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Hugh Wheelan’s diary: South Africa, SRI performance, and why costs and charges is an RI issue

Big picture issues feeding into responsible investment thinking.

Cape of good hope
Good news from South Africa at the election of Cyril Ramaphosa as President. The former miner and founder of the National Union of Mineworkers is set to outline plans to fight corruption. Few perhaps will be aware of his interest and involvement with responsible investment organisations like the IRRC (Investor Responsibility Research Center Institute) which goes back decades to when IRRC was among organisations working on identifying companies with links to South Africa to amend US state and local laws and help in the fight to end apartheid. Good news, hopefully, for the future of responsible investment in the country.

Renewing purpose
Sometimes a blog piece or an article hits the spot in allying a number of really important issues in a touching and engaging manner. A recent Linked-In post I was recommended to read from a well-known RI/sustainability professional writing in a personal capacity looks at the serious issue of professional ‘burn out’ in today’s hugely competitive and stressful work environment. This can often be combined with a lack of ‘purpose’ in work, or worse, a sense that our work is directly opposed to our values; a common complaint I hear from people that are passionate about sustainability/human rights/labour rights, etc., etc., but ground down by a seemingly all powerful market they work in or around, that, as the article, says, seeks: ‘profit at any cost to society and the environment’. The piece goes on to look at a number of potential solutions to the problem, including a book I’d heard about a few years back, but which I’ve now stuck on my reading list, the highly acclaimed: ‘Reinventing Organizations: A Guide to Creating Organizations Inspired by the Next Stage of Human Consciousness’, by Frédéric Laloux, the former McKinsey consultant turned executive advisor and coach. The blog is well worth anyone’s head time: Link to it here

We can’t go on with suspicious minds
An article in Barron’s, the esteemed American weekly financial magazine that traces its history back to before the Wall St Crash, says “Suspicions about ESG investing are giving way” as big US fund managers embrace the idea that a company’s good-citizen record is “actually a decent predictor of financial success.” Better late than never! Interestingly, it points out that Lipper, the funds data group, now has data on 535 SRI mutual funds. For the year to Jan. 25, the SRI equity funds averaged a 7.73% return, compared with a 6.64% gain for non-SRI funds. Last year, the two groups tied at roughly 21.7%. In 2016, SRI funds averaged 8.81%, while non-SRI funds averaged 9.59%. On a three-year rolling basis, it’s even stevens. The article also suggests that according to an InvestmentNews/Calvert white paper the top reasons financial advisors give for not proposing ESG funds to clients are ‘limited investment opportunities’ (29%) and poor or limited returns (22%).I went to a financial advisor recently (mostly out of curiosity), and despite running a magazine called Responsible Investor and investing in a number of sustainability funds, the advisor did not mention ‘sustainability’ to me once. They rarely do. I’d like to suggest, politely, that given the financial data, availability of funds and changing attitudes of investors, financial advisors really need to pull their heads out of the sand.

Second-class savers
The issue of full transparency for the end investor (pension or fund saver) on costs and charges for total asset management services (securities trading, asset management services, pension fund costs) is a fundamental responsible investment issue. I believe it will rightly dominate the asset management debate in the coming years. Investment value for money cannot be assessed without cost clarity. My recent article on the UK Financial Conduct Authority’s (FCA) Institutional Disclosure Working Group (IDWG) proposals to UK investors for a detailed disclosure template suggests it should significantly improve costs and charges reporting in equities, fixed income, foreign exchange, private equity, derivatives and property mandates. Frustratingly, however, the FCA is proposing that reporting to the new template will be voluntary, unlike mandatory cost reporting systems that already exist in the Netherlands and Australia. When asset managers (many of the same ones) are already obliged to report clear, regulated information to pension scheme members, you have to ask why beneficiaries in the UK and other countries are deemed to be second-class savers?

Watching the watchers
ShareAction in the UK is doing its usual good job of focusing on transparency and good governance for savers and shining a light in dark corners. In a new report, titled Who Watches the Watchers? Transparency and Accountability in Workplace Pensions, it ranks the quality and transparency of the reports of 16 independent governance committees (IGCs) of the largest UK pension providers. The IGCs were set up in 2015 by the FCA to address poor consumer outcomes in workplace pension schemes and to act as a champion of savers’ interests. Defined contribution (DC) pensions savings through individual, workplace and (hopefully) much larger collective retail funds, allied to personal financial arrangements, is the future of pensions and long-term saving. But there are huge information (notably on costs and charges) and knowledge deficits. In 2015, the Financial Conduct Authority (FCA) required contract-based pension providers to appoint IGCs to address poor consumer outcomes in these pension schemes and to act as a champion of savers’ interests. However, in May last year it dropped its review of their effectiveness. ShareAction has picked up the baton. Interestingly, it puts Aviva’s IGC at the top of its ranking and BlackRock’s IGC at the bottom. Take a look where your pension fund provider or asset manager sits