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Sukha & Associates

Service Providers Framework 2020

You are in Strategy and Governance » Policy on ESG beliefs

Policy on ESG beliefs

SG 01. Responsible investment policy

01.1. Describe how your organisation’s philosophy incorporates environmental, social and governance factors, and the link to your business offerings.

We are an independent, owner-managed and level 1-rated B-BBEE asset consulting firm that provides a high quality and dedicated investment advisory service to retirement funds. We seek to provide our clients with top quartile risk-adjusted returns but at the same time have a positive impact on the environment and society. We manage risk holistically - we do not only focus on the members' financial risks like most of our competitors. We also raise awareness of social and environmental risks that retirement fund members will face in the future and suggest mitigation strategies to our clients. Our company seeks to be Responsible Investing ("RI") leaders within our own industry but to also help our clients be RI leaders in their own industries as well. 

Our firm was founded to address shortcomings and improve governance levels within the asset consulting industry and have therefore structured ourselves to avoid such shortcomings. These shortcomings were outlined by Actuary Rob Rusconi in a 2008 paper called "Whose money is it anyway?". Our firm is truly independent and offer no subsidiary services to avoid conflicts of interest. We are not incentivised to support nor linked to any affiliates that seek to generate additional revenue from our clients. We have suggested industry solutions to the shortcomings in the asset consulting industry. For example, we have publicly written about "dual consulting" as one possible solution.      

Our company is based on four founding principles: Independence, Integrity, Innovation and Insight. One of the categories against which staff are regularly measured is how well they have implemented these principles within their daily work or actively promoted these principles within the business or in the industry. Therefore, good governance is a strong feature of our business not only in terms of structure but also in terms of culture. Our founding principles and Code of Ethics states that "client interests always rank ahead of our business interests" and practical examples are provided to employees to demonstrate how this can be applied in practice. Employees must comply with the Code of Ethics.  

We were the first black-owned asset consulting firm in South Africa to sign up to PRI; 50% of our clients have signed up to PRI (100% target) and all of our clients have set Responsible Investing Policies. We actively promote Responsible Investing to our clients and seek to increase awareness of ESG issues and encourage clients to take action to mitigate ESG risks. Our company, in conjunction with our clients, have developed a strong track record in supporting renewable energy, job creation, impact investments, good governance and diversity. For example, our clients, with our help, have used their influence to encourage and create jobs and opportunities for black graduates. Our efforts were recognised by Trustees and Principal Officers who awarded us with the Batseta Imbasa Yegolide award for the "2018 Responsible Investment Consultant of the Year."     

Given the history of the country, our company seeks diversity in terms of its staff compliment and to provide opportunities to previously disadvantaged individuals in South Africa. All current full-time employees are previously disadvantaged employees. We volunteer our time to professional bodies such as the Actuarial Society of South Africa and have representation at their Investment Committee.   

Our investment process considers three main factors now, namely risk, return and impact. Investment opportunities / asset manager products that score highly in all three factors are priortised and receive preference in terms of our recommendations and client capital allocation decisions. We have actually implemented this process in practice as our clients  are invested in at least 3 South African blended finance funds.    

Our business seeks to highlight climate change risks and mitigate its impact through awareness at asset owner level, encouraging asset managers to incorporate environmental factors within their processes and by encouraging clients to invest in sectors such as renewable energy. Since coal is one of South Africa's top 5 exports, we have raised the concept of a just transition with clients, as we believe that this will be the best way to tackle our social and environmental risks. We have already recommended products that are primarily focused on creating jobs alongside renewable energy investments in order to ensure a just transition for South Africa.   

01.2. Indicate whether you have policies that formalise the incorporation of your ESG beliefs in your business offerings.

01.3. Indicate the components/types of your internal policy and provide the URL and/or an attachment of the document/s if they are publicly available.

