Five Questions about SRI – Weekly Expert Interview with Carron Howard, Portfolio Manager, Cadiz Asset Management, Cape Town, South Africa – November 30, 2012

Each week Emerging Markets ESG publishes an interview entitled, “Five Questions about SRI.”  The interview features a practitioner’s insights about SRI in emerging markets and through Emerging Markets ESG shares this expertise with a wide global audience.  The goals of Five Questions about SRI are fourfold:

  • To collect a catalogue of examples of SRI in practice in emerging markets;
  • To raise awareness about SRI in emerging markets;
  • To reflect on what SRI in emerging markets means to practitioners; and
  • To enable SRI practitioners in emerging markets to network with peers around the world.

This week’s interview is with Carron Howard, Portfolio Manager, Cadiz Asset Management, Cape Town, South Africa.

Cadiz Asset Management is an independent, award winning asset management company focused on enriching lives through sustainable investment excellence.  Established in 1996, Cadiz Asset Management has more than R34 billion in assets under management (AUM) for both individuals and institutions. It has built its success by delivering investment performance, patiently cultivating meaningful relationships and providing clients with exceptional client service.  As an independently managed company, it is able to put the needs and requirements of its clients first. This is made possible by its team that creates an environment of collaboration and a commitment to improve, prosper and always doing it right. It believes that achieving sustainable investment excellence is only possible in a working environment where colleagues are committed to collaboration, personal responsibility and accountability.  Cadiz Asset Management offers unit trust investments, structured investments and life investments.  In 2011, Cadiz Asset Management was acknowledged by Morningstar as “The Best Specialist Fund House in South Africa.” It also received fund awards for a number of its funds and the POA Imbasa Yegolide award for its socially responsible investing expertise as “The Best SRI Manager in South Africa.”  Carron Howard has a law degree from University of Witwatersrand and spent the early part of her career consulting in the formulation and implementation of corporate strategy for Braxton Associates, a UK based strategy consulting firm. Thereafter she entered law articles and on being admitted as an attorney in 1996, she joined Syfrets Bank, in the Private Client division.  Over the next five years she worked in Financial Services, gaining specific experience in fund management and investment analysis.  She obtained her CFA in October 2001.   At the end of 2001 she started her own business and successfully established a number of entrepreneurial business ventures during the following nine years. In 2010, Carron joined Cadiz as a Credit Analyst with specific focus on unlisted credit in the area of impact investing and Socially Responsible Investing (SRI).  She is currently the portfolio manager responsible for structuring and managing unlisted credit investments for the Cadiz Protected High Impact Credit Fund, the Socially Responsible Unlisted Credit Fund and the Cadiz Enterprise Development Fund.

Emerging Markets ESG:  How would you define socially responsible investment (SRI)?

Carron Howard:  Our approach to SRI is based on the fundamental belief that it is possible to mobilize capital, not only for the creation of wealth in the form of an investment return, but also for the creation of initiatives that deliver high social impact (i.e. are capable of delivering a double bottom line).  We therefore go well beyond the traditional SRI guidelines around “doing no harm” and proactively seek investments that create opportunities for lower income groups to access the economy mostly through job creation, entrepreneurship or access to capital. Within this context, SRI identifies and invests into organizations that are able to deliver the following:

1. Sustainable and scalable business models that are able to generate competitive commercial returns; and
2. A measurable social impact as a result of the product or service being delivered to the market. (We ensure this by consistently measuring the impact.)

Support of these organizations can be in the form of debt (loan funding), equity or a combination of both. Importantly though, SRI is not charity or grant funding and requires a commercial return on investment.  SRI in this form is therefore able to deliver superior financial returns whilst still delivering measurable social impact.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Carron Howard:  Mainstream investment does not have as its primary focus the objective of directing capital into investments that will generate a double bottom line. They are not concerned with generating social impact or addressing any of the intractable social challenges that many emerging market economies face.  ESG focuses more on ensuring that the investment opportunity does no harm.  In the current business environment this makes sense because there are clear risks associated with investments that do cause harm (The recent Marikana tragedy is a case in point).  I guess the real difference in my opinion, is that ESG minimizes risk on traditional mainstream investments whilst SRI aims to create additional value.

