cfa south africa socially responsible investing: beyond esg factors andrew c. canter cfa april 2009

CFA South Africa

Socially Responsible Investing:

Beyond ESG Factors

Andrew C. Canter CFA

April 2009

Agenda

• SRI: Finding a common lexicon

• A world of non-conformity

• Prescription: rearing up again

• Points of confusion

• Trends in SRI…

• …and how to get there

• Conclusions

Wh

ere

it’s

been

Wh

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it’s g

oin

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SRI = Socially Responsible Investing

The 3 styles of Socially Responsible Investing

1) Positive Screened Investments

…infrastructure, carbon, housing, ESG*,

FTSE4Good, etc

2) Negative Screened Investments

…Shari’ah compliant, ESG*, etc (“1st do no harm”)

3) Investor Engagement & Activism

…environmental, labour, governance, BEE, etc

Integrated ESG Analysis & PRI seek to cover all areas

PRI = UNEP Principles of Responsible Investing. ESG = Environmental, Social & Governance factors

Developing world has a different perspective...

greenhouse gasescarbon footprintgovernance

basics!water / electricity / roadstelecomms / housing

But unity in spirit... seek to avoid harm and do good...... protect and improve body, spirit and environment.... ... doing well and doing good...… civilisation is about self restraint

ESG: It’s a matter of time before…

… statistics will prove that “good” companies perform better over long periods…

… and ESG factors become embeddedin all investment decision processes.

See “Does Governance Matter to Long-Term Investment Performance?” David Beatty, CFA Institute Conference 05/2008

Interjecting some reality into ESG (1)

• Narrow universe reduces portfolio efficiency.

• Excludes some high ROE/cash flow sectors

Unsavoury businesses have less competition

• Definitions: Every firm gives it a new name

• Evidence of outperformance?

• Product development vs investment process

Interjecting some reality into ESG (2)

• EDHEC Business School 6 year study (2002-2007) of 124 European SRI funds:

“did not identify alpha values both positive and statistically significant for SRI funds. In fact… most… obtained negative, but not statistically significant, alpha…”

“it seems regrettable to us that, despite the lack of empirical evidence of… outperformance, asset management firms and consultants have larded their communications with promises of SRI fund outperformance and failed to express the necessary reservations.”

See “Socially Responsible Investment Performance in France”, 12/2008 EDHEC Business School

Before

After

After

SRI: Fads, Trends and Fashions…

Negative and Positive screening

Living in a world of non-conforming viewsQuestion Accountants and you should get the same answer

Question Asset Managers… you’ll get numerous answers!

… ask about SRI and you will get double the number of opinions

Question Doctors and you hope to get a similar opinion

Reg 28: enabling vs. prescriptive:

“retirement funds are encouraged to consider the broader social impact of their investments on the

development of the nation”or

“retirement funds will allocate 10% of assets to SRI”

Prescription: The ends do not justify the means

• No SRI “standard”: Who decides what to “prescribe”?!

• Prescription distorts capital markets...its a “tax” on returns

• If government prescribes, they must underwrite the risk!

• Undermines risk:return efforts of the retirement fund industry

• Seeking gov’t “regulation” of SRI is an abdication of responsibility

• Government can directly influence a) the funds where they are

direct stakeholders, and b) the well capitalised DFIs

• Money is not the problem – capacity to deliver remains

• Danger of money flood: Value will be lost by funds

Points of Confusion

Points of confusion… what SRI is and isn’t

Is SRI the same as Corporate Social Investment?

SRI = how the money is invested (returns & impact)

CSI = giving back to the community (grants, gifts, goodwill)

Is SRI Positive Procurement?

Hiring PDI or pro-active firms to provide services


PDI = Previously Disadvantaged Individual

Is SRI an Asset Class?

