University of Cape Town Graduate School of Business Research Seminar What is the State of...

SinCo – sustainable investment consultants © 2006-2012 FOR PROFESSIONAL INVESTORS USE ONLY – NOT FOR DISTRIBUTION TO THE GENERAL PUBLIC 1

REGULATORY INFORMATION No part of this report or proposal suggests or should understood to suggest endorsement or advice on any investment approach, strategy or offering. The rights and obligations of the investor are set out in the relevant policy contract. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance.

UCT GSB research seminars hosted by Tamlyn Mawa and Ralph Hamman UCT GSB, Waterfront, Cape Town, South Africa 25 July 2012 1PM - 2PM

sustainable investment consulting

Designing and developing world-class ESG architecture for institutional investment in frontier and emerging markets since 2006

Graham Sinclair Principal

SinCo sincosinco.com | @SinCoESG | [email protected]

What is the State of Sustainable Investment in Africa?

SinCo

sincosinco.com

sustainable investment consulting

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sincosinco.com/sustainable-returns-project.php sustainable investment consulting NOT FOR DISTRIBUTION OR CITATION

Agenda

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CONTEXT

•  Significant increase in interest around sustainable investment, ESG factors, and the role of asset management

•  Studies in Africa centering on South Africa, recently expanded to multi-country surveys and analysis of North Africa and Sub-Saharan Africa

•  Academic literature focused mostly in South Africa reviewing pensions and asset management activity, role of JSE SRI index and multi-stakeholder initiatives for example Carbon Disclosure Project

DISCUSSION TODAY 1.  Summary of selected recent research/activity

•  Sustainable Investment in Middle East and North Africa (2010) and Sub-Saharan Africa, (2011)

•  2011-2012 – watershed year?

•  One Year Later Report

•  Sustainable Returns Project – Phase 1 report “Defining Momentum” on retirement fund investment value chain paper

2.  AfricaSIF.org Marketplace Trends Report 2012

3.  Conclusions and next steps


SinCo��sustainable investment consulting, global emerging markets practice

  SinCo at a Glance   Bespoke investment advisory focused on

sustainable investment architecture

  Architect + analysts with support team operating projects with partners in Geneva, Seattle, London, Nairobi, Washington DC, Cape Town, Istanbul

  Word-of-mouth, below-the-radar approach working directly with principal

  Philosophy

  SinCo is a boutique investment advisory firm specializing as an ESG investment architect for sustainable investment in frontier and emerging markets.

  SinCo helps clarify questions, design & develop answers, and project manages thinking into action.

  SinCo promotes answers to sustainability emerging from talent in frontier and emerging markets, as well as developed countries.

  Experienced   Established boutique in Boston in Q4 2006: inaugural

engagement for Wall St proprietary and third party manager with USD 900bn AUM, 200 analysts, mutli-asset classes

  Since 2006, SinCo has delivered sustainable investment architecture globally to pension funds, asset managers and international organizations integrating ESG factors into investment practice.

  Projects for proprietary clients in listed equity, hedge funds, investment product R&D, investment bank derivative instruments, ESG impact metrics.

  Proven Project Leader

  Multi-year, multi-stakeholder, multi-country projects over milestones through time, including PRI in EM project rollout.

  ESG services   Bespoke research, benchmarking ESG best practices,

making sustainable investment case, designing ESG indexes, streamlining private equity ESG frameworks, investment roadshows

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As sustainable investment architect, we consider sustainability through the lens of environmental, social and governance factors are integrated in all investment decisions. Working with SinCo our clients have access to world-class strategy, plans

and experience to quickly and effectively solve the challenges in making sustainable investment work.

sincosinco.com


youtube.com/africasif

AfricaSIF.org is an independent, pan-African, not-for-profit network, knowledgebase and advocate promoting investment in sustainable development across the continent. The AfricaSIF.org Project is building a network of institutions and individuals promoting sustainable investment in Africa by investors in public, private and philanthropy sectors across asset classes, countries and stakeholders from our platform www.africasif.org. 2012 HIGHLIGHTS include: AfricaSIF.org ESG Masterclass: Education and training for investors, pension fund trustees, consultants and regulators. Next training planned for Johannesburg (Aug) and Cape Town (Sept), with plans for Casablanca (Dec). http://www.africasif.org/esg-masterclass.php AfricaSIF.org Marketplace Trends Report 2012: A sustainable investment benchmarking survey that looks at investment market size and dynamics in 54 African countries. For the first time, AfricaSIF.org will contribute the Africa coverage in the global SIFs Trends Report in December. http://www.africasif.org/marketplace-and-trends-report.php AfricaSIF.org Networking 2012: The AfricaSIF team invites you to meet and mingle with 100 investors and stakeholders in Africa. Events are planned for Johannesburg around the ESG Forum 21 Aug, 5 Sept in Cape Town ahead of the IMN Africa Cup 2012, with plans for Casablanca in adjacent SuperReturn Africa 3-5 Dec. http://www.africasif.org/networking-events-2012.php

| twi4er.com/africasif

www.africasif.org

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sincosinco.com/sustainable-returns-project.php sustainable investment consulting NOT FOR DISTRIBUTION OR CITATION 6


African Stock Exchanges: three stages in development

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Top 5 African Africa stock exchanges by market capitalization (above USD 10bn) Other operating Africa stock exchanges

Source: SinCo analysis 2011; : SinCo+RisCura data; 2011 © International Finance Corporation (IFC)

IFC Advisory Services in Africa

Advisory Services by Business Line, FY11 - Total Project Expenditures: $207 Million

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IFC Hub Offices IFC Country Offices

ATLANTIC OCEAN

Mediterranean Sea

INDIAN OCEAN

Cape Town

Johannesburg Maputo

Antananarivo

Lusaka

Freetown

Nairobi Kigali

Douala

N’Djamena

Lagos Accra

Ouagadougou

Abidjan

Dakar

Cairo Amman Jerusalem

Beirut

Algiers

Rabat

Sana’a

Dubai

Monrovia

Kinshasa

Addis Abala

Dar-es-Salaam Bujumbura

Bamako

Bangui Juba

Access to Finance

31% Investment

Climate 27%

Sustainable Business 29%

Public Private Partnerships 13%


Sustainable Investment in Middle East and North Africa 2010

  MENA $54.25 billion 2.13%, MENA without Shari’ah - compliant investments $17.1 billion 0.67%. This is a conservative estimate based solely on disclosed data, and excludes publicly committed investments which cannot be verified as already invested.