Policy components/types

Public availability

Public availability

          Founding Principles of the Business
        

Public availability

          Code of Ethics
        

Public availability

01.4. Indicate how these are put into practice internally across the organisation.

01.5. Additional information [OPTIONAL]


SG 02. Norms used to develop policies

02.1. Indicate what frameworks and guidelines you have used to develop your organisation’s policies. Tick all that apply.

          CRISA
        

02.2. Additional information. [OPTIONAL]


SG 03. Policy offerings to clients

03.1. Indicate whether you offer standard, off the shelf, policies to clients as part of your product offerings, and/or whether you create tailored versions for individual clients.

Off the shelf
Tailored
Asset class-specific RI guidelines
Sector-specific RI guidelines
Screening/exclusions policy
Engagement policy
(Proxy) voting policy
RI guidelines set out within the Investment Policy Statement (IPS)
RI guidelines set out in a freestanding RI policy
Multi-year RI implementation project plan
Conflict of interest management policy
Stockbroker allocation policy
Securities lending policy
Other, please specify (1)
Other, please specify (2)
Other, please specify (3)
None of the above

03.2. Provide a brief description of the key elements, any variations, or exceptions applying to these policies.

We typically start by providing high level training on RI and ESG issues. This includes the importance of RI, disclosure of regulatory requirements, trends, global best practice and practical examples. Based on the engagement, we then tailor the next steps to each client.  

Our starting point is to determine whether a separate RI policy is required for the client based on their feedback. For larger clients, we advocate a separate RI policy in addition to RI wording in their Investment Policy Statement. The RI Policy will typically be quite basic initially but enhanced every year as the client becomes more familiar, engaged and empowered with ESG issues. The RI policy will typically include the following: 

- Vision and Mission

- Importance of RI and ESG and links to UN SDGs and National Development Plan

- The Client's RI approach in general terms 

- Which asset classes are covered and the RI approach to each asset class

- RI strategy regarding manager selection, engagement, proxy-voting and conflicts of interest

- B-BBEE / Transformation strategy

- Collaboration strategy

- Specific projects / initiatives (e.g. research or engagement dealing with either Governance, Environmental and/or Social issues)

- Reporting and Disclosure

- Roles and Responsibilities for implementation

- Frequency of review.

We raise and debate general ESG risks and issues at Investment Committee meetings to ensure that the RI policy remains relevant and "top of mind". Time has been formally allocated to cover ESG risks at every Investment Committee meeting. Asset managers are required to report back on their ESG approach at every meeting with the client and specific issues are also discussed e.g. stance on particular ESG issues or how proxy votes were cast. 

At the moment, our clients do not have a separate proxy voting policy but are considering it. Larger clients have a separate stockbroker policy and securities lending policy, both of which consider ESG risks. 

Implementation of the RI policy is monitored at least once a year and changes made where necessary. 

03.3. Additional information. [OPTIONAL]


SG 04. ESG/RI in business offerings

04.1. Briefly describe how you include ESG/RI factors as part of your business offerings.

Business area

Investment Consultancy

How you include ESG/RI factors

Our firm provides independent asset consulting services, which includes advice on ESG and RI issues. We feel that RI is an essential part of any successful investment strategy as it either helps to enhance return, reduce risk and/or create a positive ESG impact. We have therefore incorporated risk, return and impact in our investment process.  

We make clients aware of their fiduciary duty to consider ESG and RI issues but also help them comply with such duties based on global best practice.

We assist clients who have no experience of ESG and RI issues but also those clients with intermediate knowledge of such matters.    

We provide independent ESG advice based on our own research and third-party research e.g. from the PRI.

Our advice would include for example:

- Importance of ESG and RI

- SDGs, National Development Plan and CRISA

- High level training (or utilise specialists if necessary)

- How to set an RI policy

- How to implement an RI policy

- Proxy voting and engagement

- Impact investing

- ESG risks and how it affects investments

- ESG incorporation within decision-making

- Specific ESG projects that are important to the client.

