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Oikos PRI Finance Academy 2015: Unpacking the Black Box
The document investigates the decision-making processes of South African institutional investors with a focus on responsible investing (RI). It identifies barriers and enablers to the growth of RI, emphasizing the roles of corporate governance, legislation, and asset managers while highlighting a passive approach among investors. The findings suggest a need for increased accountability, transparency, and understanding of ESG factors to promote responsible investment practices.
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Oikos PRI Finance Academy 2015: Unpacking the Black Box
- 1. UNPACKING THE BLACKBOX: An investigation into the decision- making processes of South African institutional investors 1 Colin Habberton Oikos PRI Academy Henley, Reading, UK 1-4 June 2015
- 2. 2 Overview 1. Introduction 2. Motivation 3.Research Methodology 4. Findings 5. Conclusions 6. Limitations & Alternative Explanations
- 3. (Source: USB) Cape Town,South Africa
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- 5. Introduction Adapted from: Piketty(2014) in Cassidy (2014)
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- 9. 9 Overview 1. Introduction 2. Motivation 3.Research Methodology 4. Findings 5. Conceptual Model 6. Limitations & Alternatives
- 10. 10 • Increasing supportfor normative frameworks • UN Principles for Responsible Investment (PRI) • CDP & Integrated Reporting <IR> Initiatives Growth of Responsible Investing (Source: UNPRI, 2015) US$45tn AuM 1300+ Signatorie s
- 11. 11 “All retirement funds,long term insurers, collective investment scheme (CIS) management companies are treated as institutional investors…” (SARB, 2013) • Asset Owners • Public Sector: GEPF, Transnet, Eskom, parastatals • Private Sector: Over 4800 funds FSB registered • Asset Managers • Public Sector: Public Investment Corporation • Over 200 Retirement Funds & CIS Institutional Investors in South Africa
- 12. 12 • Comparative Analysis: •ASISA Membership Base • UNPRI/CDP/<IR> Signatories • SA Reserve Bank & FSB Registration • Interim Findings: • Of the 45 South African UNPRI Signatories • 5 of 4800+ Asset Owners, just 1 Private Sector • 34 of 200+ Asset Managers • Role of Asset Consultants in the process Institutional Investors in South Africa
- 13. 13 • Analysis of20 top asset managers in RSA: • Top 10 managers account for the management of >75% of private sector AuM • Top 20 for >95% of AuM • Comparison to the PRI listing: • All of the Top 10 are PRI signatories • 15 out of the top 20 asset managers • Yet, the growth in RI funds and PRI signatories, especially asset owners, has stagnated in recent years (Viviers 2014; A Local Dilemma
- 14. 14 Research Questions • Whatare the barriers that are limiting the growth of responsible investing in South Africa? • What factors influence the decision-making process of institutional investors towards responsible investing?
- 15. 15 Barriers, drivers andenablers to RI (Source: The State of Responsible Investing in South Africa, 2007; van der Ahee & Schulschenk; IODSA , 201
- 16. 16 • Strong corporateculture of corporate governance developed over 20 years: • King Reports & Institute of Directors “…how a company has, both positively or negatively, impacted on the economic life of the community in which it operated…” (IODSA, 2009). • Localised ‘apply or explain’ version of PRI • Code for Responsible Investing in SA (2011) • New commercial & pension fund legislation • Companies Act of 2008 • Regulation 28 of 2011 The legal & regulatory environment in SA
- 17. 17 • 60% werePRI signatories (n=47) • 40% disclosed their investment policies • >10% of asset owners make mandates publicly available. • >11% disclose their activities or indeed any progress made regarding CRISA disclosure CRISA/PRI Signatory Compliance • 30% of asset owners that provide any form of information relating to CRISA compliance, • 90% delegated their disclosure requirements to asset managers. • No details on how the principles are applied by any asset consultants CRISA compliance research summary (IODSA, 2013) South African institutional investors exhibit a “passive and selective approach” to the practice of RI
- 18. Principles for Responsible Investing 18 (Source:UNPRI, 2014)
- 19. 19 Research Questions • Whatfactors influence the decision-making process of institutional investors towards responsible investing? • What are the barriers that are limiting the growth of responsible investing in South Africa?