Some investment managers do screen their investments using ESG criteria but these approaches do not typically go far enough in terms of bringing the requirement of creating real value for underserved communities and markets to the forefront of the decision making process.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for companies in South Africa to manage?

Carron Howard:  South African companies operate in a well regulated and transparent context that is characterized by a multitude of legislative requirements with which they need to comply. Whilst this could be seen as challenging for some companies, compliance is a non negotiable pre-requisite of doing business in this country and therefore all aspects of ESG are part of business as usual.  However, it is the contextual environment in which businesses operate that poses the biggest risk in any emerging market.

South African companies operate in an environment that is characterized by a complex and nuanced set of social challenges.   From high unemployment, a failing education system, a pervasive culture of entitlement and low productivity, to a collective bargaining system geared to protecting the employed.  It is clear that companies have an array of competing social dynamics to manage.   The South African context is distinctive with considerable structural unemployment; an increasingly uncompetitive manufacturing sector as well as a society typified by severe income inequality and HIV infection rates.  There is therefore a strong argument that the SRI focus locally should be on the S in ESG as opposed to the environment or governance.  If one doesn’t prioritise the creation of additional opportunity for marginalized people in South Africa, this could result in a politically unstable environment for business as a whole to operate in.

The sheer enormity of crafting sustainable solutions to these social challenges is a reality for every business in South Africa.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for investors in South African companies to analyze?

Carron Howard:  Ease of analysis is determined by the quality and quantity of publically available information. As there are certain legislative requirements regarding reporting on environmental and governance factors, accessing information on these aspects does not present a major challenge for investors in South African companies.  In addition, if “social” is defined by the conditions of employment, South Africa also has clear labour relations and basic conditions of employment policies.  The challenge is more if “social” is more broadly defined as the people in communities surrounding business operations.  South Africa has policies that encourage companies to socially invest in broader communities, which is mostly in the form of grants.

As far as the analysis of social impact is concerned however, one of the challenges we are faced with, is to identify and define consistent social impact metrics against which investments can be measured.  What we have found is that where the analysis of social impact is an investment prerogative the approach to analyzing this has typically been bespoke to the investment at hand.  Companies are not required to report on social impact and therefore have not developed methodologies to do so.  Unless legislated, it is unlikely that information on this aspect of ESG will be widely available.

Emerging Markets ESG:  Cadiz Asset Management has been acknowledged and awarded for its SRI expertise.  From your perspective, what are the key SRI issues in South Africa today and how do these influence your work

Carron Howard: Within South Africa today, we have in excess of R3 trillion available in life and pension fund savings.  Of this savings pool, less than 1% of this is invested into SRI. On the other side of the spectrum, we have a multitude of social imbalances that need to be addressed:

  • Unacceptably high levels of unemployment;
  • Infrastructure backlogs;
  • A desperate need for affordable and subsidy housing;
  • A banking system that is not geared to providing micro finance to those who find themselves existing at the base of the pyramid;
  • Critical gaps in education and health care; and
  • Vibrant and financially sustainable SMME’s that struggle to access the capital needed to expand.

In the middle of these two extremes is a sophisticated financial sector that encompasses the role players necessary to unlock this pool of savings (e.g. asset consultants, pension funds, trade unions and development agencies).  These role players are failing themselves and the country as whole by not utilising their considerable resources to find innovative ways to stimulate and unlock new sources of capital for investment into sustainable and commercial initiatives that could start to address these imbalances. This failure perpetuates the inefficient allocation of capital by directing it into sectors of the economy that typically not only have access to a much larger pool of capital, but are not structured to deliver measurable and meaningful social impact.