As impact investors we look for opportunities to marry financial return with a measurable positive social and economic impact. We seek out ways to make a contribution to grow our economy in a sustainable and more inclusive manner and ask ourselves this guiding question: What kind of society do we want to live in and retire to, and what role can we play in determining this?
For the past 20 years the GlobeScan-SustainAbility Leaders Survey has monitored and shared insights about how society can tackle the world’s most pressing sustainability challenges. In 2018 the survey covered 729 entities across the corporate and non-governmental sectors in 70 countries. The focus of the research is very much on what business can contribute and, in the South African context, this would also encompass cultivating a more inclusive economy that creates jobs.
South Africa has more than its fair share of challenges, perhaps most acutely captured for the 40% of people between the ages of 15 and 64 who are not employed, or in education or training.
Internationally many corporates have come to realise that they are part of a stakeholder network across employees, customers, shareholders and the broader operating environment, and are being held to account to integrate sustainability into business models. It is disappointing then, to see that Africa accounts for just 6% of respondents in this survey. And there is no mention of any South African corporate leaders. Instead, the leaders identified encompass the likes of Unilever, IKEA, Patagonia, Greenpeace and the World Wildlife Fund (WWF).
However, as Dutch businessman and global climate leader Feike Sijbesma observed in 2012: “You cannot be successful, nor even call yourself successful, in a society that fails.” So, addressing the contribution we can make as investors is a critical aspect of both the sustainability conversation and a future-focused approach to investing.
Investing for impact
The first question we need to be asking ourselves is how much investment is currently being allocated towards impact investing.
We know that investment portfolios are typically skewed heavily toward listed equity, with listed bonds, property and cash making up the balance. Despite Regulation 28 enabling at least 35% of allocations toward private markets (such as private debt and equity), our research shows that South African investors allocate only about 2% of their assets to alternatives. This is well below international norms of 10-20%. Add to this a further two largely overlooked factors, and South African portfolios are relatively underexposed to our real economy.
First, according to several studies, more than 60% of the JSE’s Top 40 derives its revenue offshore. Secondly, in the debt market, more than 80% of companies fund themselves through the banking system (private markets). This means that pension and other funds that only access the listed bond market for credit exposure are limiting diversification benefits to just 20% of SA Inc’s debt needs. It is evident that our collective savings exposure to the real economy is highly constrained. Some of this is no doubt due to legacy legislation, but Regulation 28 now allows up to 35% exposure to real assets.
Given the challenging environment investors face, we are well versed in factors such as a constrained economic outlook, sluggish stock market performance, political uncertainty and lack of business confidence that put a lid on our investment expectations. However, this would seem an opportune time to explore alternative sources of return, such as those found in the real economy in infrastructure and private equity and debt. This offers potentially positive inflation-linked opportunities for diversification benefits in asset classes that are relatively uncorrelated and still provide attractive valuations compared with traditional (and dominant) asset classes.
Geographical allocations by assets under management and % of respondents
Left side: Percent of AUM: n=226; total AUM=USD228.1 billion
Right side: Percent of respondents with any allocation to each geography: n=229; respondents may allocate to multiple geographies
Note: 'Other' includes investments with a global focus.
Behind the curve
South Africa is unfortunately also a laggard in the swiftly-growing world of impact investing. The latest 2018 Global Impact Investing Network survey of 229 impact funds reported on US$228 billion under management. The accompanying graph shows that Sub-Saharan Africa receives a relatively large share of this (12%) from mostly international impact investors. They found that the market is diverse with the top sectors of investment including financial services (19%), energy (14%), microfinance (9%) and housing (8%). Overwhelmingly, impact investors also reported performance in line with both financial and impact expectations.
In South Africa, given the regulatory requirement to consider more sustainable investing and development prerogatives we as investors face, we urgently need to develop our impact investing capabilities and fund offerings to help convert many of our challenges into opportunities for investment – in much the way that Capitec and Transaction Capital, in the financial and transport industries respectively, have done.
The country’s first job creation fund – the Jobs Fund – was underpinned by a guarantee from National Treasury and has now created more than 10 000 permanent and decent jobs while generating consistent benchmark beating returns. In 2019 South Africa created a second, larger fund, the SME Fund. But we need many more such impact funds to be both demanded and created by our financial industry.
The role of business
As South Africans we commonly acknowledge that we face political, social and environmental challenges. But we could also take a closer look at business challenges. We could ask where the vision is - then and now - that recognises the role that business could have in believing and building towards inclusive growth?
Instead of collectively hedging business against South African risk – which some would argue is quite rational, albeit self-fulfilling – how different could it be if more businesses genuinely committed to working in partnership to deliver the sustainable growth of which we are capable? The small to medium-sized enterprises (SME) Fund in collaboration with the Jobs Fund are hopefully good examples of how this could be done. But this needs to become a more systemic and planned force that business drives in the interests of generating scale and broad stakeholder value.
A win-win opportunity
Regulation 28 for pension funds also encourages funds to invest for long-term sustainable outcomes, which if embraced positively could extinguish the prescribed asset menace.
According to Roger Urwin, one of the leading voices on sustainable investing, the central tenet for any investment fund policy requires an evaluation of investment values and investment beliefs. “Values distinguish the investment mission and goals of a fund; beliefs distinguish the investment strategy,” he noted in a 2011 Tower Watson paper entitled Perspectives: Sustainable Investing Principles and Practice.
Articulating these values and beliefs within a sound governance framework gives agency to pension fund owners to expressly determine how their investments are made. Current pension fund laws make it a requirement to address and incorporate the principle of sustainable investing and explicitly require the consideration of environmental, social and governance factors. The real question then is: Are fund contributors receiving appropriate advice and product to direct their money towards creating a better future in which to retire?
South Africa has many positives; not least of which includes a strong financial and banking sector, an independent central bank, and a healthy regulatory and legal environment in which business can operate. But, perhaps most importantly, we are a relatively sophisticated emerging market with the unique combination of having highly-developed world-class infrastructure within an opportunity set of emerging market challenges to solve. Our fiscal constraints preclude government solutions at scale, which means that we need institutional investors and we need to create a broader offering of real economy assets such as infrastructure in which to invest.
Our aim should be to invest for the long term, based on a vision of the future we hope to see come true. And then we can work on how to get there with all stakeholders.
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