Sample Retirement Fund

Equities 65.0%

Bonds 25.0%

Cash 4.0%

Property 2.0%

Inflation Linked 2.0%

Private Equity 2.0%

Total 100%


With SRI Allocation

Equities 62.0%

SRI Equities 3.0%

Bonds 23.0%

SRI Bonds 2.0%

Cash 4.0%

Property 1.5%

SRI Property 0.5%


Private Equity 1.5%

SRI Private Equity 0.5%

Total 100%

SRI is a theme, must fit into an strategic asset allocation

6% SRI… strategic asset allocation maintained

Does SRI mean lower returns?Points of confusion… what SRI is and isn’t

• Principles of portfolio management prevail!• SRI is not subsidy finance!

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JSE SRI

ALSI

JSE-SRI vs JSE-ALSI: Index 2004 - 2008

Higher risk should mean higher returns

Alexander Forbes Bond Survey including FG Infrastructure and Development Bond Fund

SA Bond Managers: 3 Year Risk: Return - 31 January 2009

Futuregrowth Community Property FundComparative Performance

CPF appears 2nd over six months in the IDB (Investment Data Bank) survey

Comparative Investment ProductivityIncremental Output per unit of Infrastructure Investment

Source: Benno Ndulu, 2004

AFR = Ethiopia, Kenya, Madagascar, Senegal, TanzaniaEAP = China, Indonesia, Laos, VietnamECA = Bosnia, Kazakhstan, Moldova, TurkeyLCR = Argentina, Brazil, Honduras, NicaraguaMNA = Morocco, YemenSAR = India, Sri Lanka

DECADE AFR EAP ECA LAC MNA SAR AVERAGE

1960-69 0.326 0.301 0.263 0.259 0.54 0.314 0.334

1970-79 0.243 0.316 0.215 0.247 0.239 0.225 0.248

1980-89 0.151 0.146 0.109 0.085 0.106 0.235 0.139

1990-99 0.074 0.191 -0.229 0.143 0.214 0.220 0.102

2000-02 0.109 0.237 0.258 0.048 -0.022 0.175 0.134

AVERAGE 0.181 0.238 0.123 0.156 0.215 0.234 0.191

Community Returns on Infrastructure Investment

(a) Output change for a 1% change in the level of infrastructure

(b) PV of output increase/PV of infrastructure investment

(a) Output change for a 1% change in the level of infrastructure

(b) PV of output increase/PV of infrastructure investment

Source: World Bank, World Bank Development Report, 1994: Infrastructure for Investment

SampleElasticity

(a)

ImpliedRate OfReturn (b) Author/Year Infrastructure

Taiwan, China 0.24 77% Uchmura & Gao, 1993 Trans, water, comm

Korea 0.19 51% Uchmura & Gao, 1993 Trans, water, comm

Israel 0.31-0.44 54%-70% Bregman & Marom,1993Trans, power,water,sanitation

Mexico 0.05 5%-7% Shah, 1998, 1992 Power, comm, trans

Multicountry, Dev 0.07 95% Canning & Fay, 1993 Transportation

Multicountry, Dev 0.16 63% Easterly & Rebelo, 1993Transportation,communications

United States 0.39 60% Aschauer, 1989Nonmilitary publiccapital

If investors get risk adjusted returns…

Private sector keeps “score” by returns, public sector uses a balanced scorecard

DFI = Development Finance Institution

Private Sector

DFIs

Doing what other’s don’t X X

Lower liquidity deals X X

Higher risk deals X X

Targeted outcomes X X

Filling “risk gaps”/market failures X X

Providing subsidised capital X

Cross-subsidise business lines X

Operational inefficiency X

Creating enabling environment X

The role of Development Finance Institutions

…then who offers subsidised capital?

MTN1998

Exp

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Social Impact≈ Higher Risk≈ Lower liquidity≈ More Effort/work

2008

Measuring Social Impact is a thorny issue

• Private Equity is not necessarily SRI (but SMME finance is…)

• Early mover/higher risk is often SRI… simple competition isn’t

• Impact measures are subjective (“jobs created”, “families affected”...)

