Conference report: PRI in Person, Cape Town, South Africa

RI reviews some of the main panel talking points at the PRI annual gathering.

Investing in Africa was appropriately centre stage at the seventh annual PRI in Person conference in Cape Town, South Africa. In an opening plenary titled “Doing Business in Africa today, understanding the political, economic and social landscape”, Arnold Ekpe, Former CEO, Ecobank Group, the Pan-African bank, said international investors should have confidence that they can invest profitably in the continent, despite the perceived risks. He said Ecobank, which operates in 34 African countries had never had problems in remitting dividends nor had to shut down operations because of social or economic concerns. But he warned against a tendency to view Africa as a country rather than 54 separate and very different markets. Tshepo Mahloele, CEO, Harith General Partners, the South Africa-based infrastructure fund manager, said investors needed to look at the success as well as scare stories. The former, he said, included private equity funds that had made 30% risk adjusted returns in some funds. Harith manages the 15-year old Pan African Infrastructure Development Fund (PAIDF). John Oliphant, Principal Executive Officer at South Africa’s ZAR1.2 trillion (€101bn) Government Employees Pension Fund (GEPF), the largest in Africa, said the scheme had invested $250m in the PAIDF, alongside investment banks, financial institutions and development finance institutions. Mahloele said Harith had made a number of successful club deals across Africa, including an airport in Tunisia and cabling projects in Kenya. The fund’s investment process considers ESG risk factors and reports on the development impact of the projects it invests in. He said there had been no portfolio write-offs to date and value impairment in just two of the companies it had invested in.Ebrima Faal, Regional Director, Southern Africa Resource Centre at the African Development Bank, which is 50 years old next year, also noted that GDP growth in a number of African countries had doubled in recent years, on a par with China and India. He said the ADB was looking at issues of greener growth and social mobility in its investment selections and plans the launch of an Africa 50 fund to combine institutional, private and government money for infrastructure investment across the continent. Discussing the issue of corruption, the panellists said it was a problem, but that foreign investors coming into Africa had a duty not to be party to it. Faal said: “Capital coming in has to be responsible also and to work in a way that builds lasting partnerships on the ground; not hot money.” Oliphant at GEPF, urged pension funds to partner with local players: “If I was to invest in Brazil I would want to invest alongside other pension funds because they know the local references.” The panel said such partnerships would contribute to a virtuous cycle to overcome another major issue, engaging African capital into investment in its own continent. Mahloele said: “The commitment of long-term capital to the continent is very slow but corporate capital is coming in. There needs to be a better articulation of the risk/reward story in Africa.”
On a public policy panel, titled: “How can investors work with governments to create integrated capital markets?”, Olano Makhubela, Chief Director, Financial Investments and Savings at South Africa’s National Treasury, ran through the history of South African regulatory moves on CSR/ESG, starting with the 1994 King Code on corporate governance, now in its third iteration, which includes integrated reported via a comply or explain mechanism. For investors, he said South Africa’s

