DAILY MAVERICK / 25 APRIL 2019 - 11.29 / RUAN JOOSTE
A conference this week examined one of the trickiest issues of our day: why is it proving so difficult to mobilise retirement funds to aid social upliftment? Meanwhile, inequality is rising and threatening to become a political time bomb, environmental crises are increasing, tax revolts are looming, and levels of violent social unrest could become unmanageable. Is there a solution? Cue impact investing.
“Inequality and unemployment have become synonymous with South Africa,” said Elias Masilela – Director of DNA Economics and a part-time commissioner on the National Planning Commission.
“Whatever we (the private and public sector) have been doing has been delayed and has proven inadequate.”
Speaking at the Riscura Education Series for Institutional Investors on April 24, 2019 the former CEO of the Public Investment Commission (PIC) and founding member of the Financial Sector Charter Council stated that it has now come down to individuals and the power of their retirement savings to get the ball rolling and they need to get it moving urgently. “That is where radical economic transformation lies with me,” he said. “Do the right things in the shortest amount of time and get the maximum return for doing so. We should adopt impact investing.”
But what is impact investing? The World Bank defines it as “investments made into companies, organisations, vehicles and funds with the intent to contribute to measurable positive social, economic and environmental impact alongside financial returns.” For some people that means putting their savings into instruments that follow international norms and principles designed to address Environmental, Social and Governance (ESG) risks. For others, it means avoiding industry vehicles that they see as causing harm—for example, tobacco and gambling. Impact products aim to go one step further by utilising the power of large scale funds to invest in products that will socially uplift society, and make it financially lucrative to do so for members of those funds.
Although the local social impact investment ball has not technically been stagnant in South Africa it has not grown to a significant size to get the momentum going and prove significant impact.
For example last year the Bertha Centre at the UCT Graduate School of Business launched the country’s first social impact bond to drive Early Childhood Development (ECD) targets in the Western Cape; Ashburton manages a job fund to drive work opportunities and Old Mutual boasts a range of ESG compliant unit trusts, but industry players say that is not nearly enough to effect proper and sustainable change.
A Capital Advisors Report: The Landscape for Impact Investing in Southern Africa states that only 3% of local financial assets are allocated to impact investment strategies.
Said Masilela: “South Africa requires more private capital pursuing social and environmental impact with intent. He says local pension funds collectively manage over R4 trillion in assets and the discussion on their effect on society and the role retirement assets should play in socio-economic development should be accelerated.”
Is it feasible? “Yes”, said Masilela. “The Government Employees Pension Fund, even Eskom’s pension fund is already doing it. Abroad US$230 billion in impact investment activity has been recorded and is growing at 20% per year. But, this is predominantly in the developed world. Where it is most needed, in the developing world, Africa in particular, and what is transpiring is a mere trickle in the bigger scheme of things and/or what is required.”
It seems the need amongst individuals to get more involved in social and environmental initiatives is already present and growing. Investors s are becoming more interested in options aligned with personal values, and Masilela said the boards of trustees of SA’s respective retirement funds need to start applying the required pressure on behalf of the members.
A 2017 Global investment survey by Schroders found that 81% of South African investors reported sustainable investment growing in importance to them in recent years. 67% of these respondents reported increasing their allocation to these investments in the 5 years precedent. Among the respondents contemplating a sustainable investment, 70% indicated a willingness to provide equal or higher emphasis on social and environmental returns relative to financial criteria.
These findings are consistent with global demographic trends. Around 86% of millennials (ages 18-35) and 79% of Generation X (36-50) investors indicate sustainable investment has become more important to them over the last 5 years. And 70% and 64% respectively also reported increasing their allocation to sustainable opportunities in recent years. The trend is also present, albeit less pronounced, for the older generation of savers. 67% of boomers (51-69) indicated attaching greater personal value to sustainable investment and 50% had raised their allocation to sustainable funds.
“Changing investment preferences should drive the alignment of retirement plans to impact investment principles and would be a significant step in meeting individual needs for suitable investment options, said Masilela. “ Reporting to beneficiaries on both financial performance and the effect of their retirement savings on people and the planet could also grow individuals’ affinity with their retirement plans and encourage saving behaviour.”
Social pensions, retirement plans based on a response or impact investing strategic asset allocations, have been piloted with promise in several jurisdictions across the globe.
Regulators have taken clear steps toward responsible investment and industry groups are proactively moving to facilitate such transition. The United Nations-supported Principles for Responsible Investment has noted over 400 policy instruments intended to promote sustainable investments globally, half of these introduced in the last five years alone.
Some notable local developments in regulatory and industry-driven initiatives include an amendment to Regulation 28 of the Pension Funds Act establishing a requirement for funds to consider Responsible Investment (RI) in investment decisions; the launch of a Code of Responsible Investing in South Africa (CRSISA), a voluntary code consisting of five principles to guide RI practices of institutional investors and the introduction of the Sustainable Returns initiative to help retirement funds comply with Regulation 28 and CRSISA to name a few.
In October 2018, SA was inducted as a partner to the global network of fighters for impact investing and became a member of the Global Steering Group (GSG) in New Delhi, an independent group of private capital holders catalysing impact investing. SA joined fellow African states Kenya, Ghana and Zambia who all committed to making the agenda a continental one, to be owned at the level of the African Union, according to media reports. It was termed the New Marshal Plan for Africa. . Currently, governments are missing in this movement, yet they are critical in creating the right investment environment, said Masilela
“Global trends and SA’s growing involvement in the movement shows that introducing local offerings is consistent with trustee fiduciary duties, strengthen the relevance of plan offerings to beneficiaries and expand the retirement community’s contribution to sustainable development in Africa,” said Heather Jackson, head of Impact Investing at Ashburton Investments and founder of the Responsible Investing Subcommittee at The Association for Savings and Investment South Africa (Asisa). Jackson was also involved in drawing up the guidelines mentioned. She was also a panellist at the Riscura Education series.