Private equity

SMME equity

Listed/Rated.. Diversity/liquidity

Unlisted/Unrated.. Non-diverse/il-liquid

Broad Categories of SRI & Impact

* Proxy voting is normal practice and excluded

SRI Category SRI Sector Impact

Positive Screened

Infrastructure Development & Social Services High/Medium/Low

Black Economic Empowerment Funding High/Medium/Low

SMME/Enterprise Development High

Consumer & Business Access to Finance High/Medium

Agricultural Development/Land Reform High/Medium

Low Income & Affordable Housing High/Medium

Environmental Preservation Medium

Community Development & Redevelopment High

+’ve screens of listed instruments (industry or ESG) Low

Negative Screened

-’ve screens of listed instruments (industry or ESG) Low

Shari’ah/Religious compliant investments Low

Investor Engagement *

Investor Involvement Medium

Investor Activism High

SRI Reporting: Positive Screened, Category Level

SRI Categories % Holding

Infrastructure Development & Social Services 54.85

Low Income & Affordable Housing 2.45

Community Development & Redevelopment 0.32

Consumer & Business Access to Finance 17.15

SMME Development 6.77

Agricultural Development & Land Reform 0.54

Environmental Preservation 0.00

Black Economic Empowerment 8.18

Other infrastructure 1.50

Sub Total 83.78

Less: Double counting 8.98

Total 74.80

Updated 28/02/2009

Futuregrowth Infrastructure & Development Bond Fund

SRI Reporting: Infrastructure & Social Services Futuregrowth Infrastructure & Development Bond Fund

Infrastructure Development & Social Services Sub-Categories

% Holding

Water & Sanitation 8.39

Transport 23.34

Communications 10.51

Energy 5.04

Health 1.25

Education 0.61

Safety & Security 0.00

Social & Economic Urbanisation 1.59

Tourism 0.08

Development Finance 4.05

Capital Market Development 0.00

Information Systems/Infrastructure 0.00

Total 54.85

Updated 28/02/2009

Where is SRI Going…

…and how to get there

Integrating ESG into investment process…

…allows 100% of the fund to be SRI

With SRI Allocation

Equities 62.0%

SRI Equities 3.0%

Bonds 23.0%

SRI Bonds 2.0%

Cash 4.0%

Property 1.5%

SRI Property 0.5%


Private Equity 1.5%

SRI Private Equity 0.5%

Total 100.0%

Where’s SRI going (1)...

…with a range of impact

Shareholder plutocracy in action….

Developing world: positive screening… infrastructure, development, job creations, labour, environment, governance Developed Countries focus on both positive & negative screening and ESG analyses

Continued differences…

Where’s SRI going (2)...

SRI/ESG Screens… Investor engagement…

Investor Activism

Percent of firms

0 10 20 30 40 50 60

East Asia & Pacific

Europe and CentralAsia

South Asia

Sub-Saharan Africa

Middle East & NorthAfrica

Latin America andCaribbean

% of firms that consider infrastructure to be a serious obstacle to doing business

Source: Shigeo Katsu, VP Europe & Central Asia, World Bank, 09/2007

Where’s SRI going (3)... Infrastructure

Infrastructure spending numbers are big…

• Globally $2 trillion per annum to 2015*

• Global GDP + $54.4 trn*, p.a. spend is + 3.7% of GDP

Global Stock of Infrastructure

60% in high-income countries (16% population)**

13% in low-income countries (39% population)**

• $370bn p.a. globally to 2010 for telecoms, energy, water, transport…

• … of which $233bn p.a. in EM (+2.5% of GDP)**

*OECD **World Bank

Direct Infrastructure funds - Africa

Source: Public-Private Infrastructure Advisory Facility (2008 in process), Futuregrowth