  The main sustainability issues identified in Sustainable Investment in Middle East & North Africa 2011 are economic diversification, climate change, water scarcity, governance reform and greater transparency, youth development and employment, contribution of women to economic/social development and labor conditions.

  To determine the current state of development of SI in MENA, the study used an assessment framework which primarily focused on “Market Preparedness” and current “Market Interest” in SI among active investors in MENA. The Market Preparedness assessment covers two components: investment, ESG regulations and country performance; and ESG disclosure.

  The level of SI in MENA is low, but not insignificant, and there is a growing recognition of a need for action on sustainability issues. Whereas governance reforms have been initiated, there has been less progress on environmental and social elements of ESG. Some countries in the region have made important strides, but many areas are still in very early stages of development and challenges remain for the growth of SI in MENA.

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  Sustainable Investment in Middle East & North Africa 2010, full report: hCp://www.ifc.org/sustainableinvesEng WriCen by: Guy Morgan, BSR and Darin Rovere, Sustainability Excellence. Editorial team: Taha Rafi, Jason Youmans, and Berit Lindholdt Lauridsen

Briefing on Sustainable Investment in Sub-Saharan Africa Report (IFC, July 2011) April 2012 | © SinCo 2012 | sincosinco.com

Takeaways: Sustainable Investment Marketplace Snapshot

•  Sustainable investment (SI) is an established niche in Sub-Saharan Africa, and predominantly in its largest institutional investment market – South Africa. This study recommends five measures to expand SI through 2020.

–  The report forecasts that over the next 10 years there will be considerable growth of ESG considerations in investment management in South Africa, Kenya, and Nigeria.

–  The strongest growth will be in the ESG-integrated segment driven by major asset owners, DFI-led PE investment, regulatory changes, and activities of SI/ESG-specialist investment boutiques.

•  In both the private equity (PE) asset class and in general asset management practice, SI as a pure-play, branded environmental, social, and governance (ESG) investment theme totals an estimated $5.5 billion in assets under management (AUM). However, using the broader definition to which this report subscribes, which defines SI as investment practice that integrates ESG factors in investment policy and/or process stages, this report estimates that SI in Kenya, Nigeria and South Africa stands at over $125 billion AUM (20 percent of total AUM).

•  The relatively high proportion of ESG-integrated investment is the result of: –  Largest asset owner in the largest African investment market, South Africa’s Government Employee

Pension Fund (GEPF) with $131 billion and asset manager of 92 percent of its assets, the Public Investment Commission (PIC), both adopting ESG-integrated sustainable, responsible and/or developmental investment policies since 2009. Largest series of PE funds in the past decade have in part had DFI-sponsored PE mandates in Africa

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Sustainable Investment in Sub-Saharan Africa 2011

  Sustainable investment (SI) is an established niche in Sub-Saharan Africa, and predominantly in its largest institutional investment market – South Africa. This study recommends five measures to expand SI through 2020.

  The report forecasts that over the next 10 years there will be considerable growth of ESG considerations in investment management in South Africa, Kenya, and Nigeria.

  The strongest growth will be in the ESG-integrated segment driven by major asset owners, DFI-led PE investment, regulatory changes, and activities of SI/ESG-specialist investment boutiques.

  In both the private equity (PE) asset class and in general asset management practice, SI as a pure-play, branded environmental, social, and governance (ESG) investment theme totals an estimated $5.5 billion in assets under management (AUM). However, using the broader definition to which this report subscribes, which defines SI as investment practice that integrates ESG factors in investment policy and/or process stages, this report estimates that SI in Kenya, Nigeria and South Africa stands at over $125 billion AUM (20 percent of total AUM).

  The relatively high proportion of ESG-integrated investment is the result of:

  Largest asset owner in the largest African investment market, South Africa’s Government Employee Pension Fund (GEPF) with $131 billion and asset manager of 92 percent of its assets, the Public Investment Commission (PIC), both adopting ESG-integrated sustainable, responsible and/or developmental investment policies since 2009. Largest series of PE funds in the past decade have in part had DFI-sponsored PE mandates in Africa

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Drivers: Investing in Sub-Saharan Africa

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“Negative perceptions and the engrained bias that this has created remain Africa's greatest challenge in attracting investment. Private equity is still a young asset class for Africa and despite well known fund managers like Actis and ECP, there isn’t a long track record of success to point to when making the case.” – PE Fund


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17

17

15

25

28

38

44

11

15

22

19

28

18

34

42

0

0

14

29

29

29

0 20 40 60 80 100 120 140

Overhang of capacity

Liquidity

��Environmental or social risks

Portfolio diversification

Data on good performance

Political/economic risks

Corporate governance/standards

Attractive risk-adjusted returns

Identify the importance of these factors in choosing whether or not to invest in Sub-Saharan Africa today

Ranking results identified as "very important" on 4-grade scale [frequency ranking from 8 options; n=48 PE investors + 44 asset owners and asset

