Responsible investing in different cultural contexts 3

(Third of four parts)

I have dedicated the weeks of March on my column to revisiting how sustainable finance is doing across different geographies. For those just joining us in this series, a quick summary: Responsible Investment (RI) is the umbrella term for the act of considering environmental, social, and governance issues in investing. It traces its roots to religious societies in the United States and Europe. It then evolved over time to encompass social issues such as boycotting financing apartheid and the Vietnam war, towards environmental protection and more recently, governance issues.

In the United States, the retail type of investing, known in the field as SRI (Socially Responsible Investing) is still very much ethics-driven with dedicated funds screening out so-called unsustainable companies, providing for a more dichotomized approach when putting one’s money. In Europe, the trend, which has been largely driven by institutional investors, particularly pension funds under government pressure, is much more pragmatic. Unwilling to completely divest or label entire sectors or firms in transition as “banned,” Europeans RI funds have advocated for increased transparency, best-in-class approaches, and stakeholder engagement. To wit, you can invest in an energy firm which is not 100% renewable, but that is actively attempting to improve its sustainability practices. In Latin America, we found that the practice is much more nascent because of the lack of institutional funds. The focus there has been on impact investing, or putting money in social enterprises, or giving donations using a percentage of fund proceeds to specific causes. This has been slowly shifting with the advent of new sustainability indices to become more accepted by institutional investors.

Now, what about the African continent?

Assets under management invested using a sustainability approach in the African continent remain at single digits as a percentage of total. But while RI remains a marginal practice, it has seen a surge in recent years. According to the latest data from the 2017 African Investing for Impact Barometer (AIFIB), there has been an increase of 23% in Southern Africa and 18% in East Africa compared to the previous year, totaling more than $400 billion or more than half the funds they examined in sub-Saharan Africa.

The largest economy in the continent is South Africa, also its biggest institutional investment market. And recall that apartheid played a huge role in the history of Responsible Investment. However, the apartheid regime was actually a double-edged sword to the development of RI: on the one hand, it spurred awareness for questioning where we all put our money, which extended towards the world, exposing powerful corporations and actors. But on the other hand, South Africa suffered in receiving foreign direct investment in the country. In the first couple of years after the democratic elections of 1994, South Africa received foreign capital averaging 1% of GDP. This was obviously detrimental to a country which faced a high number of social challenges such as the HIV/AIDS epidemic which has direct costs for companies (e.g., higher healthcare and training costs) and indirect costs (e.g., lower revenue due to absenteeism and lower productivity) as well as basic energy needs and access to water. Healthcare and education are also becoming increasingly important focus areas. It is therefore unsurprising that the themes surrounding socially responsible investment in this region are strongly of a developmental nature.

Similar to Latin America, impact investing is by far the most important RI strategy in South Africa, either on its own or in combination with positive screening, though several legislative initiatives since 2011 have pointed towards the inclusion of institutional investors.

Promising signs of prospects are visible in terms of two key factors: first, as the region develops its financial markets, RI is likely to follow suit because it caters to calls for a greater need of transparency.

According to the Business Indicator Index, Egypt, Tunisia, and Morocco are among the most corrupt countries in the world and RI organically helps address significant governance issues in the region’s companies, which are an important focus of investors. In fact, a lot of the focus of these funds are on investor engagement or the ability to influence company behavior. This has also led to the launching of corporate governance codes by the OECD in 2005 and the creation of sustainability indices.

Second, the practice of Responsible Investment can be tailored to be Shari’ah-compliant. The dominant religion of the population base in several countries in the continent is Islam. Shari’ah compliant investing adheres to Islamic finance principles which exclude involvement in “sinful” activities such as alcohol and tobacco, advocates “no exploitation” and equal risk-sharing wherein full disclosure and symmetric information is required from two transacting parties (i.e., similar to having good corporate governance), as well as “materiality,” wherein a financial transaction should have a positive impact on the community.

These are similar to employing negative and positive RI screens. Screening, which is the term used to describe investments related to religious and ethical investment practices, like Islamic Finance, for instance, is the third most significant investment strategy on the continent with over $192 billion in assets across the region according to AIFIB. n

The original book chapter on which this series is based is published in Italian: Laurel, D. & Piani, V. 2013 L’SRI nei diversi contesti culturali (Socially Responsible Investing in Different Cultural Contexts) in Creare Valore a Lungo Termine (Creating Long-term Value) eds. Del Maso, D. and Fiorentini, G. EGEA (Milan, Italy).

Daniela “Danie” Laurel is a business journalist and anchor-producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Prior to this, she was a permanent professor of Finance at IESEG School of Management in Paris and maintains teaching affiliations at IESEG and the Ateneo School of Government. She has also worked as an investment banker in The Netherlands. Ms. Laurel holds a Ph.D. in Management Engineering with concentrations in Finance and Accounting from the Politecnico di Milano in Italy and an MBA from the Universidad Carlos III de Madrid.