IMPACT INVESTING

Evan Jones_CadizThere are ways to earn good returns and make a difference to society, says Evan Jones, Deputy CEO at Cadiz Asset Management

Over the past decade or two there has been a growing realisation that investing is not solely about making a financial return. It is also an opportunity to make a difference. There are many examples where that is reflected in what is becoming known as “shareholder activism”, where shareholders vote against unpalatable practices by management in an effort to guide the company down a path acceptable to shareholders.

At the same time, another investment philosophy has come to the fore; one which focuses on the impact of long-term investing on society. Although this investment philosophy is relatively recent, it has gone under a number of names. The one which we are most comfortable with is impact investing.

The strategic thinking behind impact investing is that they factor in not only the financial benefits of the investment, but also measure the positive societal benefits. A simple example will aid understanding. Consider an investment manager with capital to invest. Conventionally they will look to invest into bonds, equity, property, money market etc. dependent on where they see value. Their focus will be on trying to maximise their financial returns with the lowest possible risk – that is conventional portfolio management theory. This focus is likely to be for the duration of their investment horizon (five to ten years).

A high impact investment, whilst still focusing on financial returns, will specifically look to make investments that deliver a social good. A social good is typically some goods or services which benefit society or which uplifts society. Good examples of these types of investments are the building of low cost housing, sanitation, schools, waste management, and access to finance whilst at the same time creating sustainable new jobs for people. The investment rationale then is to not only consider the conventional risk and return framework, but to also specifically measure, monitor and report on the larger social impact of the investment.

A high impact investment, while still focusing on financial returns, will specifically look to make investments that deliver a social good – Evan Jones

The main investment thesis then is that, by uplifting society, the investment will have a positive long-term social impact. In this context we are talking very long term – so the thinking is around creating a better society for our children or our children’s children. If this method of investing is successful, by combining the dual elements of a financial and a social return, as an individual invested into these funds, you should end up living off your retirement savings (which have grown at an acceptable risk) in a better society (which has been enhanced because of the nature of the investments that you have helped fund).

Cadiz’s experience

cadiz_strategyOver the past six years Cadiz Asset Management (CAM) has been at the forefront of socially responsible investing in South Africa. Not only was CAM one of the first South African investment companies to sign the United Nations’ Principles for Responsible Investment, we were also a founding member of the Codes for Responsible Investing in South Africa (CRISA).

CAM has offered institutional investors the ability to invest into the Cadiz High Impact Funds for the past six years. The Cadiz High Impact Funds have invested into business that not only delivered good commercial returns (returns consistently in excess of various benchmarks, including the All Bond Index, inflation + 3% and Prime), but importantly to provide tremendous social impact, uplifting the plight of the most needy – these include investments into affordable housing, schools, transport, health care, sanitisation and many more.

Up until 2012 our High Impact Funds were aimed primarily at the institutional market. In 2012, to address concerns around the perceived riskiness of these investments (despite our funds having never suffered a missed interest or capital payment from any of the loan counterparties), we secured a variable guarantee (up to 50%) from the US Agency for International Development (USAID) which expires in 2020. We are in the process of fund raising on a closed ended fund which will utilise this guarantee. That closed ended offering is scheduled for implementation in June 2014.

In 2013 we also launched, off the back of our High Impact investment skillset, an Enterprise Development Investment. This fund is aimed at corporates and their owners. This unique investment offers companies the opportunity to earn the required Enterprise Development (ED) point in terms of the Department of Trade and Industry’s B-BBEE scorecards, by shifting their ED spend from an income statement expense to a balance sheet asset. It also provides a massive social benefit by targeting investments into black owned businesses, which deliver high social impact.

Not only have all our High Impact Funds delivered solid financial benefits to our investors with very low volatility of returns (the underlying investments are prime linked), our investors have earned significant social returns. The graph entitled “Cadiz High Impact Composite Social Impact statistics” sets out the high level social impact statistics for all our funds since inception in February 2008 to June 2013.

It is therefore clear that high impact investments do not equate to charity or donations.  It, if well managed by a reputable team, is capable of delivering on its dual mandate. That mandate is to provide good financial returns together with high social benefits: in short, to do good and to do well.

PRI appoints Martin Skancke as Advisory Council Chair

The Principles for Responsible Investment (PRI) has appointed Martin Skancke as the new Chair of its Advisory Council to be based in Norway.

Skancke succeeds Dr. Wolfgang Engshuber, who completes his 3-year term as Advisory Council Chair this year.

Skancke previously served as Director General and head of the asset management department at the Norwegian Ministry of Finance, where he designed and established the Norwegian Government Pension Fund, a founding signatory to the PRI and one of the world’s largest sovereign wealth funds (SWFs), with assets under management of more than $800bn.

He spent four years as head of the domestic policy department at the Office of the Prime Minister of Norway, acting as chief advisor to the Prime Minister on economic policy issues, including pension reform.

In 2011, he left the Ministry of Finance to establish his own consultancy firm to help governments in developing countries create their own SWFs.

He has also worked at McKinsey & Co. advising Norwegian and international companies on business strategy.

Commenting on the appointment, Skancke said:  “Much of my career has been devoted to promoting well-functioning financial markets that are useful to society. One important aspect of this is increasing the impact and effectiveness of asset owners as responsible investors. I look forward to accelerating this very important work at the PRI.”

