Although ethical investments are still few and far between in South Africa, the options for individual investors who want to match their financial returns with the rewards of social responsibility are increasing steadily. We report on eight unit trust funds that deliver on all levels.
An ethical or socially responsible investment combines an investor's desire to make money with promoting social objectives, such as a healthy environment, good labour relations or sound corporate governance. The investment process must integrate the financial risk and return of the investment with social criteria.
Currently, the simplest way to be socially responsible with your money - short of donating it to your favourite charity - is to invest in a unit trust fund with an ethical mandate.
The first unit trust to include social criteria in its mandate was the Pax World Fund, launched in 1971 in the United States. The fund would not invest in companies involved in weapons production, and sought out companies that produced goods and services that improved quality of life, treated employees well, and were environmentally responsible.
Prior to the introduction of the Pax World Fund, ethical investing simply meant avoiding the sin stocks of companies involved in alcohol, tobacco or gambling. However, the emphasis has shifted to companies that address socio-economic issues, and the term ethical investing has given way to the concept of socially responsible investing (SRI).
In the US, SRI tends to be confrontational. Funds exclude companies that do not measure up ethically, while using their financial muscle at shareholder meetings to influence resolutions concerning environmental and social issues.
In Europe, SRI currently has a strong environmental focus. In the United Kingdom, SRI was initially concerned with excluding companies from portfolios on ethical grounds, such as those that made weapons or tested products on animals. It has now shifted to a triple bottom line approach, which calls for corporations to account for their social, environmental, as well as their financial, performance.
Until the 1990s, several investment funds around the world avoided investing in companies associated with South Africa as a protest against apartheid.
The first ethical investment vehicle in South Africa, the Community Growth Unit Trust Fund, was launched in 1992. The background to this fund was the labour unions' fight for basic rights for their members in the 1980s, Cromwell Mashengete, the fund manager of Community Growth, says.
The unions realised their need to influence corporate South Africa. This they achieved by using their financial muscle - the investment base accumulated through their members' retirement funds - to gain better working conditions and build industrial capacity.
In 1992, six trade unions joined forces to form Unity, a non-profit organisation. Together with Franklin Templeton NIB Investments (then Syfrets Managed Assets), they formed Community Growth Management Company. Community Growth's mission statement includes a commitment to foster sustainable long-term growth in this country by investing in socially responsible companies.
Mashengete says that although SRI in South Africa is still small compared to the US - where one in every eight dollars is invested in socially responsible portfolios - there is scope for further growth, especially as investor sentiment towards ethical investing is becoming favourable.
According to the Alexander Forbes Targeted Development Investment Survey, released on June 30 this year, there are about 21 socially responsible funds in South Africa, with a total of R9.3 billion under management. Of these, eight are unit trust funds open to individual investors, while the rest are institutional funds - that is, funds tailored to meet the needs of an institutional investor such as a pension fund or provident fund.
Heather Jackson, the chief investment officer of Fixed Interest Fund Managers at African Harvest Fund Managers, says that despite South Africa's tremendous social backlogs, the growth in SRI in this country has been disappointing.
However, Jackson says several factors should encourage the growth of SRI in the future. These are:
- The King 2 Report, released in 2001, which calls for greater transparency in corporate governance, should steer companies to live up to their social responsibilities. Greater shareholder awareness will encourage good corporate citizenship, while greater transparency should increase the amount of information on which SRI decisions can be based.
- The Black Economic Empowerment Commission, which was established by the Black Management Forum, has recommended that 10 percent of institutional assets should be invested in areas of national priority. Certain European countries, such as Germany and the UK, require institutional investors to disclose the extent to which they consider social issues in their investment strategies.
- The introduction of an SRI index, along the lines of the FTSE4Good Index in the UK, is planned for later this year. The FTSE4Good Index is designed to enable investors to track the performance of socially responsible companies (companies that have a positive record on environmental issues, workplace practices and human rights). Its sister index, the FTSE4Good UK 50, tracks the 50 largest companies on the FTSE that meet these social responsibility requirements.
SRI in South Africa is focused mainly on improving the lot of previously disadvantaged communities, Jackson says. Whereas the socially responsible funds here and abroad are probably managed similarly, the themes are broader overseas, encompassing environmental issues, she says.
Socially responsible funds subscribe to the principle that companies that demonstrate good social and environmental management will have good financial performance in the long term, Terence Craig, the chief investment officer at Frater Asset Management, says.
Craig gives the following examples of how adopting socially responsible principles positively influences the overall performance of companies:
- Poor corporate governance can be linked to corporate failure - for example, Leisurenet and Enron. Shareholder activism through socially responsible funds encourages good corporate governance. Voting and engagement on governance issues can ensure checks and balances on aspects such as board responsibility and management share options.