Fund Current Size $mPercentage weighting

Pan Africa Infrastructure Development Fund (PAIDF) 625 7.9%

South Africa Infrastructure Fund (SAIF) 199 2.5%

Africa Infrastructure Investment Fund (AIIF) 186 2.4%

Kagiso Infrastructure Empowerment Fund (KIEF) 81 1.0%

Prescient Fieldstone Infrastructure Funds 580 7.4%

PME Africa Infrastructure Opportunities plc 180 2.3%

EU- Africa Infrastructure Partnership Trust Fund 489 6.2%

Emerging Africa Infrastructure Fund (EAIF) 365 4.6%

InfraCo Management Services 200 2.5%

Actis 1,100 13.9%

Africa Finance Corporation (AFC) 1,000 12.7%

HSBC 100 1.3%

Millennium Development Goal Fund 404 5.1%

Africa Millennium Fund 350 4.4%

AIG Africa Infrastructure Fund 408 5.2%

Contour Global 500 6.3%

InfraVentures 100 1.3%

Futuregrowth Infrastructure & Development Bond Fund 735 9.3%

Futuregrowth Infrastructure & Development Eqt Fund 43 0.5%

OMIGSA Alternative Investments IDEAS Fund 243 3.1%

Totals 7,888 100.00%

MTEF expenditure by key sectors (Rm)

214,010

93,658

44,46535,807 31,035

18,249 15,549 14,542 10,191 4,395 4,065 3,025 1,664-

50,000

100,000

150,000

200,000

250,000

Electricity Roads Rail(Passenger,

Freight &Gautrain)

Housing Water Health Education Ports Sanitation World Cupstadiums

Prisons Policeinfrastructure

Courts

Source: Budget Review 2008, Macquarie Research, August 2008

Previous (2007) 3 year capex: R568 billion

The numbers are big: South Africa Public Sector Infrastructure Plans

Source: Macquarie FirstSouth Securities, Let the Construction Begin: SA Infrastructure Update, 09/2008

SA: R787 bn (US$79bn) to 2012 (+9.7% of GDP)

1) Fund asset allocation policy must prevail

2) Fund profile & positionSize & life of fundStructure of benefits (DB/DC/member choice)Risk tolerance, liquidity needs, diversity needsGovernance & decision processInternal management capacity

3) Aspirations of constituent stakeholdersMembersShareholdersWork force/labourCustomersGovernment relations

Pre-Requisite: The Formulation of an SRI Policy

• Set SRI Goals & Desired Impact

• Adopt SRI definitions

• Identify categories of SRI in which to participate

• Establish risk: return guidelines

• Set target percentage to SRIs (100% to 0%)

• Delineate ramp-up period

• Identify methods (direct, indirect) to employ

• Identify measurement & reporting requirements

Formulation of SRI PolicyKey Issues for SRI Policy

SRI Headlines: Funds Have a Choice…

• SRI is “in the eye of the beholder”… fads & trends…

• Non-Conformity of information, goals & methods: No “one size fits all”

• Prescription is a non-starter… the problem isn’t money

• SRI is a theme (screening/reporting), not an asset class

… stick to your asset class measures

… “social impact” is hard to define

… SRI is always an additional analysis & decision process

• Portfolio management principles prevail…

• … don’t compromise your manager selection criteria

• Returns & Social Impact must always be compatible

• Government & DFIs do subsidised finance

• Answer 1: Results happen when the investor engages!

• Answer 2: Thought leadership by A.M., consultants, clients

Opening of Khayelitsha Mall

Thank you

Futuregrowth Suite of SRI Products

Positive Screened Funds:

Futuregrowth Infrastructure & Development Bond Fund

Futuregrowth Infrastructure & Development Equity Fund

Futuregrowth Community Property Fund

Negative Screened Funds:

Futuregrowth SRI Equity Fund

Futuregrowth Albaraka Equity Fund

investment focus infrastructure, development, social upliftment

asset class fixed & variable debt instruments

benchmark BEASSA all bond index (ALBI)

return target ALBI + 1.00%

interest rate risk ALBI MD +/- 1.25

credit risk95% investment grade debt, up to 5% equity fund average credit quality >A - concentration limits / sectoral limits

liquiditymin 20% liquid assets (ALBI constituents & cash) … up to 50% unlisted assets

approval process credit and investment committee

structure pooled / unitised

Infrastructure and Development Bond FundMandate

Investment Performance as at 28 February 2009

*annualised/GIPS compliant

10.768.328.02

1.64

13.58

6.219.28

12.45

8.16

1.4005

1015202530

3 months 6 months 1 year 3 years* 5 years*

I nfrastructure & Development Bond Fund ALBI

Infrastructure & Development Bond Fund

Product profile

launch date 1 Sept 2006

current fund size R 400 million

investment focusinfrastructure, development and social upliftment

asset class equity, mezzanine (20%) & cash

benchmark CPI + 10%

return target long-term 18 - 22% nominal

approval process investment committee

structure pooled, unitised on balance sheet

Infrastructure and Development Equity Fund

11.63

1.897.60

31.70

3.65

18.40 17.88 16.47

05

101520253035

6 months 1 year* 2 years* Since inception(1/09/2006)

Development Equity Fund CPI + 10%

Development Equity Fund



Product profile as at 28 February 2009Community Property Fund

Launch Date 1 June 1996

Current fund size: 28 February 2009 R2.5bn

No. of properties owned currently 25

No. of properties developed 29

Geographic spread 8 provinces

Property type Retail

Market segment C & D income

Hurdle rate CPI + 4%

Risk profile Moderate

Community Property FundInvestment performance as at 28 February 2009

*Annualised/ GIPS Compliant

17.71

8.65

18.85

12.35 11.029.56

0

5

10

15

20

1 year* 3 years* 5 years*

C ommunity Property Fund C PI + 4%

Investment Focus

Benchmark

Return Target

Investment Process

Fund Structure

Inception Date

Mandate

Listed companies with Triple Bottom Line focus

JSE SRI Index

SRI Index + 3% p.a.

Active Equity

Unitised portfolio

1 July 2004

Futuregrowth SRI Equity Fund

SRI Equity Fund

*annualised


10.71

-38.40

2.04

-41.11

1.44

10.70

-50

-40

-30

-20

-10

0

10

20


SRI Equity Fund J SE SRI I ndex

Futuregrowth Albaraka Equity Fund

• Negatively screened fund

• Shari’ah compliant companies

• Excludes banks, alcohol, tobacco, gambling etc.

• Narrow target market

Mandate

Albaraka Equity Fund



11.33

-34.77

-2.64

-30.75

5.38

16.80

-40

-30

-20

-10

0

10

20


Albaraka Equity Fund ALS I



11.416.11

-17.72

-5.22

-21.55

5.20

10.35

-20.20-18.35

-7.25

-25

-20

-15

-10

-5

0

5

10

15

3 months 6 months 1 year 3 years* 4 years*

SRI Balanced Fund ALBI

SRI Balanced Fund

investment focusTriple Bottom Line (Sustainability) &

Targeted Development Fund focus

benchmark

The benchmark is a composite weighting of

the underlying funds. Composite:

Futuregrowth SRI Equity, IBF, CPF

fund structure Unitised portfolio

asset allocation

SRI Equity (55%), Infrastructure &

development bond fund (25%), Community

property fund (15%), Cash (15%)

inception date 1 October 2004

Mandate

SRI Balanced Fund

SRI Reporting: Infrastructure & Social Services Futuregrowth Infrastructure & Development Bond Fund

Infrastructure Development & Social Services Sub-Categories

% Holding

Water & Sanitation 8.39

Transport 23.34

Communications 10.51

Energy 5.04

Health 1.25

Education 0.61

Safety & Security 0.00

Social & Economic Urbanisation 1.59

Tourism 0.08

Development Finance 4.05

Capital Market Development 0.00

Information Systems/Infrastructure 0.00

Total 54.85

Updated 28/02/2009

cfa south africa socially responsible investing: beyond esg factors andrew c. canter cfa april 2009

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