Very important - Private Equity Investors

Very important - Asset Owners and Asset Managers

Stakeholders - Very Important


Understanding the influence on investment decisions

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0 10 20 30 40 50 60 70

Fixed income investors

Investors based in Europe

Investors based in USA

Sovereign wealth funds

Institutional investor gurus e.g. Warren Buffett or Bill Gross

Investors based in Middle East

Listed equity investors

High net worth investors

Institutional investors with pan-African mandates

Institutional investors with global emerging markets mandates

Regional Development Banks e.g. AfDB

Investors based in Asia

Private equity investors

Institutional investors with local country mandates

International financing institutions e.g. IFC

Most influential investors driving demand TODAY in sub-Saharan Africa n=97 investors & stakeholders; forced ranking of 3 /15 options Jan 2010 - May 2011]

3rd

2nd

Most Influential

Source: Sustainable Investment in Sub-Saharan Africa Report 2009 – 2011, SinCo analysis 2011; SinCo+RisCura data; 2011 © International Finance Corporation (IFC) 2011


Sector awareness: …extractives are high-impact, high-visibility

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Source: SinCo analysis 2011; SinCo+RisCura data; 2011 © International Finance Corporation (IFC)

3

6

7

12

8

11

14

8

6

5

12

7

31

39

2

4

5

2

8

4

5

9

14

15

11

22

26

25

3

3

3

2

4

6

4

6

7

10

8

34

19

22

0 10 20 30 40 50 60 70 80 90 100

Automobiles & parts

Transport and shipping

Food, beverage and tobacco

Chemicals

Travel & leisure

Gas, water & multi-utilities

Forestry & paper

Construction & materials

Pharmaceuticals/healthcare

Telecommunications

Electricity

Banking and financial services

Mining

Oil & gas producers

Stakeholders' perspectives on ESG awareness from industries in Africa are today

[14 options + "other" option; n = 47 stakeholders; January 2010 - April 2011]

Environmental

Social

Governance

www.sincosinco.com/siinssa


Defining sustainability: …ESG and a string of issues

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Source: SinCo analysis 2011; SinCo+RisCura data; 2011 © International Finance Corporation (IFC)

2

3

3

8

9

9

10

13

13

14

19

27

28

3

1

4

8

5

5

2

7

6

8

26

25

24

3

4

2

12

10

13

8

10

7

13

22

34

30

0 10 20 30 40 50 60 70 80 90 100

Non financial risks (risk mitigation) and

Other (e.g. depending on client mandate,

Political stability / sustainability

Long term period factor

Infrastructure factors (including legal and

Conservation factors

Economic factors (esp. country and

Financial factors

Stakeholder factors

Business Performance factors

Governance factors

Environmental factors

Social factors

How do you define "sustainability"? What sustainability issues - environmental, social or corporate governance - are front of mind for you in Africa today?

[open-ended; top 10 responses; n= 52 PE investors + 46 asset owners and managers + 59 stakeholders

PE investors

Asset owners and asset managers Stakeholders

•  Definition of “sustainable investment” used by the IFC - "an umbrella term for all investment techniques that integrate environmental, social and governance (ESG) value-drivers into financial research and investment processes”



Ten years: …range of ESG issues, and prioritization

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6

6

8

12

13

16

17

18

21

21

24

29

31

44

9

12

12

13

24

21

15

16

22

27

17

20

32

37

15

11

5

18

23

8

12

16

17

31

15

16

37

34

0 20 40 60 80 100 120 140

Biodiversity.

Micro-finance, micro-insurance.

Gender Diversity.

Emissions of greenhouse gases.

HIV/AIDS.

Broad-Based Black Economic

Product Health, Safety and Nutrition

Human and Indigenous Peoples

Jobs creation [“decent paying” jobs].

Water scarcity or sanitation.

Environmental Management

Employee Relations, Safety and

Infrastructure Development.

Corporate Governance.

Performance impact of ESG Factors 3-10 Years [n= 97 investors (51 PE investors) + 46 stakeholders; forced ranking 14 answers, very/somewhat/marginally/not important;

Jan'10-Feb'11; SinCo analysis 2010-11]

Private Equity - Very Important

Investors (excluding PE) - Very Important

Stakeholders - Very Important

www.sincosinco.com/siinssa Source: SinCo analysis 2011; SinCo+RisCura data; 2011 © International Finance Corporation (IFC)


Drivers and barriers: …carrots, sticks and inertia

The primary drivers of SI identified by participants in this study were:

1.  Good investment returns (a record of premium from ESG integration)

2.  Explicit and tangible ESG benefits/impact

3.  More information 4.  Government/regulator

incentives

5.  Demands from clients/investor mandate/shareholder pressure.

The top five barriers cited participants in this study were:

1.  Lack of adequate information to evaluate investment target ESG-related performance

2.  Lack of evidence that ESG factors increase financial returns

3.  High costs of implementing ESG investment 4.  Lack of appropriately skilled advisors and

necessary expertise

5.  Short-term reporting against prospect of long-term returns.

Barriers also include the “investment-as-usual” approach, the perception that SI consists of “ethical” investment and/or negative screening, and the specialized “language of sustainability”.

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“More capital available to pursue ESG mandates…Increased returns, higher exit values, due to ESG…There has to be a business by business basis to try and get help to improve attractiveness. Standards don't really help, but increased awareness on governance and more board training would help. Also being realistic about what can be achieved.” – composite verbatim comments



Drivers: Making Sustainable Investment Attractive

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More capital available to pursue ESG mandates…Increased returns, higher exit values, due to ESC…Find a GP that is highly skilled and knowledgeable on ESG and the other risk issues…There has to be a business by business basis to try and get help to improve attractiveness. Standards don't really help, but increased awareness on governance and more board training would help. Also being realistic about what can be achieved. – composite answers


Perceived Key Drivers to Sustainable Investing in Sub-Saharan Africa open-ended; n= 41 asset owners & managers + 43 PE investors + 43 stakeholders; Jan'10-Jan'11; Interviews SinCo analysis 2010-2011

Private Equity Asset Owners and Asset Managers Stakeholders

Good Investment / Financial Returns 35% Good Investment / Financial Returns

44% Good Investment / Financial Returns

38%

More Information Available 26% Tangible ESG Benefits / Impact 22% = Tangible ESG Benefits / Impact = Incentives from governments, regulators

27%

Incentives from governments, regulators

22% Demand from clients; investor mandatel shareholder pressure

17% More information available 18%

Demand from clients; investor mandatel shareholder pressure

17% Incentives from governments, regulators

12% Proven risk reduction 13%

Explicit SI/ESG Impact 15% More information available 7% Demand from clients; investor mandatel shareholder pressure

9%

Please note: The respondents, answering an open ended question, could integrate more than one drive to their answers.