- Good environmental management enhances the reputation of companies and their access to global markets. It also reduces the risk of expensive litigation and environmental rehabilitation.
- Sound employee relations strengthen loyalty, while lowering the potential for industrial action and production losses.
- Approaching HIV/Aids through treatment and education programmes is becoming recognised as critical to good corporate governance.
- Global reporting standards are starting to incorporate non-financial matters in company statements.
South African investors can choose from the following socially-responsible unit trust funds:
Fund manager: Community Growth.
Launched: In 1995 as the Community Income Fund; renamed the Community Gilt Fund in August 1998.
Classification: Domestic fixed interest bond. The fund was ranked 11th out of 14 in terms of performance over the three years ended June 2002.
Ethical component: The fund's underlying investments are in reconstruction and development type bonds. The fund only invests in assets that comply with socially responsible investment criteria. A minimum of 25 percent of the total fund is invested in non-governmental and non-banking bonds.
Fund manager: Franklin Templeton NIB.
Launched: June 1992. This was the first fund in South Africa to offer retirement funds and individual investors the opportunity to invest in companies that met certain standards of social responsibility.
Classification: Domestic equity general. The fund ranked 15th out of 34 finds in its sector for the three years ended June 2002.
Ethical component: The fund invests according to how companies score in terms of eight equally weighted criteria: job creation; affirmative action; training and skills development; black economic empowerment; good conditions of employment; sound environmental practices; high health and safety standards; and open and effective corporate governance. Independent researchers investigate the extent to which companies meet these criteria by interviewing staff, management, and shop stewards. This information is translated into a score. Community Growth does not invest in companies scoring below 50 percent; those scoring between 50 and 60 percent are conditionally approved and reassessed if the fund managers express a need to invest in them; those scoring more than 70 percent receive special attention. Approved companies are monitored to ensure ongoing compliance and to note improvements in their performance.
Fund manager: Community Growth.
Launched: August 2002.
Classification: Domestic fixed interest money market.
Ethical component: Community Growth donates 0.1 percent of the fund's 0.5 percent annual management fee to charities identified by Community Growth's management board. The money is held in a trust until suitable charities are identified.
Fund manager: Frater Asset Management.
Launched: October 2001.
Classification: Domestic equity general.
Ethical component: This is not a screened fund - Frater invests all types of shares. However, Frater uses its influence as a large shareholder to urge companies to improve their corporate governance and performance on social and environmental issues. If Frater believes that a company is not being socially responsible, Frater will raise this at shareholder meetings, and use its voting power to influence corporate policy.
Fund manager: Frater Asset Management.
Launched: June 1992.
Classification: Domestic equity general. The fund ranked third out of 34 funds in its category for the three-year period ended June 2002.
Ethical component: Like the Oasis Crescent Equity Fund (below), this fund's mandate is based on Islamic principles: It does not invest in companies involved with alcohol, gambling or non-halaal foods. Futuregrowth Pure Equity does not hold interest-bearing securities other than those required by the laws governing South African unit trust funds.
Fund manager: NIB Quantitative Asset Management.
Launched: August 2002.
Classification: Domestic equity general.
Ethical component: The fund invests in companies listed in the FTSE/JSE Top 40 index that consider the environmental, social and economic consequences of their investments. The Nedbank Sustainable Investment (SI) Index Fund tracks the performance of a customised sustainability index. The SI index weights companies according to the FTSE/JSE Top 40 index and scores them on sustainability issues in terms of international best practice and the extent to which the companies integrate the concept of sustainability into their business activities. Due to the legal requirements for South African unit trust funds, the Nedbank SI Index Fund will not perfectly track the index, because a minimum of five percent must be invested in cash at all times, and any one stock must be capped at 10 percent of the portfolio.
Fund manager: Oasis Asset Management.
Launched: August 1998.
Classification: Domestic equity general. The fund had the best overall performance in this category for the three-year and one-year periods ended June 2002.
Ethical component: The fund operates according to Islamic principles. This means it does not invest in companies that are involved in gambling, pornography, the marketing or manufacturing of pork products, or liquor, as well as companies that are highly geared and certain financial shares. Since Islam forbids the charging of interest (although profit through trade is considered acceptable), unitholders have the option of asking the fund to donate their portion to a designated charity.
Fund manager: African Harvest.
Launched: December 1999.
Classification: Domestic asset allocation flexible.
Ethical component: African Harvest donates 60 percent of its initial management fee, and 30 percent of its annual management fee, to organisations working to prevent violence against women and children. Investors also have the option of contributing their six-monthly income distributions to a community organisation of their choice.
- This article first appeared in Personal Finance Magazine, Fourth Quarter 2002 (Vol 13)