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Stewardship: the quiet way in which major investors are changing the world

Published Jan 10, 2022

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The provider of the unit trust or retirement fund you invest in may be doing more than you realise to influence the companies they invest in on your behalf to become more sustainable.

This behind-the-scenes, often unheralded, work by institutional investors to steer companies in the right direction – through both active engagement and proxy voting at shareholder meetings – is known as stewardship, and it’s a crucial part of the ESG (environment, social and governance) movement.

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A new report on stewardship in South Africa was released recently by investment firm RisCura. Moving the Needle – Stewardship in South Africa is the result of a survey of 52 South African asset managers, with over R3.9 trillion in assets under management. This represents 70% of South Africa’s total investment pool of R5.5 trillion.

RisCura managing director, Malcolm Fair, says institutional investors and asset managers have a huge responsibility to drive change. “Properly engaging with companies about factors that materially affect their long-term sustainability – such as improved corporate governance, better environmental and social practices – can improve their financial stability, reduce risk and become a crucial part of making companies more investable, both by local and international investors. Institutional investors have the opportunity to ‘move the needle’ by actively engaging with the companies they invest in on these important issues,” he says.

The research was a combination of both an online survey, and one-on-one interviews, which focused on three specific questions, namely:

1. How are you moving the needle through stewardship activities towards a better South Africa and world?

2. How are you contributing towards dealing with the bad actors, individual or corporate alike?

3. How do you rate your proxy shareholder voting systems and processes internally?

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“With the many ESG challenges that South Africa faces, asset managers can and should play a vital role as stewards of savings they are entrusted with. Indeed, they have many tools at their disposal, from engaging with the investee companies through to removing and replacing directors or ultimately driving up the cost of capital through disinvesting,” says Fair.

Governance dominates

According to the report, asset managers by and large continue to spend most effort engaging with corporates on governance issues (the G in ESG). While there is an increasing, more recent focus on environmental issues, specific attention on social issues remains weak.

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“With the world facing a global climate crisis, and South Africa predicted to be amongst those more severely affected, the level of attention to environmental issues was lower than expected, especially given the survey was conducted in the lead up to COP26. Social issues hardly featured in the interviews. This was surprising given the combination of Covid lockdowns, massively increased mortality and social unrest and looting that severely impacted particularly SMEs in South Africa earlier this year. SMEs are the growth engine of any economy,” Fair says.

Dealing with bad actors

According to the report, many managers rate themselves relatively highly on actions that they have taken to weed out bad actors in the market. Yet, their efforts have clearly been thwarted in the past few years with the series of corporate governance failures in South Africa, most notably Steinhoff, African Bank, the Resilient Group, EOH, and Tongaat in the listed equity space. Of course, the judicial system needs to improve as well, by bringing white-collar criminals to book.

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“Bad actors getting away with their misdeeds with limited consequences sets a bad example for those that follow. We need to give more thought to how these bad actors are dealt with and particularly how white-collar criminals are brought to book in South Africa. The industry could do more here to lean in and help clean up,” says Fair.

Stewardship practices are improving

Notwithstanding the above, stewardship practices are improving, the research found. In 2011, RisCura conducted a similar exercise and produced the report Spoilt Votes. The current research revealed that, across the board, the quality and quantity of stewardship has improved dramatically since then. The proxy voting process has also improved.

However, many respondents said that there are systemic issues such as regulatory or judicial hurdles that act as hindrances to better stewardship.

“There have been areas of improvement in stewardship practices in South Africa, but at the same time, we appear to be falling behind our global peers. Our report concludes with some critical suggestions for how South African asset managers, their investors, and all players in the industry can regain lost ground and move the needle further for the long-term benefit of all savers.” – Supplied by RisCura

This article first appeared in the December issue of our free digital magazine IOL Money, which you can access here.

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