Roles: Impact on Practice of Asset Management

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“We have a different background, for e.g. these factors cannot be included into the restructuring and divestment process….ESG will take some time…The drive is from the outside in…In PE mainstream it is not particularly helpful. Work from markets is at the leading edge. Country reports are limited.” – composite investor responses.


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9

19

20

21

25

30

6

25

20

17

18

23

25

0 10 20 30 40 50 60

Recruiting investment professionals

Research

New client asset gathering

Portfolio management

Investment selection

Marketing

Risk management

Investment Roles and ESG: how ESG will become more important in Next 5 Years

[forced ranking; 7 options; n = 49 PE investors + 45 asset owners and managers; January 2010 - February 2011] Private Equity Investors - Strongly Agree Asset Owners and Asset Managers - Strongly Agree


Impact on practice of asset management

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“We have a different background, for e.g. these factors cannot be included into the restructuring and divestment process….ESG will take some time…The drive is from the outside in…In PE mainstream it is not particularly helpful. Work from markets is at the leading edge. Country reports are limited.” – composite investor responses.

6

9

19

20

21

25

30

6

25

20

17

18

23

25

0 10 20 30 40 50 60

Recruiting investment professionals

Research

New client asset gathering

Portfolio management

Investment selection

Marketing

Risk management

Investment Roles & ESG: how ESG is more important in next 5 years [forced ranking; 7 options; n = 49 PE investors + 45 asset owners and managers; Jan 2010 - Feb 2011]

Private Equity Investors - Strongly Agree Asset Owners and Asset Managers - Strongly Agree



Supply: ESG in PE Investment Lifecycle

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“Future: Fund-raising is incidental to the process and may screen out GPs unaware of ESG issues. ESG is helping mitigate risks in portfolio: ESG manages risks and enhances returns…Higher corporate governance means higher exit. Greater all around return…No view on exit. There will be demands from investors for higher ESG intergration going into the future.” – composite of investor responses


77% 82% 87%

59%

14% 13% 8%

30%

3% 3% 6% 5% 5% 8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fund-raising Due diligence Fund management Fund/company exit

How ESG is used in the PE investment lifecycle [Forced 4 answer choices; n= 48 PE Investors; January 2010 - February 2011]

Never Seldom Sometimes Often


Leaders: …which brands and franchises are most respected?

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Perceived Sustainable Investment Market Leaders in sub-Saharan Africa n= 29 stakeholders + 28 PE investors + 25 asset owners & managers; open ended questions. SinCo analysis of SinCo+RisCura data. January 2010

- May 2011

Private equity Asset Owners and asset managers Stakeholders IFC / World Bank 36% Futuregrowth / Old Mutual

Investment Group (OMIGSA) 28% GEPF 14%

Other DFIs, funding agencies, development banks

14% GEPF 24% Old Mutual (Futuregrowth / Community Growth)

14%

= Mining / Resources Companies (i.e. oil etc.) = CDC = Old Mutual Investment Group South Africa (OMIGSA) = FMO

11% IFC / World Bank 20% Element Investment Management 14%

= Equity Bank = PE Firms / Venture Funds

7%

Element Investment Management 20% PE Firms / Venture Funds 10%

PIC 16% IFC / World Bank 10%

Note: Respondents to the open-ended question could provide more than one perceived sustainable investment market leader.


Markets: …numbers adding up to sizeable market

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1.  The percentage of respondents self-reporting that they manage assets for DFIs (which by definition requires ESG integration in investment mandates). 2.  The percentage of respondents (PE and general asset management) self-reporting their firms use a fully integrated ESG strategy applied to the majority

of their investments. 3.  The self-reported gross AUM from members/signatories of initiatives such as the CDP or Principles for Responsible Investment.



Understanding the powerful role of advisors

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24%

17%

11% 9%

7%

6%

6%

6%

6%

4%

2% 2% 0%

Promoting sustainable investment in Sub-Saharan Africa and greater awareness of ESG issues among investment organizations and professionals in the next 3-10 years

[14 answer options; n=43 stakeholders; Jan 2010-May 2011]

Asset owners [e.g. pension fund trustees]

Other options

Asset consultants

Accounting or auditing standards bodies

Practitioner networks [e.g. PRI, AfricaSIF etc]

Finance and investment regulatory authorities

International organisations (World Bank, UN, OECD)

Environmental regulatory authorities

Business schools

Professional bodies (e.g. CFA Institute)

Stock exchanges

Business/investment media

Civil society/NGOs


Private Equity in Africa Sustainable Investment Briefings

sincosinco.com/peacchis

Project: Client:

sincosinco.com ifc.org 25

www.sincosinco.com. | sustainable investment consulting 26

African private equity and infrastructure…viewed as better 3 year bets

  Investors moving to longer term investment strategies for Africa, rather than more speculative short-term bets. In key African markets, investors worry more about technical risks than political or macroeconomic risks.

  Institutional investors plan to increase their allocation to African markets in the coming five years. 20% had zero current Africa allocation, in investors >US$10bn, 33%. Most have as part of global emerging/frontier markets. By 2016, expect >5% of fund value may be allocated to Africa. allocation.

Source: Into Africa: Institutional investor intentions to 2016, Invest AD + Economist Intelligence Unit, January 2012 Notes: Online survey of 158 institutional investors Aug – Sep 2011 by EIU includes insurane and pension funds, private banks, wealth managers, hedge funds, and mutual funds, 22% have > US$22bn AuM, split amongst North America, Europe, Asia-Pacific, Middle East, and Africa.

www.sincosinco.com. | sustainable investment consulting 27

Institutional investors in Africa…expect development outcomes

  …

Source: Into Africa: Institutional investor intentions to 2016, Invest AD + Economist Intelligence Unit, January 2012 Notes: Online survey of 158 institutional investors Aug – Sep 2011 by EIU includes insurane and pension funds, private banks, wealth managers, hedge funds, and mutual funds, 22% have > US$22bn AuM, split amongst North America, Europe, Asia-Pacific, Middle East, and Africa.


One Year Later:

  IFC always needs to prove the success of their work, including reports. In our conversations with investors and stakeholders, the audience for SI in SSA either has not fully read and digested it, or has not built on its findings.

  Overview of SI in SSA and 5 recommendations

  Update key data on marketplace, supply & demand of ESG products & services

  SI in SSA AUM summary table as per little 2-pager Issue Brief

  PE growth in SSA pg 49 – may not have been much change here

  Portfolio/funds supply table

  funds with exposure in Africa

  SA specific tables

  Proxy voting graphs as per “Spoilt Votes”

  Changes in AO + AM + PE policy/reporting/activity

  Opinions from project people on why SI in SSA matters/-ed & what it's impact was/was not

  Published August 2012

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+1


One Year Later: ESG > greenwashing?

  Regulation 28: The updated Regulation 28 of the Pension Funds Act 24/1956 in South Africa, language and principles were expanded to include the concept of ESG, and in Principle IX an explicit reference to ESG (on top of references to BEE).

  Code for Responsible Investment in South Africa (CRISA): The launch of a voluntary investor initiative to increase stewardship followed similar work in Europe (voluntary in UK Stewardship Code (2010), regulation in Denmark CSR reporting, (2009) and Indonesia. Tensions between stakeholders may be expected. The Integrated Reporting Initiative (IRI) has been adopted by the JSE as an outcome of King III, and will meet the demand for material non-financial information.

  Sustainable Investment in Sub-Saharan Africa Report: Investment practitioner views of sustainable investment in private equity and asset management in South Africa, Nigeria, and Kenya (IFC, July 2011) determined the state and trajectory of SI in South Africa, Nigeria, and Kenya, and provides recommendations to stimulate sustainable investment over the next five years.

  Spoilt Votes Proxy Voting Report: The landscape report of proxy voting at South African asset managers by Jimmy Winfield, University of Cape Town noted “[i]t is clear from this study that the proxy voting space for asset managers in South Africa is underdeveloped. The importance of active stewardship of assets has been flagged in South Africa at least since the mid-1990s.

  Dirty Feet : Portfolio Carbon Report Analyzing the risks and opportunities to largest 10 unit trusts and largest 40 companies on the Johannesburg Securities Exchange from the pricing of externalities in 2011. There is a need for major S.A. JSE-listed companies to clearly articulate to shareholders, policymakers and regulators their plans and practices in managing their carbon footprints and ESG issues. There is also a clear case for comprehensive, mandatory company reporting on carbon in annual reports & accounts.

  Updated IFC E&S Framework / Equator Principles 3: The Environmental and Social (E&S) Performance Standards, an integral part of the Framework, have become a global benchmark for E&S risk management used by over 100 financial institutions worldwide, including 77 project financers and banks signatories to the Equator Principles . The IFC Sustainability Framework effective on January 1, 2012, incorporate modifications on challenging issues that are increasingly important to sustainable businesses, including supply-chain management, resource efficiency and climate change, ecosystem services, labor practices and human rights.

  UNFCCC COP17 but record CO2: Hosted in Durban, South Africa, the 17th Conference of the Parties (COP17) to the United Nations Framework Convention on Climate Change (UNFCCC) ended in “extra time” with a weak resolve to move to something substantive from 2015, to be enforced from 2020. Global carbon-dioxide (CO2) emissions from fossil-fuel combustion reached a record high of 31.6 gigatonnes (Gt) in 2011 .

  Rio+20 conference in June 2012: “At the close of the Rio+20 Earth Summit, heads of state and ministers from more than 190 nations signed off on a plan to set global sustainable development goals and other measures to strengthen global environmental management, tighten protection the oceans, improve food security and promote a "green economy".”

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About Sustainable Returns Project

  Sustainable Returns Project is an industry-led initiative to integrate environmental, social, and corporate governance considerations into the mainstream of retirement industry investment practices in Southern Africa. The project features a pioneering partnership between the Principal Officers Association (POA) and IFC (International Finance Corporation) to position southern African practitioners at the forefront of global best practice. Launched in December 2011, the project will run until December 2013. The project will provide a consistent framework and set of tools for retirement funds to comply with the new Regulation 28 of South Africa’s Pension Funds Act and the Code for Responsible Investing in South Africa (CRISA).

  Supported by funding from the Norwegian Government, the initiative was convened in 2011 by the Principal Officers Association of South Africa (POA), IFC, the Government Employees Pension Fund (GEPF), and the Association for Savings and Investment South Africa (ASISA).

  It is led by a Steering Committee of high-level representatives from the Financial Services Board (FSB), National Treasury of South Africa, Banking Association of South Africa (BASA), Botswana Public Officers Pension Fund, Congress of South African Trade Unions (COSATU), Debswana Pension Fund, Federation of Unions of South Africa (FEDUSA), Financial Planning Institute (FPI), Government Institutions Pension Fund Namibia (GIPF), Institute of Directors (IoD), Institute of Retirement funds (IRF); National Council of Trade Unions (NACTU), Pension Lawyers Association, South African Institute of Chartered Accountants (SAICA), Southern Africa Venture Capital Association (SAVCA), Telkom Pension Fund, and the UN-backed Principles for Responsible Investment (PRI).

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Sustainable Returns for Pensions & Society Project

Project: Client:

sincosinco.com ifc.org 31 sincosinco.com/sustainable-returns-for-pensions-and-society.php poa.org.za


New primary research on retirement fund investment value chain, insights on ESG integration

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  Referencing to 2007 survey of asset owners, investment managers and advisors

  RFIVC paper covers new material on ESG factors in investment decisions, attitudes, investment decisions & proxy voting

  Referencing to 2011 survey of asset owners, investment managers and stakeholders in SA, Kenya & Nigeria

  RFIVC paper covers new insights on investment decisions, education and timelines, expert opinions on drivers in RFIVC and role of investment management

  Large Funds Survey Output supplementary report


Analysis from primary research

33

Large funds survey •  71 survey responses •  From 156 funds universe from IRF + POA •  Distribution via IRF + POA to 3 roles: chair, chair of investment committee, PO •  38 large funds representing 2,273,792 active members contributing (averaging

59,836/fund), 453,034 beneficiaries (averaging 12,943/fund).

Influence makers survey •  44 expert interviews/survey respondents

•  Contacts from SinCo expert networks •  Responding in personal capacity •  Diversity of representation from retirement funds,

advisors, services providers, investors, stock exchanges, law and media

Steercom survey •  12 responses from steering

committee members •  Representing 12/15 major

stakeholders •  Incomplete submissions from

respondents •  Gaps in respondents

•  Approach to primary research shifted as responses lagged in Q2 2012. •  See Report for list of responding funds, experts, and SteerCcom respondents

Four steps

1. Review secondary research including media and reports

2. Analyzed findings from 3 survey groups, reviewed with UNISA

3. Feedback from peer reviewers and PMC editorial

4. Final report including appendix

of survey responses and stakeholder report.

Responses below expectations, supplemented by expert and Steercom insights

Material for RFIVC paper and information inputs for Phases II & III


Report 1: Defining Momentum: The retirement fund investment value chain and the state of ESG in South Africa

  Executive Summary

  1. Introduction

  2. Investment Value Chain

  3. Retirement Investing Systems

  4. A Brief History Of ESG In RSA

  5. 2011: The ESG Tipping Point?

  6. Answering Questions

  7. The Language of ESG

  8. Big vs Small Funds

  9. DB vs DC Funds Investing

  10. Investment Knowledge

  11. Fund Roles

  12. Collaboration

  13. Reporting

  14. A Co-designed Future

  15. Some Conclusions

  Recommendations

  Footnotes

34


Report 1: Defining Momentum: The retirement fund investment value chain and the state of ESG in South Africa

  Retirement funds investment practices in 2012 demonstrate awareness of the challenges/opportunities, the need for education and ESG integration. Investment decisions in a growing African economy in the 21st century are made within parameters of fiduciary duty and regulation, competitive investment market realities and demands from stakeholders. Will momentum for investment integrating environmental, social and governance (ESG) factors overcome the inertia of investment-as-usual, moving from investment policy to fund practices?

Executive summary

1.  Retirement fund investments must deliver for their final client – the pensioner.

2.  Retirement funds are major investors.

3.  The retirement fund investment value chain (RFIVC) is increasingly complex

4.  Investment with environmental, social and governance (ESG) factors is new.

Conclusions

Drawing together some conclusions in this research, in summary:

  Investment returns are critical

  Developed retirement system

  Gatekeepers control information

  Funds ESG responses differ

  Investment value chain limited

35


Growing fund assets “What is the proper role of retirement funds in a growing economy in Africa in 2012?”

Influence makers survey

  “Ideally, the role of retirement funds (and therefore their investors) should be to follow long term investment strategies, and guide capital to those companies/ventures with a long term, sustainable proposition…securing long-term returns…with it many opportunities but also risks; it's important that all these are taken into account - after all, it is people's retirements being invested.”

  "Specific role is to provide sustainable returns for their beneficiaries with the flow on effect of providing income in retirement. This can have positive benefits for both the economy and society.”

  “I expect Parastatal and Government funds to play a role in infrastructure funding, but other funds will only start do so if regulation / legislation enforces it."

  “Massive and growing because retirement savings are spreading throughout the region.”

  "Mobilisation of savings/capital to enable economic growth and thereby ensuring a sustainable retirement prospect for members / economy.”

  "Maximise returns”

  “Investment professionals need strong pressure to move away from short term pressures - not sure CRISA in its present form will do it"

n=33; open-ended question; interviews and online survey of experts by SinCo for IFC+POA+IRF, March – May 2012.

36


Understanding the influence on investment decisions 1/2

37


Weak observed demand for ESG

38

0 5 10 15 20 25 30

Demand for environment issues

Demand for governance issues

Demand for social issues

Demand for B-BBEE issues

What proportion (if any) of your FUND members are demanding the FUND include environmental, social and governance (ESG) considerations into your investment

policy statement?

80%+ 20 < 80% 5 < 20% 1% < 5% < 1%

n=26; 4 answer opEons with 5 categories; online survey of 156 reErement funds by SinCo + UNISA for IFC+POA+IRF March – May 2012


Are funds inactive stewards?��How many times in 2011 did your FUND vote your fund proxies differently to your fund manager/s [house view]?

39

55%

14%

14%

0% 10%

4% 3%

No votes Never vote 0 < 5 5 < 10 10+ Do not know Other:

n=29; 7 answer options; online survey of 156 retirement funds by SinCo + UNISA for IFC+POA+IRF, March – May 2012


Shifting barriers ��What are the 3 biggest obstacles to incorporating ESG factors into your FUND's investment policies/strategies?

Top-ranked barriers

Large funds survey

  Lack of information

  Not justified by business/investment case

  Unrealistic to expect our fund to meet the same ESG standards applied globally

Most frequently cited barriers


  Lack of expertise

  Not justified by business/investment case

n=57; 10 answer options with 3 ranking scale; online survey of experts by SinCo for IFC+POA+IRF, March – May 2012


  Other more important priorities


  Lack of staff /experienced staff

  Other more important priorities,

  Lack of expertise


n=32; 10 answer options with 3 ranking scale; online survey of experts by SinCo for IFC+POA+IRF, March – May

2012

40


Answering Right Questions Lessons about fund fraud

What ONE thing have you / your FUND learned about responsible investment from the disaster of the Canyon Springs / Trilinear Empowerment Trust / Sactwu disappearance of R100+ million of workers' retirement fund assets?

Large funds survey

  “Conflict of Interests, corruption, lack of governance”

  “[D]on't know what it entails.”

  “ESG principles are a worthwhile consideration.”

  “Proper Governance which includes providing enough information to Boards of Trustees through detailed reporting mechanisms”

  “There needs to be good discussion and debate at investment committee level where investments and investment performance is critically evaluated.”

  “Understand the product/service provider you're investing in. You need to ask whether the investment is suitable for your Fund needs. There is no substitute for a proper due diligence before investing.”

  “Corporate governance in the retirement industry sucks”

  “Despite early detection, no action from the regulatory authorities has led to members suffering financially”

  “To be diligent and not invest if you do not see a track record and know the integrity of the players involved.”

n=35; open-ended question; online survey of 156 retirement funds by SinCo + UNISA for IFC+POA+IRF March – May 2012

41


Looking forward growing ESG

“In the next 5 years, to make investment that integrates ESG factors (more) attractive to INVESTORS like you, what is the ONE thing you need to see happen?”


  “The only thing that will make it more attractive is to illustrate success”

  “The impact of ESG factors on corporate value needs to be better understood, quantified and incorporated into investment analysis.”

  “Asset owners (not managers) must devise their own policies and communicate them to their managers.”

  “More studies on the linkage between performance and ESG integration and increased effort into trustee training”

  “Proof that it supports investment returns and that it is not simply a way to justify mediocre returns or new high-margin products for investment houses”

  “The carbon tax needs to be implemented – a reality check of note”

  “Education of trustees and advisors”

  “Invest the time and resources to create the awareness and accountability and knowledge around the issues of ESG.”

n=33; open-ended question; online survey of influence makers by SinCo for IFC+POA+IRF, March – May 2012.

42



AfricaSIF.org Marketplace Trends Report 2012

  “Given Africa’s new identity as a land of possibility, the marketplace cannot afford to overlook the importance of integrating sustainability issues in investment decisions. Africa is still in dire need of capital that can bring about sustainable economic and social transformation. In this vein, we at AfricaSIF saw an urgent need to create an independent pan-African not-for-profit network, knowledgebase and advocate promoting sustainable investment across the continent. We believe that AfricaSIF is well-positioned to play a key role as one of the strong institutional supports that ushers in Africa next sustainability evolution.” - Kelebogile Moloko, CIO at Prowess Investment Management and co-founder of AfricaSIF.org.

1. AfricaSIF.org Marketplace Trends Report 2012 #AfricaTR2012

  maximum 30 pages + appendixes report due November 2012

  definitions and survey methodology in line with global SIFs

  asset size broken down by strategy, investor type, and by country

2. Global Sustainable Investment Trends Marketplace Report 2012 #GTR2012

  Africa region coverage for global SIFs report due December 2012

  maximum 2 pages summary, using global SIF methodology

  http://www.africasif.org/marketplace-and-trends-report.php

44


APPENDIX


Tracking progress of pension funds in SA

  "Fernandez: "ESG principles must be integrated into investment process." Beware of 'short-termism', the Achilles heel.”

  "ESG in your investment process is an assessment and valuation tool and not a harsh and blunt screening process.”

  Retirees & workers on retirement: "It's scary..A lot of people I know can't retire..I am going to have rely on govt pension”

  24% of #pension funds report resignations to access savings to pay short term debt.”

  "Unions should be getting involved in education around financial literacy." ~ Isaac Ramputa

  "Pension funds target inflation, peer groups and the index rather than ESG issues as set out by CRISA”

  "Role of employer and service providers to pension funds should be to build skills of trustees." - Isaac Ramputa

  "73% of the funds don't have an ESG policy in place"

  "King 3 allows companies a cop out - either comply or explain. Interrogate those explanations." ~ Cora Fernandez

  Launch of Sanlam Benchmark Survey 2012 , Midrand South Africa, 25 July 2012 #sanlambenchmark http://www.sanlambenchmark.co.za/

46

Private Client Briefing on Sustainable Investment in Sub-Saharan Africa August 2011 | © SinCo + RisCura 2011

Recommendations: Grow SSA Sustainable Investment Market

Recommendations A systematic approach will encourage integration of ESG factors in investment decisions in Sub-Saharan Africa building on the momentum of the small but committed best practice examples in evidence, especially in the largest investment market, South Africa, as well as the enabling investment regulatory and investment policy contexts for PE and SI/ESG emerging in Kenya, Nigeria and South Africa. The report makes the following recommendations:

1.  Key influencers to drive messaging: The SI message should be presented in the language of

investors, and should be driven by the end clients – the asset owners – appealing to advisors and leading asset managers open to exploring advances in institutional investment practice.

2.  Streamline reporting: Reduce information gathering and execution costs by streamlining the ESG reporting approaches of major investors (especially the DFIs), and increasing comparability of ESG impacts (and therefore the utility) through common reporting guidelines for PE .

3.  Leverage local knowledge: Leverage local and regional insights in sustainable investment to integrate into new global best practices, profiling advances in integrating ESG factors into investment practice in frontier and emerging markets by asset owners and asset managers in the region.

4.  Make the investment case: presenting the sustainable investment case to make the proposition that SI has the potential to generate increased returns and/or reduced risks across all asset classes.

5.  Keep score: Performance metrics and analysis is fundamental to investment. Investors need to measure investment performance and ESG impact. Regular Africa and SSA surveys of sustainable investment products, portfolios, and performance are required, along with benchmarking through a regional sustainability index .

47

Private Client Briefing on Sustainable Investment in Sub-Saharan Africa August 2011 | © SinCo + RisCura 2011

Background

48

ABOUT SUSTAINABLE INVESTMENT IN SUB-SAHARAN AFRICA REPORT 2011 Written by Graham Sinclair of SinCo, with Roselyne Yao. Analysis based on research 2010 – 2011 by SinCo and RisCura, led by Malcolm Fair. Project management by Cecilia Bjerborn IFC. This report was commissioned by IFC through its Sustainable Investing Unit in the Sustainable Business Advisory Department. The conclusions and judgments contained in this report should not be attributed to, and do not necessarily represent the views of, IFC or its Board of Directors, or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publication and accept no responsibility for any consequences of their use.

ABOUT IFC

IFC, a member of the World Bank Group, creates opportunities for people to escape poverty and improve their lives. We foster sustainable economic growth in developing countries by supporting private sector development, mobilizing private capital, and providing advisory and risk mitigation services to businesses and governments.

ABOUT SinCo SinCo, the sustainable investment consulting firm, is a boutique investment advisory specialist in sustainable investment architecture in frontier and emerging markets. SinCo engagements deliver innovative policies, strategies and indexes that move our clients up the learning and experience curves smarter. Since 2006, SinCo has integrated environment, social and governance (ESG) factors into investment processes for institutional investors, private equity funds, stock exchanges and international organizations promoting long-term sustainable investment performance.

ABOUT RisCura With offices in London, Cape Town, Johannesburg and Windhoek, RisCura is a premier independent financial analytics provider and investment consultant with significant expertise in Africa. RisCura services seven of Africa’s ten largest pension funds that represent more than USD 115 billion AUM, as well as money managers who together represent over USD 5 billion in hedge fund AUM and PE committed capital. In addition, RisCura Fundamentals is the leading provider of independent valuation, risk and performance analysis services to investors in unlisted instruments in Africa. RisCura Team on IFC/SinCo Project 2010-2011 include: Malcolm Fair (Director and Head of RisCura Analytics), Rory Ord (Head of RisCura Fundamentals), Claire Rentzke (Head of Manager Research: RisCura Consulting), Jacobus Troveri (Head of RisCura Transition), Kerry Kilcullen Sinclair (Head of Marketing), Thibaut Takadong, Nischal Baijnath, David Moore, Madelein van Wyk (RisCura Consulting Namibia), Rebecca Smith and Daria Alkhovik (RisCura Operations).


About SinCo team: Graham Sinclair

Graham Sinclair is Principal at SinCo, where his roles include sustainable investment strategist, ESG architect and global project leader.

  Graham has eight years specialist experience in sustainable investment globally after eight years in pensions consulting and investment banking in Africa. Recent consulting engagements in sustainable investment include leading IFC-funded research into private equity and liquid equity ESG strategies in sub-Saharan Africa in South Africa, Kenya and Nigeria to be published in 2011, developing innovative financing mechanisms strategy and ESG index architecture for developed, emerging and frontier markets for a Swiss-based international organization, and for a global institutional investment firm in New York with a US$ one trillion AUM portfolio, designing ESG architecture across private equity, liquid and global real estate portfolios covering philosophy and process innovations and investment strategies. Currently he provides index architecture and stakeholder engagement for the Istanbul Stock Exchange Sustainability Index.

  As consultant to the UN, Graham developed strategy for 25 emerging markets and launched PRI in Emerging Markets project in Q2 2007 for UNEP FI, creating a network infrastructure, building relationships with 108 investor stakeholders including in Africa through 2008. Before launching the sustainable investment advisory boutique SinCo in 2006 in Boston, he was Product Manager at KLD Research & Analytics, Inc adding to his background in pension funds and asset management.

  Graham is a former contributor to the CSR Initiative at Harvard Kennedy School, Distinguished Member of Net Impact, alum of WWF One Planet Leaders programme and the Tallberg Forum New Leaders Program. He currently leads the AfricaSIF Project building an independent, pan-African not-for-profit Africa Sustainable Investment Forum network at africasif.org, member of ASISA’s Responsible Investment sub-committee, and a member of Investment Analysts Association of South Africa, and the Network for Sustainable Financial Markets. He has lectured at more than 25 graduate schools globally, and the most recently published work is chapters on Private Equity, Indexes and Africa to Evolutions in Sustainable Investing [Wiley Business, 2011].

  Graham earned his MBA on scholarship at Villanova University in the USA where he co-managed the Arnone-Lerer SRI Fund equity portfolio in 2004. He holds a B.Com from the University of Natal and LL.B from the Howard College School of Law as well as numerous industry specialist certifications. He holds diplomas in retirement funds and insurance law, and in 1998 he was one of the youngest ever dual-FILPAs. He resides in Cape, South Africa and Vermont, USA.

Graham Sinclair Principal SinCo sincosinco.com 1 August 1970 South African B.Com 1991, LL.B 1994, MBA 2004 Dip.RFM 1997, IISA 1998, ILPA 1999 IASSA, ELP, WWF OPL, USSIF.org AfricaSIF.org Experience in over 25 countries English, Afrikaans

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