While Regulation 28 allows pension funds to invest up to 15% in alternative assets, trustees may still find it difficult to access “impact” investments.
Speaking at the Alexander Forbes Hot Topics seminar, Deslin Naidoo, head of investment research, said impact investing is a subset of the new definition of socially responsible investing, which is now referred to as sustainable, responsible and impact investing (SRI).
Impact investing is a very specific type of investing across all types of asset classes that aims to have a positive impact on society and the environment, he said.
“It [impact investing] is the more distinct extension of SRI which bypasses traditional investing within listed securities (equity and debt) to invest directly in companies, organisations, and projects that generate social and/or environmental returns in addition to financial ones,” an Alexander Forbes article on the subject adds.
While impact investing may offer an opportunity for pension funds to meet their fiduciary duty to support the adoption of a responsible investment approach, diversify risk and contribute to the long-term sustainability of the economy and society, pension funds may still find that these investments are difficult to access.
Naidoo said the industry is still primarily focused on traditional asset managers.
The Bertha Centre for Social Innovation and Entrepreneurship’s African Investing for Impact Barometer 2014 suggests that investing for impact is a growing part of the overall local investment industry, but allocations to impact and responsible investing remain relatively small and is more prevalent in the private equity space than amongst traditional asset managers.
Rob Southey, head of asset consulting at Alexander Forbes, said while listed equities were offering returns of inflation plus 10%, trustees might not have seen the need to consider other types of investments. These investments may be very different from traditional listed equity investments, and may require considerable time to examine.
But over the last few months things have changed.
Southey said despite warnings that the good times in the equity market wouldn’t last forever, it continued for quite a while. Over the last year however, the situation has changed. As returns in the listed space have come under pressure, trustees have started to consider other asset classes as well.
Conceptually, many trustees have been reluctant to consider these investments, as they are complex. A lot of these investments are unlisted and there may be liquidity issues that have to be managed, he said.
It also tends to be more expensive than listed entities, and it is important to understand why this is the case.
Southey said pension fund clients generally do have an environmental, social and governance policy and believe impact investing is a positive development, but because these investments are often complex, it is during the practical implementation that their enthusiasm starts to wane.
He said some clients do have a considerable governance budget, a lot of time and expertise to spend and do take up these investments, but often trustees also have other responsibilities and don’t have the time to investigate these opportunities.
Naidoo said at the moment there is not necessarily a connection between the pension funds, the products and the managers. To allow impact investing to develop, trustees need to understand what role they can play in the allocation of capital and meeting the fiduciary and governance requirements.
Regulation 28 asks that trustees take these criteria into account, he said.
Naidoo said he was not advocating that trustees rush off to buy products that reflect impact investing, but there must be a response that communicates what characteristics impact investing portfolios or funds need to exhibit and there should be policies in place to facilitate that.
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