Regulation 28, calls on pension funds to consider material factors in their investment affecting long-term performance, while July 2011’s Code for Responsible Investing in South Africa (CRISA) formally encourages institutional investors to integrate environmental, social and corporate governance (ESG) considerations into their investment decisions. He said CRISA was designed to assist and nudge pension funds on ESG: “It’s a relatively new area and the inertia so far has led to the nudge, after a lot of consultation. We hope pension fund trustees will take these issues seriously without being told.” One questioner said that given the onerous compliance issues of Regulation 28 for prudent supervision of assets, trustees were using this as an excuse to put off doing anything about ESG. Stephanie Giampocaro, Senior Lecturer at the Graduate School of Business, University of Cape Town, said the pre-amble to the regulation was also “very optimistic about human nature” in encouraging trustees to act on responsible investment: “Materiality is key, so the question is how is this measured? King is soft law, Reg 28 is soft law. Given this, how can the trustees get the level of sophistication they need to really do responsible investment?” A separate plenary addressed the broad question of: “How do we bring about long-termism in financial markets?” Both Sandy Frucher, Vice Chairman at Nasdaq, the US stock exchange, and Erika Karp, CEO of Cornerstone Capital, argued that the issue wasn’t whether long-term was better than short-term. Frucher said: “It’s about how you get people thinking that long-term is the way to go for sustainable capital formation and growth.” However, he added there was a need for more regulatory ‘stick’ that could really drive, forexample, more sustainability/integrated reporting by companies listed on stock exchanges, which would underpin long-term investment thinking. Karp said the carrot accompanying any stick should be that ESG helps to create investment value over time without loading the cost of externalities on to society. Elias Masilela, Chief Executive Officer of the Public Investment Corporation of South Africa, said asset owners had an in-built rationale for duration saving across inter-generational beneficiaries that needed to be driven home with their agents: “Institutional investors have a long-term interest, so asset managers need to know that if they don’t have that in mind they won’t win the money!” Diana Radley, CEO of Old Mutual Group in South Africa, accompanied this with an asset owner market rationale against offsetting long-term value in favour of quick profit: “For pension funds, short-term alpha (return) is not acceptable if it interferes with long-term beta (market appreciation).” Frucher countered with the market reality that asset managers get measured in quarters and years for their returns. Radley responded that this was a mechanism that could be overcome: “I’m surprised that a private equity mandate will be handed over to a general partner for 5-7 years and measured on an internal rate of return while public equity mandates are being measured by the year or less.” In a separate challenging exchange, Frucher asked Karp, the former Head of Global Sector Research at UBS, the Swiss banking group, whether the sell-side was serious about ESG and if a UBS analyst had ever asked a sustainability question on an analyst call. Karp responded: “Yes, they were talking about issues like safety, innovation, human capital, governance structures. You won’t hear them say that this is the

‘sustainability’ question! I call it the “S” word: it’s a drag. What we are actually talking about here is business excellence.” On another plenary about values and value in responsible capitalism, Paul Clements-Hunt, former head of the UNEP Finance Initiative that incubated the PRI and founder of the Blended Capital Group, praised the work done by the PRI so far, but said it was just “the end of the beginning” for the PRI’s own value proposition. He said that while pension funds understood the growth story of Africa, they were put off by its headline risk. Future success, he said, would be measured in investment application: “The PRI needs to look back in 2023 and ask itself, for example, whether it has moved the dial in terms of concentrated private capital flowing into productive investments in Africa alongside the South African Government Employees Pension Fund, alongside the Nigerian Pension System, or whether it has become a country club with nice conferences.” He said: “Don’t let’s kid ourselves: there’s a long way to go.” Jay Youngdahl, trustee at Middletown Works Hourly and Salaried Union Retirees’ Health Care Fund in the US, said that for pension fund trustees values and value were inextricably linked given the purchasing of opaque, complex investment products prior to the financial crisis. He said: “We trustees face serious value issues, and we have the greatest fiduciary duty and are ultimately responsible for values. We often allow political pressure or opulent wining and dining to produce a kind of institutional corruption that can cloud our ability to focus solely on our beneficiaries as we should.“He said pension funds didn’t live in an ethical vacuum and that moral issues such as garment factory collapses in Bangladesh, land rights and workers’ interests couldn’t be divorced from the same fiduciary duty. In a specialist workshop, titled “Mining in Africa: boosting sustainability in the mineral economy”, Martin Kuscus, Independent Chair of the Board of Trustees at the South African Mineworkers Provident Fund, gave a hard-edged local example, noting that the tragic violence at the Marikana platinum mine operated by Lonmin was a complex mix of poor housing, difficult work conditions and aggressive unionization that pension investors had to understand and act on where possible. He said shareholder activism had to be part of the solution in reining in the rife inequality that he said was a serious issue in the sector due to huge disparity between worker salaries and highly paid executives: “Shareholder activism is pathetic here in South Africa. It’s too nice and diplomatic, and the management bonuses get bigger every year. The new capitalists are the workers because it’s their pension fund money.” The panel said long-term investors could start to make a difference following Marikana by developing policies on mining companies based around transparency on licensing issues, workers rights and employment conditions, water use and the rehabilitation of mines post production. Investor visits to a Lonmin mine prior to the PRI in Person conference could be part of that investor move to fully understand the on-ground reality of their investments and apply pressure where both values and financial value are at risk. How far that work will have progressed should be key material for next year’s conference in Montreal, Canada on Sept 24-26, 2014.