South African asset managers flex sustainability muscles in private

It’s petrochemical company Sasol and internet company Naspers that have provoked the greatest number of controversial engagements with South African asset managers over the past year, followed, at quite some distance, by the likes of Glencore, Pepkor, MTN and Absa.

In the case of Sasol, investors are concerned about its environmental policies relating to greenhouse gas emissions, disclosure of climate risk and its decarbonisation strategy. They also have governance concerns relating to executive remuneration and capital allocation.

When it comes to Naspers, investors disapproved of its convoluted share swap scheme with Prosus and have issues with its generous executive remuneration policy. 

This is according to a recent report from investment firm RisCura, titled “Moving the Needle — Stewardship in South Africa”. The report is timeous given that the COP26 conference, held in Glasgow in November, has reminded us of the importance of being a responsible investor in the current age.

It is also relevant given that almost 12% of South Africa’s Capped Swix Top 40 index are heavy carbon emitters, compared with 2.5% on the MSCI World Index, and given the many environmental, social and governance (ESG) related challenges that the country faces.

It is in tackling these that responsible stewardship can prove vital, helping investors to engage with investee entities about the assets in their custody and, in the case of equity assets, communicating with voting proxies on behalf of shareholders.

RisCura surveyed 52 large and small equity managers in the latter part of the year and held one-on-one interviews with the country’s 17 largest equity managers, excluding the Public Investment Corporation (PIC). 

The 52 local equity managers represent about R3.9-trillion in assets under management, or about 70% of South Africa’s total savings and investment pool of about R5.5-trillion, again, excluding the PIC.

The aim was to measure the stewardship activities of local asset managers managing equity assets listed on the JSE. To what extent are investors using their vote to influence management teams to make the decisions that would maximise the long-term value of the assets on which returns and clients’ and beneficiaries’ interests depend?

As it turns out, while local asset managers may lag their global counterparts, stewardship practices have improved dramatically since RisCura conducted its first stewardship research report in 2011. 

However, most asset managers tend to focus on governance issues — remuneration, board composition and minority shareholder rights — and more recently on environmental issues, notably climate change and greenhouse gas emissions, air quality and water issues. 

The “social” aspect of ESG — diversity, impact on communities and health and safety — tends to be neglected. This prompted RisCura to suggest that managers should challenge themselves to do better in all the three key ESG measures, particularly when it comes to funds’ impact on society.

While the annual general meeting is intended as a forum for shareholders to ask questions and air grievances, this is not the preferred approach to tackling sensitive issues.

In general, managers prefer to engage directly with the CEO, according to the report. Other routes include writing to the board or engaging with the relevant sub-committee of the board, or the chairman. 

If these discussions are not fruitful, managers may consider exercising their voting rights, divesting from the firm, or filing a shareholder resolution, although in a recent case involving Standard Bank, the board chose not to table the resolution presented by shareholders.

Going public with their concerns is an absolute last resort — South African asset managers prefer to engage with companies behind closed doors. Thus when 36 asset managers sent a strongly worded letter to the boards of Naspers and Prosus highlighting their concerns about the proposed share exchange between the two companies and the misalignment of the executive compensation system, it was an incident almost without precedent. 

Given that more collaboration is happening between managers, and that clever use of online collaboration platforms can expedite collaboration, one can expect to see more of this. 

RisCura recommends that the smaller managers, who do at times feel their voices don’t count, specialise and collaborate with “the big guys”. BM/DM