04.2. Indicate the roles in your organisation, and indicate for each whether they have oversight and/or implementation responsibilities for ESG/RI within the organisation.

Roles present in your organisation
Oversight/accountability for ESG/RI
Implementation of ESG/RI
Board
Directors
Chief Executive Officer (CEO), Chief Financial Officer (CFO)
Chief Operating Officer (COO), Chief Information Officer (CIO)
Other chief-level staff
Other heads of department
Dedicated ESG/RI staff
Other role, specify (1)

Please specify

          Senior Analyst
        
Other role, specify (2)
Other role, specify (3)
None of the above

04.3. Indicate how you ensure ESG/RI expertise for the roles where there are RI oversight/accountability or implementation responsibilities.

04.4. Indicate whether your organisation has any ESG/RI linked incentives for its employees.

04.5. Describe the ESG/RI linked incentives.

The incentives are largely governance-related at this stage. 

Our Founding Principles and Code of Ethics sets out our key founding principles, which includes Independence and Integrity. Our other founding principles are Innovation and Insight, which encourages a culture of research and sharing and discussing of new ideas in all work areas including ESG and RI. 

Staff are expected to demonstrate application of these principles in practice. This is discussed in regular key performance appraisal sessions with staff and remuneration set accordingly. Non-compliance with our Founding Principles and Code of Ethics could result in debarment and/or dismissal. 

We are considering other incentives linked to ESG to strengthen our existing culture and to promote our values. This would also help to strengthen our relative competitive advantage in this area.  

04.7. Additional information [OPTIONAL]


SG 05. Outsourcing of services (Private)


SG 06. Providing training/education

06.1. Indicate whether you provide training/educational services on ESG/RI. Tick all that apply.

06.2. Describe the main components of your training/educational services on ESG/RI and any variations depending on the group you provide training/education to.

We generally advocate using professional bodies / industry associations for training, especially for intermediate or advanced training on ESG issues. We tend to focus on basic and high-level training and assist our clients in understanding RI and the importance of it. We try to make this practical to enhance the effectiveness of the training.

The training would include the following:

- Importance of ESG and RI 
- Fiduciary duty and Regulatory requirements
- Social and environmental risks and how it can affect members' financial risks
- How to set an RI policy
- How to implement an RI policy
- Proxy voting and engagement
- Impact investing
- ESG risks and how it affects investments
- ESG incorporation within decision-making
- Specific ESG projects that are important to the client.

We have recently started to include training on the United Nations SDGs, the South African National Development Plan and a Just Transition. 

Industry experts are also invited to present to clients at training sessions.

06.3. Describe whether these training/educational services include any commercial elements.

          Our service level agreements with clients include setting and reviewing the client's Investment Policy Statement and / or RI Policy. In order to do this in a meaningful way, training on ESG and RI issues is required. There is no additional cost or charge for high-level ESG Training - we see this as part of our overall asset consulting service. We feel that providing training helps to make our client's policies more meaningful to them and better suited to their needs. It also helps to encourage adoption of good RI practices.
        

06.4. Additional information. [OPTIONAL]


SG 07. Applying, advancing and promoting the PRI principles

07.1. Describe how your organisation applies, advances and promotes the PRI Principles.

Principle 1:

We have included ESG factors in our advisory and investment process and explicitly consider ESG issues at various stages of our process including when reviewing our clients' investment strategy. ESG factors are also incorporated into our manager selection and risk management process. We assist our clients to incorporate ESG into their decision-making process. 

Principle 2:

We have encouraged our clients to incorporate ESG issues into their ownership practices and the importance of being an active owner. We support the move to "stakeholder capitalism". We regularly highlight the role that an active owner can play in creating a more inclusive, stable, relevant and diverse financial services industry that takes climate change seriously and creates products to help meet the UN SDGs. On climate change specifically, in the past year, we have recommended that our clients instruct their asset managers to vote in favour of key climate change resolutions proposed at a large bank in South Africa.    

