SA is a laggard in the growing world of impact investing
This is an opportune time to explore alternative sources of return, such as those found in the real economy in infrastructure and private equity and debt
SA has more than its fair share of challenges, perhaps most acutely captured for the 40% of people between the ages of 15 and 64 years who are not employed, or in education or training.
Internationally many corporates have come to realise that they are part of a stakeholder network across employees, customers, shareholders and the broader operating environment, and are being held to account to integrate sustainability into business models.
As Dutch businessman and global climate leader Feike Sijbesma observed in 2012: “You cannot be successful, nor even call yourself successful, in a society that fails.”
So, addressing the contribution we can make as investors is a critical aspect of both the sustainability conversation and a future-focused approach to investing.
The first question we need to be asking ourselves is how much investment is currently being allocated towards impact investing. We know investment portfolios are typically skewed heavily towards listed equity, with listed bonds, property and cash making up the balance.
Despite regulation 28 enabling at least 35% of allocations towards private markets (such as private debt and equity), our research shows that SA investors allocate only about 2% of their assets to alternatives. This is well below international norms of 10%-20%. Add to this a further two largely overlooked factors, and SA portfolios are relatively underexposed to our real economy.
First, more than 60% of the JSE’s top 40 index derives its revenue offshore. Second, in the debt market, more than 80% of companies fund themselves through the banking system (private markets). This means pension and other funds that only access the listed bond market for credit exposure are limiting diversification benefits to just 20% of SA Inc’s debt needs. It is evident that our collective savings exposure to the real economy is highly constrained. Some of this is no doubt due to legacy legislation, but regulation 28 now allows up to 35% exposure to real assets.
Given the challenging environment investors face, we are well-versed in factors such as a constrained economic outlook, sluggish stock market performance, political uncertainty and lack of business confidence that put a lid on our investment expectations.
However, this would seem an opportune time to explore alternative sources of return, such as those found in the real economy in infrastructure and private equity and debt. This offers potentially positive inflation-linked opportunities for diversification benefits in asset classes that are relatively uncorrelated and still provide attractive valuations.
SA is unfortunately also a laggard in the swiftly-growing world of impact investing. The latest 2018 Global Impact Investing Network survey of 229 impact funds reported on $228bn under management. They found that the market is diverse, with the top sectors of investment including financial services (19%), energy (14%), microfinance (9%) and housing (8%). Overwhelmingly, impact investors also reported performance in line with both financial and impact expectations.
In SA, given the regulatory requirement to consider more sustainable investing and development prerogatives we as investors face, we urgently need to develop our impact investing capabilities and fund offerings to help convert many of our challenges into opportunities for investment.
The country’s first job-creation fund — the Jobs Fund — was underpinned by a guarantee from the Treasury and has now created more than 10,000 permanent and decent jobs while generating consistent benchmark-beating returns. But we need many more such impact funds to be demanded by our financial industry.
We could ask where the vision is that recognises the role business could have in believing and building towards inclusive growth. Instead of collectively hedging business against SA risk — which some would argue is quite rational — how different could it be if more businesses genuinely committed to working in partnership to deliver the sustainable growth of which we are capable? The small to medium-sized enterprises (SME) fund in collaboration with the Jobs Fund are hopefully good examples of how this could be done.
Regulation 28 for pension funds also encourages funds to invest for long-term sustainable outcomes, which if embraced could extinguish the prescribed asset menace. Articulating these values and beliefs within a sound governance framework gives agency to pension fund owners to expressly determine how their investments are made. Current pension fund laws make it a requirement to incorporate sustainable investing and explicitly require consideration of environmental, social and governance factors.
• Jackson is head of impact investing at Ashburton Investments.
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