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Culture is key in the ESG journey

Renosi Mokate, board member at Africa’s largest pension fund South Africa’s Government Employee Pension Fund, GEPF, believes that one reason the R1 trillion ($107 billion) fund so comfortably embraces ESG principles stems from South Africa’s own turbulent history.

“Our investment policy has been influenced by our history,” she says, speaking at PRI in Person 2015, the annual conference for the UN-supported international network of investors working to put the six Principles for Responsible Investment into practice.

“We have a historical legacy of high unemployment and inequality. Coming from an undemocratic society, which was unfriendly to ESG, has created an environment that actually spurs us on.”

Adding that addressing the social dimension within ESG has seen the GEPF invest in SMEs, infrastructure and support Black Economic Empowerment.

In a discussion that compared the ESG ‘journey’ of different asset owners, South Africa’s history markedly contrasted with Japan where advocates of ESG take up are challenged by a conservative society.

Masaru Arai, chairman of the Japan Sustainable Investment Forum, JSIF, a not-for-profit established in early 2001 to promote SRI in Japan, puts Japan’s ESG reticence down to historical investor short-termism, a lack of staff and experience within corporate pension funds, and key cultural barriers.

“The main stakeholders of a company in Japan have always been perceived as the customers, the employees, even society, but rarely the shareholders. They are never emphasised as stakeholders,” he explains.

In contrast in South Africa the GEPF has built a policy framework around ESG to guide internal strategy and its investment managers, namely the Pretoria-based Public Investment Corporation mandated to manage the bulk of the fund.

“We are currently working with the PIC to establish a mechanism for engaging with the largest companies on the JSE on a regular basis to ensure they understand what we are trying to achieve,” says Mokate.

She describes a policy of communication and engagement that “won’t happen overnight” but will ultimately enable the GEPF to hold companies accountable to the standards the GEPF is setting.”

A moot point given that GEPF assets comprise a 50 per cent allocation to listed South African equities, a weighting that accounts for 13 per cent of the capitalisation of the Johannesburg Stock Exchange.

There are signs of change in Japan, encourages JSIF chairman Arai, pointing to political initiatives under the Abe government with the introduction of corporate governance and stewardship codes.

“These are aimed at revitalizing the economy as a whole but have resulted in more listening on ESG issues nonetheless.”

But he believes the real key to ESG take up in Japan lies with a shake-up around the concept of fiduciary duty whereby asset owners come to value non-financial considerations in their portfolios.

“Fiduciary’s have to integrate ESG issues into their normal investment process, along with financial issues. It is all about rethinking fiduciary duty.”