Finance

One Day in South Africa, Two Events, and a Major Milestone for Financial Institutions

Commentary, 03 August 2011

By Motoko Aizawa

Bankers say they are carrying out due diligence on environmental and social issues but multiple standards make due diligence confusing.

Johannesburg, July 19, 2011. I wish I could have been in two places at once.

On that day, I was part of a workshop, convened by the law firm Cliffe Dekker Hofmeyr, the University of Witwatersrand, and the Institute for Human Rights and Business, on the topic of Financial Institutions, Human Rights and International Best Practices.

The event was probably one of the first of its kind to explore the nature and extent of financial institutions’ responsibility to respect human rights. This means responsibility to carry out due diligence to understand negative human rights impacts from their actions so that they can manage them. The South African banking sector, as well as human rights experts and representatives from the Government of South Africa were present.

This is not an easy topic for any of the stakeholder groups. Challenges were identified for everyone. Bankers said they are carrying out due diligence on environmental and social issues but multiple standards make due diligence confusing.

Auditors and consultants are called in to help but they have little capacity in human rights. If things go wrong, it is difficult to figure out whether banks should stay on and work it out, or get out. And what if getting out could make the human rights situation worse? They are being asked why they should focus only on doing no harm, when they can do so much more. More fundamentally, what should we do about the tyranny of “net present value” and the short-termism that is prevalent in the sector?

The human rights community was asked whether it is possible to prioritize human rights in a business context, how they determine acceptable levels of compliance, and if there is such thing as an acceptable level of noncompliance.

South African government officials wanted to know what should be mandatory and what should be voluntary, and the right level of regulation. In addition to regulating domestic activities, should South Africa insist its outbound investments in Africa meet South African requirements? And if so, what are the uniquely South African features of such requirements?

Despite these questions, the overall discussion was refreshing and overwhelmingly positive – as one government representative said: “We are proactive in South Africa.”

The broad spectrum of discussions throughout the day indeed reflected the proactive spirit of South Africa. Even though the banking sector was reminded of its lack of innovation over the last two decades (with the exception of ATMs), the overall story was of South African progress on finance and human rights and its expectations for the future. A range of issues were explored including the need for consumer protection so that consumers of financial products do not fall victim to hidden fees and penalties; the “Mzansi accounts”, mandated in 2004, to help the poor access bank accounts; the role of ATMs in promoting human rights; the horrible human rights consequences of denial of credit, or providing excessive credit; the positive role of finance to enable fulfilment of human rights; the need to understand the extent of responsibilities, and the possibilities of the finance sector.

It was one of the more holistic discussion of the topic I have encountered in recent years, and it gave me a sense of the promise that this sector holds in relation to both addressing the negative and positive aspect of banking that can be translated in terms of human rights.

But this is not where it ends. On the same day, not too far from the banking and human rights discussion, there was a gathering to launch the Code for Responsible Investing on Corporate Governance in South Africa (CRISA), which provides guidance to the investment community on the implementation of ESG (environmental, social and governance) sustainability, consistent with the King III Report on Corporate Governance and the UN Principles for Responsible Investment (PRI). The Code applies to institutional investors, such as pension funds and insurance companies, and their service providers, and is voluntary, though it is supported by the Institute of Directors in South Africa, the Principal Officers Association, the Association for Savings and Investment South Africa, the Financial Services Board and the Johannesburg Stock Exchange.

The underpinning of CRISA is a requirement in the amended Regulation 28 of the South Africa Pension Funds Act that requires pension funds to consider any factor that may materially affect the sustainable long-term performance of a fund’s assets, including ESG factors. Its preamble states: “A fund has a fiduciary duty to act in the best interest of its members whose benefits depend on the responsible management of fund assets. The duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities. Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character.”

These developments constitute a game changer that redefines the nature of fiduciary duty of pension funds: consideration of ESG issues and long-term performance are now legitimate investment considerations for institutional investors in South Africa. Although the human rights agenda is not explicit here, it is yet another indication of the proactive agenda of the South African government to call on the financial community to fulfil their positive role.

Two significant events in one day in Johannesburg: A pure coincidence? I think this is a taste of things to come.

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