- 20. 20 Overview 1. Introduction 2. Motivation 3.Research Methodology 4. Findings 5. Conceptual Model 6. Limitations and Alternatives
- 21. Research design and methodology 21 ResearchProblem, Questions & Objectives Research Paradigm Phenomenological Research Methods Semi-Structured Interviews PRI Sample Non-PRI Control Group Data Analysis Grounded Theory Coding Memos Research Types Qualitative Descriptive, Exploratory Inductive
- 22. Research methodology • Theanalysis of the existing data sets of the South African investment industry provided a quantitative departure point for the paper. • Secondary literature research provided the theoretical foundation to inform the concepts, population & sample frame for interviews. • The consequent understanding of the theory and industry information was integrated into the design and execution of semi-structured interviews with industry experts. 22
- 23. 23 Institutional Investors • Blume,M. E. & Keim, D. B. 2012. Institutional Investors and Stock Market Liquidity: Trends and Relationships. SSRN • Gifford, E.J.M. 2010. Effective Shareholder Engagement: The Factors that Contribute to Shareholder Salience. Journal of Business Ethics. 92:79-97. • Piotroski, J. D. 2004. The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of Market, Industry, and Firm-Specific Information into Stock Prices. The Accounting Review, 79(4):1119-1151. Decision-making • Bazerman, M.H. & Moore, D.A. 2009. Judgement in Managerial Decision Making. 7th ed. Hoboken: Wiley. • Tversky, A., & Kahneman, D. 1974. Judgment under uncertainty: Heuristics and biases. Science.185(4157): 1124-1131. • Langley A, Mintzberg H, Pitcher P, Posada E, Saint-Macary J. 1995. Opening up Decision Making: The View from the Black Literature
- 24. 24 • Miller, S.J., Hickson, D. J., & Wilson, D. C. 1996. Decision-making in organizations. In Clegg, S.R., Hardy, C. & Nord, W.R. Handbook of Organization Studies. London: Sage. • Glanville, R. 2009, Black Boxes. Cybernetics and Human Knowing. pp153-167 Institutional Structure • Clarke, G.L. 2000. The functional and spatial structure of the investment management industry. Geoforum, 31(1):71-86. Responsible Investing in South Africa • IODSA. 2013. CRISA disclosure by institutional investors and their service providers. Sandton: IODSA • Van der Ahee, G & Schulschenk, J. 2013. The State of RI in South Africa:. Climate Change and Sustainability Services: E&Y Africa. • Viviers, S., Eccles, N.S., de Jong, D., Bosch, J.K., Smit, E. v.d.M & Buijs, A. 2008. Responsible investing in South Africa. Investment Analysts Journal. 69(1):3-16. • Viviers, S. 2014. 21 years of responsible investing in South Africa: key Literature
- 25. 25 “…the essence ofultimate decision remains impenetrable to the observer – often, indeed, to the decider himself…” John F. Kennedy • The Decision • What is a decision? • The Decision-maker • Economic Man (Mill, Ricardo) • Onto Administrative Man (Simon) • Now, Insightful Man (Allison, Nonaka) • Possible argument for Relational Man Decision-making theory (Langley et al)
- 26. 26 Decision-making processes (Source: Langleyet al, 1995:263-275)
- 27. 27 Stakeholder decision-making system (Source:Clark, 2000)
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- 29. Principles for Responsible Investing 29 (Source:UNPRI, 2014)
- 30. 30 Overview 1. Introduction 2. Motivation 3.Research Methodology 4. Findings 5. Conceptual Model 6. Alternative Explanations
- 31. 31 • Institutional PRI/CRISAparticipation • Perception of institutional ‘window-dressing’ • Unanimous acceptance of importance of ESG • Investment decision-making • Delegation of decision-making to skilled specialists • Influence of unregulated asset consultants • Fee structures heavily geared towards benchmarks • Responsibility • Different perspectives on definition of responsibility Findings: Institutional Investor Interviews
- 32. 32 • Accountability &Transparency • Resistance to concept by the professionals • Requires additional resources and time • Potential disregard for analysis and depth • Inefficient, chaotic driven by sentiment • Lack of investor literacy and prudence • Increase institutional investor accountability to ownership responsibilities • Highlight the importance of ESG decision- making • Increased demand may enhance choice Findings: Institutional Investor Interviews
- 33. 33 Overview 1. Introduction 2. Motivation 3.Research Methodology 4. Findings 5. Conceptual Model 6. Limitations & Alternatives
- 34. 34 Observed Behaviours & Drivers? •What factors influence the decision-making process of institutional investors towards responsible investing?