Principle 3:

We have a separate ESG due diligence template, which all asset managers must complete before they are formally ranked or included in our shortlist. Governance documents must be provided as part of the due diligence process. Transparency and Assessment reports are requested if the manager is a PRI signatory. Generally, asset managers have to report back on ESG issues at every meeting with the client. RI policies of clients generally set out the level of disclosure required from asset managers on ESG issues. 

Principle 4:

We have sought to collaborate with others in the industry on ESG issues. We have increased our clients awareness of the PRI principles. Our aim is to have 100% of our clients as PRI signatories. We seek to have our clients invested with asset managers who are all PRI signatories (currently around 92%). We have spoken publicly and promoted ESG and RI issues at many local conferences. For example, we have participated as a panelist at conferences such as the ABSIP Asset Owners Summit and the Just Share Social Inclusion conference.   

Principle 5:

We continuously seek to increase our ESG knowledge and our resources that support our RI approach. As a small business enterprise, we are looking to collaborate with other firms and work with them for mutual benefit. At a recent conference, we suggested getting various independent stakeholders across the value chain together ("a coalition of the willing") to share information in order to have a greater impact in addressing climate change and income inequality. This has been set up informally but we will look to strengthen this going forward.   

Principle 6:

We welcome the decision by the PRI to have mandatory reporting for service providers. Annual reporting allows us to focus our activities and to make sure that we improve our RI approach on a continuous basis. We report on our activities to our clients and the PRI but will seek to improve such disclosure over time and make some of this information publicly available if they give us permission to do so. We have published our RI articles on our website.  

07.2. Highlight whether there are any ways that your organisation would like to engage further with the PRI. [OPTIONAL]


SG 08. Actions taken to promote responsible investment

08.1. Indicate which of the following actions your organisation has taken to promote responsible investments during the reporting year, independently of collaborative initiatives.

08.2. Additional information. [OPTIONAL]


SG 09. Long term trends

09.1. Indicate which of the following long-term trends are addressed in your product outputs.

09.2. Explain how this long-term trend affects your product outputs.

A growing working age population is a positive for South Africa but not if our youth are not appropriately skilled and can't find employment. Youth unemployment is high in South Africa and can be a source of political and other instability (in addition to it being a moral issue).

We have encouraged our clients to be mindful of this risk and to assist with job creation efforts where possible. One of our clients has set "Job creation" as their key social initiative in their Responsible Investing Policy, which is in line with the South African National Development Plan and at least one of the UN SDGs. We have already helped our client implement this initiative in practice.   

We have recommended seeding a blended finance credit fund that explicitly targets job creation and seeks commercial returns. The fund has created "decent" work opportunities for at least 10,000 people since inception of the fund. We have also invested in the second credit fund that was launched with the same objectives.

09.2. Explain how this long-term trend affects your product outputs.

We have publicly mentioned at conferences that climate change is an existential crisis and will serve to amplify South Africa's social risks. Therefore, both climate change and our triple threats of poverty, inequality and unemployment must be addressed at the same time.    

We have recommended that our clients invest in the country's renewable energy programme to help minimise the country's dependence on coal. 

We have encouraged our client to respond to a call for public comments on the Department of Energy's Integrated Resources Plan. The Plan at the time favoured nuclear energy over renewable energy. Our client highlighted the many benefits of the Government's renewable energy programme. Our client provided a commitment to invest more capital in the renewable energy sector if uncertainty around the renewable energy sector was removed. The Government revised the IRP and restored certainty to the sector by allowing projects to reach financial close and increasing the allocation to renewable energy. Our client promptly deployed their remaining commitment amounts to the sector, making it a significant investor in renewable energy in South Africa.

Having realised that coal is one of South Africa's top 3 exports, the same client set a "Just Transition" as a key initiative that they will support in their Responsible Investing Policy. As a result, the client has made significant investments in two blended finance funds that target job creation explicitly. As the client's renewable energy exposure increases so will its exposure to funds that target job creation.  

