By Gontse Tsatsi, Head of Retail Client Management at Old Mutual Investment Group
South Africa is one of 31 out of 124 countries surveyed in The Global Risks Report 2022 where “Income disparities exacerbated by an uneven economic recovery are increasing polarisation and resentment within societies.”
An unequal society
South Africa is the most inequitable country in the world with a Gini Coefficient of 0.63, according to the World Bank. This high level of inequality is perpetuated by a legacy of exclusion and the nature of economic growth which is not pro poor and doesn’t create enough jobs. It is important to note that this value as at 2014 and considering worsening unemployment and the impact of Covid-19, it is unlikely that this has improved.
High inequality impacts economic viability
In addition, in November 2022, Fitch Ratings affirmed South Africa’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB-‘ with a Stable Outlook. According to them, SA has a low ESG Relevance Score of 4/10 for employment and income equality. They stated that this has a negative impact on the credit profile as it is relevant to the rating and is a rating driver.
B-BBEE and ESG align
The Black Economic Empowerment (BEE) Act in 1994 and Broad – Based Black Economic Empowerment (B-BBEE) Act in 2007 was introduced to transform the SA economy and address the generational inequalities. The inequalities were however not unique to South Africa. For the rest of the world, the struggle against profits at all costs had gained steam from the 1970s with investors aligned against social ills such as apartheid, the Vietnam War, and consumer product safety among others.
By 1984, the Forum for Sustainable and Responsible Investment was formed and over 20 years later in 2006, the United Nations Principles for Responsible Investment (UNPRI) was launched. This was the start of investing in line with Environmental, Social and Governance (ESG) considerations across the globe.
Although 2022 was a volatile year for the growth of ESG assets, Rifinitiv states that the “death of ESG was exaggerated”. Despite the widely publicised volatility especially in the third quarter of 2022, sustainable funds (excluding money market) still attracted £27.6 billion.
The principles of Environmental, Social and Governance (ESG) and Broad Based Black Economic Empowerment (B-BBEE) are aligned, because ultimately, they are about economic sustainability. The cynicism with which both are sometimes treated makes one wonder if we’re not only looking at what goes wrong, instead of focusing on the objectives especially since they both have a common goal of inclusive economic growth.
Although there is sufficient consensus on the need for B-BBEE, it’s always been something that South Africans have considered as a “local” idiosyncrasy. Legislation even allows for multinationals based outside of our borders to be exempted from measurement on some of the elements such as ownership and management control. However, ESG measurement considers both the above as part of their ratings, without exemptions. The table compares the issues/elements that are common between ESG and B-BBEE. Although ESG has many more issues, all the B-BBEE elements appear in the ESG list. We have used MSCI as the ratings agency we collaborate with for our own ESG Ratings, the B-BBEE scorecard is as per the Act.
| MSCI RATINGS METHODOLOGY KEY ISSUES | B-BBEE SCORECARD ELEMENTS |
| Governance: Ownership and Control Social: Employee stock ownership | Ownership: interest, blacks, black women representation (diversity) |
| Board: Skills & Diversity, older/long tenure vs younger board members and female representation | Management control: board and senior management representation blacks, black women (diversity) |
| Social: Human Capital Development – talent pipeline development, leadership & management development programmes, | Skills Development: money spent on black employees |
| Social: Distribution of benefits, local procurement, programs to support community/local businesses | Enterprise and supplier development: preferential procurement, enterprise development and supplier development |
| Social: Responsible Investment – ESG Products and opportunities & controversies in relation to community engagement | Socio-economic development: CSI on Net Profit After Tax |
B-BBEE and ESG status in Financial Services
The Financial Services sector was a pioneer in both B-BBEE and ESG. We were the first sector to propose what cooperation could look like through the Financial Sector Charter in 2003. The first key signatories of the UNPRI were financial services companies, which translated into the Code of Responsible Investing in South Africa in 2011. As custodians of South African’s savings and investments and a key enabler of the economy it is fitting that the financial services sector are leaders. They can use long-term savings to invest in infrastructure such as transport, electricity, food production among others, and to create numerous jobs from these projects.
Old Mutual Investment Group a leader in B-BBEE and ESG
At Old Mutual Investment Group, we have been committed to, and achieved, visible progress in both B-BBEE and ESG.
As of 31 December 2022, we are rated as a Level 1 B-BBEE contributor.
In 2021, we entered a partnership with MSCI to rate Old Mutual funds listed on the Old Mutual Wealth platform according to MSCI methodology. As of June 2022, all Old Mutual funds on the Old Mutual Wealth platform have been rated, with 19 rated as average (A – BB) and 35 rated as leaders (AA-AAA).
At Old Mutual Investment Group, we have also been recognised for our ESG efforts:
- The Most Sustainable African Investment Manager 2022 from Global Banking and Finance Awards
- Best ESG Responsible Investor Africa 2022 from CFI.co
- Top 3 Best Responsible Investment Manager 2022 from 27four
B-BBEE and ESG as economic drivers
Considering the elements/issues, better implementation of B-BBEE and ESG would contribute positively to SA’s credit ratings score. A junk credit status reduces our chances of foreign direct investment, government, and corporate borrowing for big infrastructural projects which are significant drivers of job opportunities, as well as trust in government, leading to low (investment) confidence. When all the above are considered, the importance of equity and income equality in growing our economy, subsequently that of B-BBEE and ESG, cannot be overstated.
“Increasing polarisation and resentment within societies” is something South Africa, and any other community can ill afford as it leads to societal degradation. As an asset manager for a responsible business and a custodian of over R1.3trillion in savings and investments, our goal is to generate sustainable long-term inflation beating returns for our investors. We see B-BBEE and ESG as key to creating a fertile environment where growth is sustained, because without that growth, sustainable investment returns are unlikely. We are committed to both the responsible implementation of B-BBEE and ESG, driving to fight social ills for our employees, clients, and communities to ensure prosperity. We continuously report on our progress in both these areas.
For more information, please visit https://www.oldmutualinvest.com/financial-planners/funds/responsible-investment/.
