In our country lending to State Owned Entities (SOEs) is a challenge involving a fine balance between its strategic importance, adequate compensation and risk mitigation on the one side and its ESG risk factors on the other side that needs to be assessed on a case by case basis. Further, from a responsible investor viewpoint, lending to SOEs also represent a challenge as a fine ESG balancing act between the different ESG concerns noted and the social responsibility (“the S”) as a South African investor.
Accordingly, governance issues with regards to SOEs are becoming increasingly important in the risk management process and as a result it is also influencing investment decisions. These issues would include, but will not be limited to: management concerns, poor operational performance, corruption and fraud, mismanagement of funds, misuse of assets, supply chain irregularities. Some issuers are unable to access the debt capital markets for funding as a result of governance concerns which in turn puts even more pressure on their liquidity position. There is also a certain amount of social responsibility involved in funding key strategic assets for the benefit of the country. Therefore we have put in place an SOE lending framework that assist in dividing the entities into different categories depending on to which extent we are willing to lend to them.
Corporate governance issues, dependency on government and funding constraints have become increasingly important considerations to rating agencies, thus the impact of ESG issues on an entity’s credit rating is also an important factor to consider in investment decisions.