Unfortunately, most of the private industry has not embraced the ‘progressive’ framework as much as policymakers thought they would, said Jackson.
Various local press coverage indicates that the private financial sector remains concerned over the potential adverse consequences of government prescribing riskier assets without proper compensation, especially in an environment where state governance, financial management and service delivery irregularities persist. Other objections cited include claimed ineffectiveness of the approach during apartheid, concerns around the erosion of retirement savings, the risk of encouraging beneficiary dissaving behaviour and property rights violations.
Jackson stated that the regulatory framework put forward by National Treasury and managed by the Financial Services Conduct Authority is in no way prescriptive and puts the decision of asset allocation in the hands of the trustees. Perhaps the FSCA should provide more clarity on the proposals to provide more comfort to industry, she added.
In the meantime, the supporters of the investment philosophy have now turned to the heart of retirement capital – the contributors and the trustees who represent them. The latter was well represented at the Riscura event.
Given the contentious nature of mandated investment, the decision to invest retirement contributions in development impact initiatives should be the hands of beneficiaries, said Jackson. “Extensive trustee education is required to ensure the provision of options with expected financial performance suited to funding the retirement needs of beneficiaries is aligned.”
Masilela agreed that education is key and added that there is no need for any more rules or regulation. “We have what we need in place,” he said. He made it clear that wrapping more red tape around the throats of corporate SA will only strangle more life out of the local industry and available capital into the arms of another offshore.
“The best way to change investment behaviour is by incentive, not by the stick of the law,” he said. He referred specifically to Black Economic Empowerment rules and the increases in the stringency of labour laws, which he said had failed to make any real improvement to the broader economy or its participants or entice corporates to fund development.
In contrast, he referenced to Section 12J of the Income Tax Act as an example of how incentive does change investment behaviour.
Section 12 J was introduced by National Treasury in 2009 and following a few tweaks along the way, it now allows capital providers, within the framework of certain terms and conditions, to write off 100% of their investment against their taxable income in the year they fund certain industries and business models specified in the legislation.
The reason behind the scheme according to the SA Revenue Service was to make it more attractive to fund the growth of new and developing small and medium businesses and give riskier industries like renewable energy and junior mining better access to capital. It also wanted to inspire the development of non-essential (yet much needed) infrastructure like student housing and tourism attractions, to stimulate the economy and create jobs.
“It seems to be working,” said Masilela, and working well.
The estimated total 12J industry assets under management stood at R3.6 billion at the end of 2018, with R1.7 billion in 12J assets under management, according to Westbrooke Alternative Asset Management, who has about 50% market share.
It has actually lead to the establishment and development of a brand-new investment class and a whole alternative industry has been growing around it. The Section 12J investment class is anticipated to increase from R3.7bn to R5.5bn by the end of the current financial year, with the alternative stock exchange ZARX now listing Section 12 vehicles to streamline the process and bring more liquidity to the market.
We need a swift and innovative solution for this pertinent challenge we are facing and Masilela that impact investing is the most obvious solution.
Firstly we don’t have to wait for government to come to the party to get in going. The regulatory frameworks are enabled and groundwork has been done and ready for digging. We also don’t need to reinvent the wheel. Global precedent has been set and there are more than enough examples to learn from successes and failures, even in our own history books.
We can get a lot from peer-led efforts and to start conceptualising suitable process and product approaches for the local market,” said Malcolm Fair, a consultant and Managing Director at Rescura.
For one the distinction between prescription and impact investment should be very clear from the get-go. In the late 80s, the South African government implemented prescribed investments that forced pension funds to invest 53% of their assets into parastatals and government bonds. The forced investment parameters did not work so well, as taxpayers ended up covering the pension fund liabilities while international funding dried up.
Experience taught us most prescribed investment policies have failed investors.
We do not have to look far to see examples of the limitations of well limited asset-class prescription much further much further from own backyard either Zimbabwe and Namibia have used prescription to some extent to try to direct flows of private capital forcing their financial industry and retirement funds to allocate a percentage of their funds into a handful of available local projects and industries.
A lack of liquidity is a consequence as individual contributions are diminishing and foreign capital as taken flight, made worse by currency and inflation factors, prescription in Zimbabwe has severely distorted the price of prescribed assets to the point where they had to be held by local pension funds but have yielded virtually no return for investors.
Furthermore, the availability of viable companies and projects that are still going concerns are few and far between. Most funds are actually falling foul of the prescribed thresholds in the country currently and have no have run out of options to rectify it.
“Capital cannot function on its own. It needs buy-in from government and the private sector. Partnerships are pivotal in driving social and economic change effectively and for the long haul,” said Fair.
There are also different models that have found success in other emerging markets It travels across methodologies, strategies and formats ranging from direct investments and subsequent profitable exit strategies in India and Mexico, to incubation hubs in Egypt and Italy with social impact mandates, even private equity firms are getting involved in Brazil. Family offices from the West are also looking into providing capital to ventures and developments in South Eastern Asia.
The consensus of the conference was confirmed: Other countries have proven that the options are endless, benefits are in bloom and pointed out the pitfalls. Back home the challenges are real, the capital is waiting in the wings and the local financial industry is ripe for disruption and more than capable of innovation. What are we waiting for?
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER