Fund service providers must measure up
Last week, I went to listen to an old friend, Elias Masilela, whom I first met when he was an official at the National Treasury. Masilela now holds the exalted position of chief executive of the Public Investment Corporation (PIC).
As PIC chief, Masilela is in charge of R1.3 trillion, mainly on behalf of the Government Employees Pension Fund (GEPF). This gives him a lot of influence.
To put that R1.3 trillion in perspective, it is more than government will spend to run the country this year. Government expenditure sneaked past the R1-trillion mark for the first time in 2012.
Masilela addressed the Cape Town Press Club at the pleasantly old-fashioned Kelvin Grove Club, which lies in the shadow of the two Newlands sports stadiums. But there is nothing old-fashioned about the PIC – it is increasingly making its presence felt as a force for good, as it should.
Masilela states, correctly, that the PIC cannot use the R1.3 trillion “to spend South Africa out of trouble” as some people think it can. But it can influence development in the country – and that, he says, is what the PIC is doing and will continue to do.
The PIC is involved in an incredibly wide range of infrastructure projects, from property development to building private hospitals (hopefully to compete with the existing oligarchy).
By developing infrastructure, the PIC is attempting to help the economy grow from one level to the next. This, Masilela says, will help to alleviate acute poverty and produce a more stable society.
The central focus of Masilela’s presentation was the issue of sustainable investing, to which the PIC’s main client, the GEPF, has firmly nailed its colours, playing a leading role locally and abroad.
The aim of sustainable investing is to ensure that money is invested in companies and projects that are:
* Environmentally friendly – they take account of ecological challenges such as climate change;
* Socially responsible – they produce long-term advantages for a community; and
* Managed responsibly – there is sound corporate governance and proper transparency.
The above principles are known internationally as ESG: environmental, social and governance.
The point of ESG is that before investors put their money into a company or project, they need to know that it will last into the future for future generations, providing a steady return on their investment, and that is not there simply to make a quick buck, destroying the environment, exploiting people, and unfairly and improperly enriching the sponsors.
The PIC has considerable financial muscle to influence ESG practices. For example, it owns about 30 percent of the shares in the mining sector, which puts it in a very dominant position to exert pressure on how companies behave.
Masilela addressed a wide range of ESG issues, but the one that was particularly interesting involves the financial services industry.
Managing R1.3 trillion is obviously a massive job, so the PIC farms out up to 25 percent of the money to private sector asset managers to invest on its behalf.
Masilela says that once the money has been handed over to the asset managers, the PIC cannot interfere with how they do their job or even how they vote at the shareholder meetings of the companies in which the PIC’s money has been invested.
He says the PIC will intervene only if the national interest is at stake.
However, this does not, and should not, mean that asset managers can do as they please.
History has shown that a very close watch needs to be kept on the financial services industry when it comes to ESG, particularly corporate governance.
The PIC has decided that asset managers should be assessed on ESG. In effect, the PIC is compiling a score card to rate how asset managers address ESG issues, and Masilela warns that those that feature among the bottom 20 will come under close scrutiny. This should serve as a wake-up call for asset managers that pay mere lip-service to ESG.
While the PIC and, in particular, the GEPF are looking at ESG, they should take this one step further and ensure that the retirement fund service providers, such as asset managers, they select measure up to ESG standards. For example, one company that should be receiving a lot of attention is asset management consultant Riscura, with its many avoidable conflicts of interest. Riscura is one of the GEPF’s consultants.
It is unacceptable that an asset management consultant should be providing advice to retirement funds while also, in effect, being paid for asset management services. The law is quite clear that conflicts of interest must be avoided – not managed – and this is clearly a conflict of interest and possibly anti-competitive behaviour, in my opinion.
Yet here we have a company that provides advice and then gets paid fees by most of the asset management companies that it selects to perform vaguely defined tasks such as risk management – tasks that most asset managers are able to do quite adequately themselves.
And to crown it all, Riscura also charges a transitioning fee for switching assets between different managers.
What is of even more concern is that Riscura chief executive Jarred Glansbeek refuses to answer legitimate questions put to him by Personal Finance. His answers would enable retirement fund members to assess properly whether or not asset managers and other service providers should have to pay Riscura for functions such as risk management and to be a preferred provider to the retirement funds to which Riscura acts as a consultant.
Riscura deals mainly with pension fund money – this is not its money but the money of many hard-working South Africans.
All South Africans, particularly those who belong to retirement funds, are entitled to know how companies such as Riscura operate so they can make a judgment call on whether or not their behaviour is acceptable.
It is all very well to subject mining companies, retailers and other entities to ESG principles; it is even more important that service providers in the financial services industry are subject to the highest standards of ESG, particularly the “G” part.
Two weeks ago, Personal Finance reported that National Treasury is asking Parliament for tough new powers to deal with the financial services industry, because not everyone in the industry is toeing the line. It is hardly surprising that Treasury needs these powers when companies such as Riscura can be so contemptuous of the public.