Return & ResponsibilityFinance Honours Guest Lecture

Stellenbosch University9 February 2016

Introduction Vodacom Samsung Medscheme Group Alexander Forbes Hewlett Packard Edgars Diners Club International FirstRand Old Mutual Group LoveLife Momentum

SANParks Peace Parks Foundation GivenGain City of Cape Town University of Stellenbosch Medicins sans Frontiers WWF SA UNICEF Greenpeace Nelson Mandela Foundation PayProp Capital

Introduction

Connecting Capital:Investigating the factors influencing the

decision-making processes of institutional investors towards

responsible investing

Part I: The History of Finance

Who is this Guy?

The Founder of Stellenbosch

Who is this Guy?

The ancestral parents of a nation?

Will the real Jan van Riebeeck please stand up?

The first multinational company

The first traded shares

VOC share price performance

VOC vs Apple?

National collaboration

Remember this?

The ‘Company’ Flag?

Part II: Financial ‘Responsibility’

DefinitionsFinance:

1. The management of large amounts of money.2. Monetary support for an enterprise.

3. The monetary resources of a state, organisation or person.Money:

A medium/object/record that can be exchanged for goods and services and is used as a measure of their

value in a market.

Seen these?

Some Questions…

What do you value?Do you have responsibilities as a financial professional?If so, what are they and how do you plan to fulfill them?What role can finance play in the context of poverty and/or environmental sustainability? Do you think massive salaries are morally justifiable in the world of finance today? Why?

Another question…

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The Investing Continuum (Oostlander)

The Investment Continuum

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FINANCIAL CAPITALMARKETS

Financial Return

Financial Performance Measurement

• Debt• Equity

• Retail (mutual funds, online brokers)• Institutional (Exchanges, Alternative

Trading Systems)

About 5%

FINANCIALCAPITALMARKETS

$165 Trillion

(SOCIALLY) RESPONSIBLE

INVESTINGSocial Screening and Shareholder Advocacy

$7-60 Trillion

RETURN

MEASUREMENT

PLATFORMS

INVESTMENTTYPE

AVERAGETRANSACTION

COST

MARKET SIZE

IMPACT INVESTINGMARKETS

Financial + Social Return

Financial + Social Measurement

• Debt• Equity

• Retail (online micro finance)• Institutional (Impact Funds,

emerging platforms)

About 10%

$5 Billion

PHILANTHROPY(GIVING MARKETS)

Social Return

Social Performance Measurement

• Grants

• Retail (offline channels, online giving, Donor Advised Funds)

• Institutional (Foundations)

About 30%

$300 Billion

SOCIAL CAPITAL MARKETS / MARKETS FOR GOOD

(Adapted: Markets for Good, 2010)

The Relevance of Finance

Wealth & Income Inequality

(Adapted: Piketty, 2014: Capital in the 21st Century)

The Significance of the 1%

(Adapted: Piketty, 2014: Capital in the 21st Century)

Just an Emerging Market issue?

(Adapted: Piketty, 2014: Capital in the 21st Century)

The Bad & The Ugly

Part III: Responsible Investing

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• Member of the G20 and BRICS countries• Market capitalisation 10x size of African rivals• Highest FDI of all African countries (2003-2012)• Biggest African investor into the rest of Africa• 3rd largest investor into Africa overall (US, UK)• 1st in Africa for investor protection, 10th in world• 4 largest, safest banks in Africa• Biggest stock exchange in Africa, 19th in world

Investment Landscape: South Africa

(Sources: Africa Report, 2014; E&Y 2013; Global Finance, 2013; IFC, 2014)(Sources: Africa Report, 2014; E&Y 2013; Global Finance, 2013; IFC, 2014)

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• Government• Ministry of Finance• National Treasury & SARS

• Regulators• South African Reserve Bank (SARB)• Financial Services Board (FSB)

• Industry Bodies• Association of Savings and Investment in SA• Banking Association of South Africa• Batseta Council of Retirement Funds for SA

Financial Sector Structure in South Africa

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• Infrastructure• Johannesburg Stock Exchange (JSE)• Strate, JSE Clear

• Legislation• Financial Advisory and Intermediary Services Act • Companies Act• Pension Funds Act (incl. Amendments, Reg 28)

• Normative Frameworks & Benchmarks• UNPRI Signatories & IODSA’s CRISA & King III (IV)• JSE SRI & Nedbank Green Index

Financial Sector Structure in South Africa

Principles for Responsible Investing

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(Source: UNPRI, 2014)

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The Rise of Responsible Investing

(Source: UNPRI, 2014)

US$60tn AuM

1450+Signatories

(Source: UNPRI, 2015)

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“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 3800 funds registered with FSB

•Asset Managers• Public Sector: Public Investment Corporation• Over 200 Retirement Funds & CIS companies• Over 100 Insurers

Institutional Investors in South Africa

Institutional Investor dominance

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• Institutional investors control 67%+ of market capitalisation in the US • They collectively own 73% of the US’s 1000 largest companies • Across 33 OECD countries average is 40% ownership of total assets• In South Africa it is estimated to be well in excess of 50% of total

assets

(Source: OECD, (2014)

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The Institutional Investment System

(Source: Clarke, 2000)

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The Institutional Investment System

(Source: Clark, 2000)

(Source: Daniel, C. 2013. Personal Finance. 22 September 2013)

Part IV: The Journey Ahead

The Bad & The Ugly

The Good?

The Birth of Responsible Finance

Definitions: Lost in Translation (Institutional) Investors

Capital(s)

(E)nvironment, (S)ocial, (G)overnance

‘Sustainability’

Responsible/Ethical/Green/Impact Investing

[The Politics & Psychology of] Decision-making43

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The Relational View of Institutional Investing

Adapted from Habberton (2005)

Relational Economics: Creating Shared Value

CSR to CSV (Porter, 2011) Value Creation not just Value Add Intrapreneurship Economic, environmental & social returns Stakeholder relationship management

Linked to normative structures in SA including: King III Report on company reporting: “…how a company has, both positively or negatively, impacted

on the economic life of the community in which it operated …”

Any answers?

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Conclusion: A Key to Innovative Thinking

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The Periodic Table of Elements