[column 6 layout="default" class="text"]The PIC’s investment process includes consideration of Environmental, Social and Governance (ESG) issues and principles. ESG is key to delivering positive, sustainable returns to our clients and cuts across listed and unlisted investments, including properties.
For listed and unlisted investments, the following activities form an integral part of the investment process and monitoring: Conducting ESG quality reviews; exercising voting rights (proxy voting); liaison with investee companies and focused ESG engagements.
The PIC believes that a strong commitment to the highest standards of business ethics and sound corporate governance is essential to creating long-term value for clients. To that end, the PIC requires all external fund managers to incorporate responsible ESG practices in their investment process which are governed by ESG policies and that is aligned to the PIC policies as well as best practice principles.
Sustainable Development Goals and ESG Factors
- Conducting ESG quality reviews: The ESG team delves into the core of an investee company’s controls, its sustainability strategy, its social responsibility intent and, ultimately, its commitment to all stakeholders.
Reviews are based on publicly available information, which includes the investee company’s annual financial statements, sustainability reports, and information displayed on its website. Reliance is placed on the audit and risk reports.
The company assessment includes thorough interrogation of the investee company’s business model, its practices and risks, as well as its regulatory compliance.
Best practice dictates disclosure on ESG issues by investee companies as well as timeous reporting on activities and progress towards implementing responsible practices. This informs the ESG rating, calculated using the PIC’s ESG rating metrics, to measure investee companies ESG compliance and identify areas for engagement.
- Exercising voting rights (proxy voting): The PIC makes its listed equities proxy-voting reports publicly available on its website, in adherence of best practice and CRISA principles.
Proxy voting reports are updated quarterly. Should the PIC not support a resolution and vote against it, and the motion carries with other shareholders voting differently, the matter against which the PIC votes then becomes an engagement item with the investee company.
- Liaison with investee companies: ESG team participates in meetings with the management teams of investee companies to address concerns and influence the ESG landscape through shareholder activism.
ESG at the Core of Stocks Selection
The PIC’s belief is that good governance creates sustainable returns. Being a long-term investor, consideration of both financial and non-financial factors in company analysis offers an opportunity to better understand the risk profile of a company and the possible impact on investment returns. The integration and analysis of ESG factors are important in the investment process. With the assistance of an internally developed risk-based ESG tool, the PIC is able to identify risks and opportunities that may impact on investee companies. Those issues then serve as engagement matters with portfolio investee companies.
PIC influencing the Regulatory Landscape
The PIC has been an advocate of Mandatory Audit Firm Rotation (MAFR) since 2016. Voting records dating back to May 2016 indicate how long the PIC has been concerned about the risks that long-term auditor-client relationships pose to the auditor’s independence. The PIC supports the MAFR ten years interval to uphold the principle of independence.
Sustainable Development Goals and ESG Factors
The UNPRI advocates that long-term investors invest responsibly and integrate ESG principles in investment processes. Investee companies are, in turn, required to consider ESG factors in business operations. The PIC has long been involved in exercising its social responsibility in society. Thus, the integration of ESG in its investment decision-making processes has helped to entrench a firm alignment to the global Sustainable Development Goals (SDGs) 2030 for the way it invests in companies. ESG engagements provide the PIC with an opportunity to monitor this alignment with SDGs in the business. The PIC has adopted a view that the SDGs provide a practical framework for the institution’s engagement activities.
Engagement Themes
The PIC is an active investor and regularly engages investee companies. This enables it to develop an integrated view of the investee companies’ affairs, both financial and non-financial. The PIC has chosen an activist engagement model. Whilst such interactions with investee companies are continuous, the materiality of an issue/s guides the frequency of engagement/s with investee companies. Engagements can take the form of one-on-one meetings with companies, written communications and telephone calls. Investee companies have continued to respond positively to the call for greater transparency and accountability. This is evidenced by the growing number of companies responding to the PIC’s call to engage on myriad issues to promote better corporate governance.
Transformation Engagements
South Africa continuously strives to correct the ills of the past through regulation and policy initiatives and, specifically, to empower Historically Disadvantaged Individuals (HDI). The Broad-Based Black Economic Empowerment (B-BBEE) Act provides the guidelines and thresholds for advancing transformation and empowerment. Albeit that true transformation, as intended, remains a challenge for some investee companies, the amended B-BBEE Codes have had an adverse impact on the BEE scores of most portfolio investee companies in meeting the required targets. The PIC, thus, continuously engages and advises investee companies on where and how to improve their B-BBEE status. Based on our clients’ mandates, the PIC is well-positioned to drive transformation in a manner that ensures there are diverse and equitable distribution of economic benefits and decision-making in our economy.
The objective of transformation within PIC investee companies is to give effect to the country’s transformation agenda and the PIC’s transformation objectives are to, among others:
- Promote and incubate the growth of broad-based empowerment;
- Achieve wide-reaching social transformation;
- Stimulate economic growth and transformation in South African investee companies; and
- Integrate all the B-BBEE elements into business processes.
As part of the PIC’s mandate to drive transformation, it is understood that true transformation occurs when black people (as defined in the B-BBEE Codes) participate in the economic interest and control of investee companies. It is anticipated and negotiated that, over time, investee companies should achieve the following PIC targets:
- Historically Disadvantaged Individuals (HDI) ownership should ideally be, at least 40% of the most senior class of shares. This target includes broad-based groupings such as Non-Governmental Organisations, Community Based Organisations, Employee Schemes, with minimum holdings of 10%;
- Minimum 15% to 20% black women ownership;
- HDI representation shall be equitable, including black youth, women and people with disabilities;
- When funding HDIs to acquire shares in an investee company, the PIC shall strive to secure step-in rights, pledge and cession of shares at a minimum; and
- Funding employee scheme acquisitions shall require representation by an unrelated or inter-related trustee(s) to the investee company.
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