“In a few short years, the PRI has grown to become an influential global investor network driving the development of a more responsible and sustainable model of capitalism. Active ownership is part of the solution to building and protecting wealth for current and future generations. I look forward to being part of the next phase of the PRI’s development and making sure the PRI delivers maximum value to its signatories. I would like to thank my predecessor Dr. Wolfgang Engshuber for his leadership over the last three years,” he added.

A CFA-holder, Skancke earned a Masters in Economics at the London School of Economics and holds degrees from the Stockholm School of Economics and the Norwegian School of Economics and Business Administration.

He served as Chairman of the World Economic Forum’s Public & Institutional Investors Industry Agenda Council from 2010-2011 and was Norwegian representative in the drafting of the Santiago Principles for SWFs in 2008.

Fiona Reynolds, managing director of the PRI, said: “Martin’s work has been instrumental in changing the way companies and markets behave, as well as how pension funds invest, and we are very pleased to welcome him to the PRI.”

 

NSE joins United Nations Sustainable Stock Exchanges Initiative

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The Nigerian Stock Exchange (NSE) has joined the United Nations Sustainable Stock Exchanges (SSE) Initiative in order to create sustainable value for its stakeholders.

At a bilateral meeting with UNCTAD on the sidelines of the World Federation of Exchanges conference in Mexico City, NSE CEO Oscar Onyema pledged to promote sustainability among NSE-listed companies.

“The Nigerian Stock Exchange is honoured to collaborate with the SSE initiative. We are confident that this partnership will be pivotal to our goal towards entrenching sustainable business practices,” he said.

With 258 listed securities and a current market capitalization of $114bn, the Nigerian Stock Exchange is Africa’s second-largest financial centre.

James Zhan, director of UNCTAD’s Division on Investment and Enterprise, said that Nigeria is a critically important market for promoting sustainable development practices in the region.

“We are delighted that the Nigerian Stock Exchange is joining its peers from South Africa and Egypt, as well as other leading exchanges around the world, in pledging to promote sustainable business practices,” he said.

The SSE initiative is co-organized by UNCTAD, the United Nations Global Compact, the United Nations Environment Programme’s Finance Initiative, and the UN-supported Principles for Responsible Investment.

The initiative explores how stock exchanges can work together with investors, regulators and companies to enhance corporate transparency – and ultimately performance – on environmental, social and corporate governance issues, and can encourage responsible long-term approaches to investment.

The NSE is the third African stock exchange to join the SSE, and the eighth worldwide. Other exchanges that are a part of this pioneering group include the New York Stock Exchange Euronext, NASDAQ OMX, the Bombay Stock Exchange, Borsa Istanbul, BM&FBOVESPA (Brazil), the Johannesburg Stock Exchange and the Egyptian Exchange.

Stock exchanges, regulators, and sustainability reporting experts continue their discussion of how to strengthen their approach to responsible investment this week in Geneva, when they gather at the 30th annual session of UNCTAD’s Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR).

PRI launches new reporting framework

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The Principles for Responsible Investment (PRI), a United Nations-supported global investor initiative, has launched a new reporting framework designed to enhance the level of transparency around the investment activities of its signatories.

Investment institutions in 50 countries, who collectively manage $34trn in assets will be required to report publicly on their progress towards implementing the PRI’s six principles each year across a wider range of asset classes and investment activities, including voting and engagement; manager selection, appointment and monitoring; and the integration of environmental, social and governance (ESG) factors into investment decision-making processes and ownership practices.

In South Africa, the PRI has 44 signatories with asset owners, asset managers and service providers including Escom, GEPF, Allan Gray, Absa, Investec, Momentum and RisCura to name a few.

By mid-2014, the PRI expects nearly 800 of its signatories to have used the reporting framework to disclose their policies, processes and performance in these areas in an objective and systematic way, using a common language to describe what they do.

This transparency will enable investment managers, asset owners, beneficiaries and the broader public to make their own judgements about the degree of each signatory’s commitment to responsible investment.

Fiona Reynolds, managing Director at the PRI, said that responsible investment is one of the fastest growing investment trends of the 21st century and robust reporting on ESG integration, voting and stewardship activity is essential if the financial services industry is to win back the trust of its stakeholders.

“This information will improve the dialogue between companies and investors about the real drivers of long-term performance, risk and return, and help asset owners more effectively evaluate and select managers, ensuring the investment chain functions effectively for clients and beneficiaries,” she said.

The reporting framework consists of more than 220 indicators across 12 modules and seeks detailed information from signatories about their policies and practices in new asset class-specific modules for the first time: listed equities, fixed income, private equity, property, infrastructure, and inclusive finance.

An average PRI signatory will need to complete five modules and 75 indicators.

Signatories will begin reporting from 1 October and have until 31 March 2014 to submit their responses. Signatories that do not report will be delisted from the PRI.

Lorenzo Saa, head of reporting and assessment at the PRI, said that while many of signatories are making good progress, much deeper implementation of the Principles will be necessary “if the PRI is to fulfil its mission and help foster the development of a more sustainable financial system”.

“A new layer of public transparency built into the framework will allow each signatory to evidence how its activities and interests are aligned with those of its clients, and help the market recognise and reward those investors that have truly embraced responsible investment,” he said.