“SA’s record unemployment rate surges to the highest in the world”, was a sobering headline published this week. A flawed education system and rigid labour laws are some of the factors that have been put forward to explain the unemployment powder keg that has developed.
According to most analysts, the blame and answer lie solely with the government. But we also need to consider the contribution of other roleplayers, specifically the retirement fund industry, and the role they can play.
Over the past 10 years financial markets, investors, and economies have witnessed a dramatic rise in socially responsible investing (SRI). This is an investment process that combines financial objectives with concern about environmental, social, and governance (ESG) issues. No-one wants to invest in anything that is morally irresponsible. But people also want to make money. The two are not mutually exclusive; many studies have shown that portfolios incorporating social objectives can still deliver competitive returns. Therefore, SA investors can target dual goals through their investments — good investment returns and social factors such as poverty reduction.
Retirement funds, and by implication retirement fund members, have an essential role in the alleviation of SA’s social ills. In the same way, though the primary duty of retirement funds is to fund their obligations to beneficiaries, fulfilling these dual objectives will depend on their roles as owners of companies. The recent spate of civil unrest and the impact on companies has demonstrated that retirement fund members cannot afford to bury their heads in the sand. Social factors as we have just seen can lead to decimated investment returns, and socially responsible investing is critical. Asset managers worldwide have developed comprehensive frameworks to incorporate and evaluate ESG factors when making investment decisions. However, the implementation of socially responsible investing in SA is unlikely to be effective in addressing social factors such as poverty reduction for two main reasons:
- First, most investors may simply be chasing “feelgood” returns — that is, feeling good about supporting desirable activities rather than from any tangible benefit of making significant change. The good feeling associated with socially responsible investing is considered similar to the fun of participation that some gamblers may derive from playing in a game of chance. The fun of participating in such a game generates more utility than would be derived from the financial return on the gamble. In the same way, some studies have found that the most likely reason for implementing socially responsible investing is “because it won’t look good if I don’t”. Some global surveys have even questioned the validity of the responses to this question (is socially responsible investing essential?) because of the desire of those polled to respond in a politically correct fashion and not necessarily putting their money where their mouths are. Therefore, though investors may be motivated by both return targets and social objectives when making investment decisions — the social factor is likely to be the least important.
- Second, there is an element of Johnny-come-lately in implementing socially responsible investing, mainly when it concerns emerging market economies such as SA. The European countries initially approached SRI to compete with other countries and support their shared goals of economic growth (this focus has since shifted to climate-change factors). Between 2000 and 2003, the European Social Investment Forum (EuroSIF) created a toolkit to help guide institutional investors to implementing socially responsible investing. Coincidentally, at the same time, the European Commission had formed a Social Policy Agenda to create new and improved jobs. Socially responsible investing was used to mobilise support towards common European objectives — making Europe the most competitive economy capable of sustaining economic growth with more and better jobs and greater social cohesion. It is perhaps unfortunate that a consequence of centralising the agenda for SRI at a global level is that factors such as poverty reduction and job creation are not a priority. These factors are critical for sustaining long-term investment returns in SA.
Retirement funds must play their role
Are retirement funds owners of companies or speculators in shares? The typical speculator generally wants to invest in shares to make a profit. Many do not want the administration and responsibility that comes with ownership. With the rise of socially responsible investing, “maximisation of shareholder value” is now more consistent with the interests of a speculator and not of an owner. Retirement funds must act like owners if they are to carry out their mission not regarding speculation but long-term investing. This will require retirement funds as owners to exert a greater focus on social factors and the utilisation of SRI to support the shared goals (with government) of economic growth. Studies conducted after the Arab Spring —uprisings that spread across much of the Arab world in the early 2010s — indicate that SA is a fertile breeding ground for social unrest. This is because of the exceptionally high youth unemployment rate. Suppose investors continue to ignore this fact, palming the responsibility to the government while having spotless ESG checklists. In that case, their long-term investment returns will be anything but sustainable.
• Ndinavhushavhelo Rabali is chief investment officer at Lima Mbeu
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