initial stages where they can still influence the direction of the development of RI.

In this article we firstly introduce some of the key international organisations involved with RI to place each in context. Secondly, we highlight specific initiatives initiated by these organisations that can assist investors to further their knowledge and involvement in RI related topics.

International Organisations

In this section we introduce some of the key international organisations in the evolution of RI and some protocols and conventions who have already achieved success and changed behaviour. We introduce each of the international protocols and conventions in chronological order of their development over time.

  • Intergovernmental Panel on Climate Change (IPCC)

The Intergovernmental Panel on Climate Change (IPCC) is an international body for the assessment of climate change. The IPCC reviews and assesses the most recent scientific information produced worldwide relevant to the understanding of climate change. It does not form a view on climate change but rather ensures that research done on climate change is scientifically sound, clear and objective. Investors can then use the information in order to form their own views.

From the scientific research assessed by the IPCC it became evident that greenhouse gases (GHGs) are increasing in the atmosphere and in need of corrective action. There is overwhelming evidence that humans are indeed responsible for the changing climate.

  • United Nations Framework Convention on Climate Change (UNFCCC)

In 1992, countries joined an international treaty, the United Nations Framework Convention on Climate Change (UNFCCC), to consider what they could do to limit average global temperature increases and the resulting climate change.

The parties to the convention have met annually to assess progress in dealing with climate change. However, the treaty itself did not set any binding limits on GHG emissions and contained no enforcement mechanism. In 1997, the Kyoto Protocol established legally binding obligations for countries to reduce their GHG emissions.

  • United Nations-backed Principles for Responsible Investment (UNPRI)

The United Nations-backed Principles for Responsible Investment Initiative (UNPRI) is a network of international investors working together to put the six Principles for Responsible Investment into practice.

In 2005 the United Nations Secretary-General invited a group of the world’s largest institutional investors to join a process in developing the Principles for Responsible Investment. Individuals representing 20 institutional investors from 12 countries agreed to participate in the Investor Group.

GraySwan is a PRI Signatory and has committed to uphold the six principles that require us to act with the highest integrity and highest effort on ESG issues and also to expect the same from others.

  • Code for Responsible Investing in South Africa (CRISA)

The Code for Responsible Investing in South Africa (CRISA) is in line with UNPRI but aimed at the South African investment community. With the introduction of the CRISA, South Africa became the second country after the United Kingdom to formally encourage institutional investors to integrate ESG issues into the investment process.

To date, the Code has been widely accepted by different industry bodies. The Institute of Directors in Southern Africa (IoDSA), the Principal Officers Association (POA), the Association for Savings and Investment South Africa (Asisa), the Financial Services Board (FSB) and the Johannesburg Stock Exchange (JSE) have all made public declarations of acceptance of the Code.

Key Initiatives

In this section we introduce some of the current initiatives available. The above mentioned organisations encouraged investors to get involved with current initiatives or recommend new initiatives in order to expand the growing reach of RI.

  • Montreal Protocol

The work of the IPCC led to the Montreal Protocol which is a treaty designed to reduce the production and consumption of ozone depleting substances (such as CFC gases) in order to protect the earth’s fragile ozone layer. There has been a dramatic reduction in CFCs in the atmosphere since the protocol entered into force.

  • Kyoto Protocol

The Kyoto Protocol is an international treaty signed in 1997, that sets binding obligations on countries to reduce GHG emissions. The 6 human induced GHGs include carbon dioxide, methane, nitrous oxide, sulphur hexafluoride , hydro fluorocarbons and per fluorocarbons.

The initial protocol commitment period was between 2008 and 2012 with most countries failing to reach their reduction targets. The next commitment period will be from 2013 to 2020. It has not yet entered into legal force as many governments are reluctant to develop stringent national limits on emissions for fear of big companies relocating their operations to countries with less stringent regulatory regimes.

  • Sustainable Returns Initiative

Sustainable Returns for Pensions and Society is a southern African, industry-led initiative to integrate ESG factors into the mainstream of retirement industry investment practices. The project was convened by many of the key organisations involved with the development of CRISA including the Principal Officers Association of South Africa (POA), International Finance Corporation (IFC), the Government Employees Pension Fund (GEPF), and the Association for Savings and Investment South Africa (ASISA).

The initiative produced the Responsible Investment & Ownership: A Guide for Pension Funds in South Africa which was made public in May 2013. This guide assists retirement funds in preparing their RI Policy which serves as a road map or plan for implementing RI in their investment decision-making. There are many other guides and frameworks still forthcoming.

  • PRI Engagement Initiatives

An increasing number of investors have been accessing the PRI engagement platform to join existing initiatives or present their own collaboration projects. Current initiatives available on this platform are

  • Engagement on the director nomination process;
  • Engagement with palm oil buyers to encourage the use of sustainable palm oil;
  • Water risk engagement group;
  • Engagement on labour standards in the supply chain;
  • Engagement on employee relations;
  • Engagement on fracking;
  • CDP Carbon Action: Engagement to encourage adoption of emissions reduction targets;
  • Engagement to encourage companies to join the UN Global Compact;
  • Executive compensation: Integrating ESG factors into incentive structures;
  • Engagement on anti-corruption.

Each of these initiatives have their own steering committees, forums, objectives and action plans.

  • Carbon Disclosure Project (CDP)

The Carbon Disclosure Project (CDP) investor initiatives give investors access to year-on-year information on companies’ GHG emissions, water usage and strategies for managing climate change, water and deforestation risks.

The Kyoto Protocol has proven problematic as individual governments have been reluctant to develop stringent national limits on emissions for fear of companies relocating their factories and jobs to countries with less stringent regulatory regimes. The CDP attempts to side step these national interests by focusing on individual companies rather than on countries.

Companies can use the information to gauge how they themselves are performing against their peers. Investors can use the information to identify companies that are more carbon and energy efficient than other companies and should therefore have lower input costs resulting in better profit margins.

  • Global Reporting Initiative (GRI)

The Global Reporting Initiative (GRI) is a non-profit organization that provides all companies and organizations with a comprehensive sustainability reporting framework that is widely used around the world.

Listed companies on the JSE are obliged to produce an integrated report in terms of the JSE’s listing requirements for their financial years starting on or after 1 March 2010. The GRI provides a framework that companies can use as guide for preparation of their integrated report.

Summary

Many global incidents highlighted that ESG issues can affect the risk and return of investment portfolios. The Enron and WorldCom scandals highlighted the risks of poor governance, the BP oil spill highlighted the risk of poor environmental considerations and the Marikana incident at Lonmin highlighted the risk of poor social relations. All of these incidents resulted in subsequent financial losses to shareholders and investors.

There are many ways in which investors can get involved and up skill themselves and work together with other industry participants in order to change the world. Investors should decide what is important to them and get involved in initiatives that they feel most passionate about.