Responsible Investing: A Fixed Income Perspective

As a fixed income manager, we have an important role to ensure that our clients’ capital is deployed in a responsible manner to sustainable enterprises that earn appropriate risk-adjusted returns.

Futuregrowth is one of the largest institutional fixed income managers in South Africa, with R198 billion* of assets under management (AUM), and a track record of 30 years. Approximately R35 billion of our AUM is invested in a range of developmental impact funds. This allows us to participate in high impact infrastructure and developmental sectors that are essential to socio-economic growth.

Exposure across infrastructure & developmental sectors

Risk return

As capital allocators, we identify risks that could potentially erode value and we price for these risks. Investing in sustainable enterprises is crucial to ensuring the appropriate long-term risk-adjusted returns for our clients. Each investment is unique and there is no “one size that fits all” when assessing non-financial risks. Analysts have access to analytical tools, frameworks, scorecards, and research as an input, but it is critical for them to apply judgment when assessing and making recommendations that will inform the rating and pricing of a potential investment. It follows that entities with higher risk exposure will attract a higher cost of funding.

Promoting sustainability and ethical practices

A key part of our role as fiduciaries is to promote sustainable and ethical practices within our sphere of influence.

South Africa has a history of both corporate and SOE malfeasance. Over the past decade alone, our industry has witnessed firsthand the material impact of corruption on a company’s revenue, reputation, and overall sustainability. As a result, non-financial risks are no longer deemed as “soft issues”.

Some important learnings resulted in our “SOE Governance Unmasked” report, released during February 2018 and highlights the following:

• Being a responsible investor implies that we make decisions to allocate capital to those sectors and entities that adopt transparent, sustainable policies and practices.

• Governance standards are not primarily there to control the ethical, but rather to constrain the unethical.

• For governance to be properly effected we need the appointment and retention of people of the highest competence and unimpeachable integrity.

To ensure we promote sustainable and ethical practices, it is important to build investment processes that embed institutional learnings, and that recognise patterns, trends, and red flags in the decision-making process.

Bondholder engagement

Bondholder engagement is an important aspect of the overall process of managing risk. This provides an opportunity for investee companies to adopt practices that promote their long-term sustainability.

Non-financial risks become financial risks over time if not addressed. We therefore place emphasis on partnership and ongoing engagement with our investee companies. This provides a pathway for these companies to commit to or work towards sustainable practices. Appropriate milestones and timelines are negotiated and included in our legal agreements so that we can measure and monitor change.

Some engagement areas are driven by socio-economic demands.

• Due to the urgency of the climate crisis, there is greater emphasis on climate mitigation (seeking ways to prevent or reduce emissions) and adaptation (seeking ways to adapt to a future state that considers the impact of climate change).

• Investors are seeking innovative solutions that leverage technology to address social and environmental challenges, such as clean energy, energy efficiency, smart cities, and sustainable transportation. This could include investments in sustainable and regenerative agriculture and other sectors that support a low carbon economy.

• There is a growing recognition of the importance of diversity, equity, and inclusion (DEI) as investors seek companies to prioritise DEI as part of their overall transformation strategy. Companies that operate in sectors where this a priority, risk losing their license to operate if DEI is not addressed as part of an intentional strategic objective.

All these aspects can present both risks and opportunities that may be identified during the due diligence and risk assessment phase, and will inform and guide the engagement approach with an investee company.

Industry engagement and collaboration

Over and above bondholder engagement, institutional investors should engage and collaborate when we have the opportunity. A recent example is Futuregrowth’s active engagement on the National State Enterprise Bill and the Public Procurement Bill, where we engaged directly with these entities as well as through ASISA.

In summary

• We should never compromise on achieving sustainable risk-adjusted returns for our clients.

• Each investment is unique and there is no “one size that fits all” when assessing non-financial risks.

• As part of our fiduciary duty, both financial and non-financial risks need to be assessed and taken into consideration and priced for appropriately.

• Engaging and promoting sustainability and ethical practices is our collective duty, to ensure a better future for all.

As institutional investors, we all have a part to play in influencing our local economy and building a more sustainable future by actively addressing these important issues on behalf of our clients.

* AUM as at 31 March 2024