NBFIRA provides encouragement, incorporates ESG on PFR2
BSE associates with global trends around sustainability
Riscura says there is intention to focus on ESG to measure down to every single asset owned
E & S a lot harder to incorporate into the investment process – BIFM
But at some point we will have to move from encouragement to compulsion – BSE
You may have heard the terms sustainable investing, social investing, mission-related investing or screening. They have been used interchangeably with Environmental Social and Governance (ESG) investing, a practice that started late in the 1960s as socially responsible investing. At this point, it was mostly screening where investors would determine which stocks, and industries to include and exclude in their portfolios. Over the years, this concept has evolved and at this point, it is more about integration rather than just screening. The current concept of ESG evolved in the mid-2000s when the United Nations (UN) commissioned an initiative titled, Who Cares Wins.
This was the first mainstream study of ESG as the world knows it. This context looked at the interaction between asset owners, managers, regulators and investment researchers. Support for ESG investing has not waned since. Over the years, governments have regulated part of the ESG with the UK passing the Companies Act in 2006. It set the standard for the governance aspect of ESG. Societal and environmental categories later followed and took shape as laws were passed to guard against discrimination as well as to manage the sustainability of natural resources. With all studies done with the current ESG integration, there is a positive correlation between ESG investing and the returns companies get.
“When you do better you tend to receive better from your community and it fosters positive performance,” said Loago Bokolwe the CEO of Riscura, an investment firm that offers investors unique insights. “Pension funds are including ESG policy in their policy documents such that we have intentionality around implementing,” he said during a panel discussion about ‘Practical Considerations of ESG in Managing Pension Assets’. Moemedi Moyo – Sector Lead – Mining and Natural Resources at RMB Botswana shared that a data analysis the bank did in 2019 has indicated an “increase for ESG indexes of about 4-3%”. “Interestingly enough, returns have supposed vanilla benchmarks.”
BSE associates with global trends around sustainability
Locally, the government currently does not have a regulatory mechanism for ESG. But Botswana has the Environment Act and climate change policies that play a part in ESG. ESG components are also being embedded in some legal frameworks. In 2016, the Botswana Stock Exchange (BSE) made a deliberate move to be associated with global trends around sustainability. The BSE became a partner exchange of the United Nations-backed Sustainable Stock Exchanges Initiative. Kopano Bolokwe, the Head of Product Development said the exchange is committed to domesticating ESG and sustainability issues into the local capital markets.
In 2018, the bourse developed the framework for reporting ESG information to ESG investors, just so on a voluntary basis, listed companies could use those guidelines to report ESG information. “We are at a point where we are now revising those guidelines on the back of a partnership between Global Reporting Initiative (GRI) and the Association of African Stock Exchanges,” Bolokwe said during a recent panel discussion on ‘Practical considerations of ESG in managing pension assets’. He explained that this is “so we make it a lot more relevant to listed companies and then we also embed the current standards from the IASB and IFRS but also the global standards such as those from Europe” because “you have companies that a listed here but their value chain goes as far as USA, Europe, and Asia”.
ESG incorporated on PFR2
For the first time, Pension Prudential Rules 2 (PFR) frameworks mention ESG. The board of Directors is encouraged to consider ESG factors along with financial factors that may contribute to the long-term retirement objectives of the fund members and its beneficiaries. Trustees may include ESG factors in their investment strategies.
This aligns with current and future trends in the ESG space. But for Bolokwe the industry has missed an opportunity in these regulations. “When we submitted our comments as the exchange at a time that these regulations were still a draft form, we articulated the developments going on at the exchange in so far as the sustainable bonds and ESG are concerned,” Bolokwe said during the same panel discussion about ‘Practical Considerations of ESG in Managing Pension Assets’.
Bolokwe wanted the PFR 2 to really support explicitly the developments at the exchange around the introduction of sustainable bonds; green bonds, sustainable bonds, social bonds, sustainability-linked bonds and the ESG guidelines. “It would have been nice if we looked at our peer markets and possibly within the regulations, explicitly made a supportive allocation to instruments that are supporting or promoting ESG and sustainability,” he opined. He cited Ghana as an example. Ghana’s National Pensions Regulatory Authority increased the maximum allocation towards green bonds by 5% for pensions’ assets under management. “Their maximum allocation I think is 30 percent. If you have hit the 30% ceiling you could go to 35% provided that incremental 5% is on account of green bonds,” Bolokwe said.
In his view, the wording of the PFR2 regulation is that of encouragement. To consider ESG factors which he still feels is fine because it gradually supports the inclusion of assets that promote ESG, sustainability and responsible investing. “But in the short to medium term, medium to long term encouragement is not enough,” he said urging that at some point there has to be some level of compulsion. While that is the case Bolokwe is mindful that NBFIRA in doing this, took into account the level of development of “our market”. “So they are taking baby steps in terms of making it gradually compulsory for asset managers to include sustainable bonds in their portfolios.”
Improvement in Governance
Botswana’s asset management fraternity has shown improvement in governance with asset managers pushing for factors such as independence on boards and gender neutrality on boards. As an example, a few of the investors of Letlole La Rona have always stated that the listed property company has not been fully compliant with the requirements of King 3 in terms of having the composition of the board being majority independent non-executive directors. As of 30 June 2023, the board comprises of the majority independent directors. “We have strengthened governance by appointing a deputy chairperson,” Letlole CEO Kamogelo Mowaneng said during the presentation of the results for the year ended 30 June 2023. Over and above that she said the company is looking at its constitution to update it to incorporate some items that have been falling behind. “Governance also speaks to internal processes,” she said. “We have worked a lot on policies, getting process flows so that there is continuity.”
Incorporating the E & S
Historically, asset managers look at the governance side because they look at the impact that governance can have on investment returns. A lot of things have been done to improve governance structures but Bokolwe said institutional clients have a responsibility to ensure that the mandate itself regulates how much goes not just on governance but also on social considerations and impact considerations.
The E and S are a lot harder to incorporate into the investment process, Thato Ungwang – BIFM Portfolio Manager – Local Equities commented during the same panel discussion. What he said they look at is to take the different environmental and social factors and make sure they are applying them to companies where it’s appropriate to do so. As an example, within the environment, they look at climate change and carbon emissions, pollution and waste.” Environment opportunity speaks to what the different companies are doing to invest in renewable energy and help with energy transition. The social aspect is mostly human capital, labor practice, etc. “We also make sure companies we invest in have products that are safe,” Ungwang said. “We also look at whether they are a social citizen in terms of corporate social responsibility.”
As trustees, Bokolwe thinks there is an intention to focus on ESG to measure down to every single asset they own. This is based on what percentage of the portfolio is centered on advancing ESG. It is a baseline for trustees which he said asset managers can then work on investments to its score. Moyo advises asset owners to establish ESG strategies to identify key areas that are a priority. “But ideally what we do as a bank to incentivise transition is essentially providing your green facilities,” he said particularly referring to the green loan, green bonds where the bank extends some discounts. That is “Your typical overdraft but then if you link it to your sustainability targets, we do help you with the journey from a de-carbonisation standpoint”.
While Botswana is still far, there are significant steps that are being taken with green buildings popping up. An example is Letlole La Rona which said it has engaged consultants to look at its building to improve energy and water efficiencies. “We are looking at what we should be changing whether it is breaking down a wall and replacing it with glass so that you get natural light,” Mowaneng said noting another project of installing solar panels at its Water Shed Mall in Mahalapye. “There is a lot of work being put into educating our tenants to incentivise them to adhere to waste management strategies we are embarking on.”
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