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- 43. Environment Social Governance SHAREHOLDERS DIRECTORS STAKEHOLDERS CONTRIBUTORS ASSET OWNERS ASSET MANAGERS BENEFICIARIES AFS <IR> SRGRI COMPANY/ ASSET COMMUNITIES KING PRI CRISA CR CSV UNGC ETHICAL FINANCIAL ANALYTICAL COMMERCIAL
- 44. Environment Social Governance SHAREHOLDERS DIRECTORS STAKEHOLDERS CONTRIBUTORS ASSET OWNERS ASSET MANAGERS BENEFICIARIES AFS <IR> SRGRI COMPANY/ ASSET COMMUNITIES KING PRI CRISA CR CSV UNGC ACCOUNTABILITY TRANSPARENCYRESPONSIBILITY PARTICIPATION ETHICAL FINANCIAL ANALYTICAL COMMERCIAL
- 45. Environment Social Governance SHAREHOLDERS DIRECTORS STAKEHOLDERS CONTRIBUTORS ASSET OWNERS ASSET MANAGERS BENEFICIARIES AFS <IR> SRGRI COMPANY/ ASSET COMMUNITIES KING PRI CRISA CR CSV UNGC ACCOUNTABILITY TRANSPARENCYRESPONSIBILITY PARTICIPATION ETHICAL FINANCIAL ANALYTICAL COMMERCIAL
- 46. Environment Social Governance SHAREHOLDERS DIRECTORS STAKEHOLDERS CONTRIBUTORS ASSET OWNERS ASSET MANAGERS BENEFICIARIES AFS <IR> SRGRI COMPANY/ ASSET COMMUNITIES KING PRI CRISA CR CSV UNGC CITIZENSHIP ACCOUNTABILITY TRANSPARENCY ACTIVITY RESPONSIBILITY PARTICIPATION ENGAGEMENT NORMS DISCLOSURE METRICS OWNERSHIP IMPACT ETHICAL FINANCIAL ANALYTICAL COMMERCIAL
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- 48. 48 Overview 1. Introduction 2. Motivation 3.Research Methodology 4. Findings 5. Conceptual Model 6. Limitations & Alternatives
- 49. 49 • Small sample •Robustness of the framework • Justification of ‘proximity horizon’ • Missing factors and behaviours • Test the validity of the model • Applicability to contexts outside South Africa • Limited data due to access to information, transparency in decision-making processes • Compare interview findings to quantitative evidence Limitations & Alternatives
- 50. 50 Final Word “We don'tknow who discovered water, but we know it wasn't the fish.” Marshall McLuhan
- 51. UNPACKING THE BLACKBOX 51 Colin Habberton [email protected] @relatomics
Editor's Notes
- #7 Individual decisions have the power to transcend markets, nations and the institutions within them.
- #8 Individual decisions have the power to transcend markets, nations and the institutions within them.
- #9 Individual decisions have the power to transcend markets, nations and the institutions within them.