          B-BBEE and Transformation
        

09.2. Explain how this long-term trend affects your product outputs.

The fund credits of members of pension funds would be meaningless in the long-term if those members retired in an unstable political and macro-economic environment and an unequal society. 

Specific client strategies have been set to support B-BBEE and transformation objectives as reported above. In addition, we assisted our clients to set a stockbroker policy that seeks to increase the amount allocated to black-owned stockbrokers and to request greater disclosure from asset managers on the cost of trading and with whom they are trading. We engaged with asset managers and industry associations in setting the policy.  

Racial and gender diversity are also monitored at asset managers every year to see how this changes over time and to engage with asset managers where necessary. This was formalised into an annual survey that is submitted to the Board of Trustees. 


SG 10. Interaction with asset owners

10.1. Indicate whether you interact with asset owner clients.

10.2. Indicate the typical frequency and type of interactions with your asset owner clients.

Type of interaction

Frequency

          Roughly every 6 weeks
        

Frequency

          Roughly every 6 weeks
        

Frequency

Frequency

Frequency

10.3. Additional information. [OPTIONAL]

Our "dual-consulting" clients typically have quarterly Investment Committee and Management Committee meetings and informal interactions takes place on a monthly basis.   


SG 11. Aligning approach with investor goals

11.1. Describe how you typically align your organisation’s philosophy and approach to ESG/RI with your investor clients’ goals.

Our clients generally aim for superior risk-adjusted returns over the long-term. Our firm believes that a strong and effective ESG process could enhance return and / or reduce risk for clients over the long-term.

We help our clients set responsible investing polices to assist in meeting this goal. The RI policy is reviewed regularly to ensure that progress is being made in meeting the client's goal.

Some large clients also believe that their investments should seek to have a positive impact on society and the environment. Our firm believes the same especially in light of the country's history. As a firm, we have recommended blended finance and impact funds, which have thus far met and exceeded our client's expectations. We have recommended increased allocations every year since 2015 with significant progress being made.   

We have moved beyond just risk and return when assessing an investment. We now also consider the impact the investment could have on society and the environment. Asset managers are viewed in a similar vein - those managers with a strong ESG process and active ESG approach are ranked higher in our scoring models. One of our clients subscribes to this view and have amended processes accordingly.

11.2. Additional information. [OPTIONAL]

We request the Transparency and Assessment reports of asset managers who are PRI signatories during our due diligence process. 


SG 12. ESG recommendations not aligned with investor goals

12.1. Describe what steps you take, if any, when your ESG recommendations are not in line with your investor clients’ goals.

We do highlight the advantages and disadvantages of a particular recommendation to clients with an alternative option being provided. However, we do emphasize the fine balance between risk, return and impact and the trade-offs required. We also remind them of their time horizon and discuss various risks over the short-term, medium-term and long-term, which must be considered. 

We also remind the investor of regulatory requirements to consider ESG in the decision-making process. Therefore, ESG issues must be considered even if this conflicts with other goals.  

We do offer to provide further information and suggest delaying the decision until the client feels that they have sufficient information to make an informed decision. We also encourage a second opinion if necessary or suggest inviting experts to provide a different perspective.       

12.2. Additional information. [OPTIONAL]


SG 13. Seeking feedback from clients

13.1. Indicate whether you seek feedback from clients on your RI/ESG services and product offerings

13.2. Describe how you use this feedback in your RI/ESG services and product offerings.

In line with Treating Customers Fairly principles, we try to obtain feedback from clients to ensure that our service offering is in line with client expectations. 

We use client feedback as an indication of where we should be improving or focusing more of our efforts. It is also helpful to get positive reinforcement and keep our team motivated when the feedback is positive but to improve our offering when we receive constructive criticism. 

 


SG 14. Managing conflicts of interest

14.1. Indicate whether your organisation has a policy for managing potential conflicts of interest.

14.2. Describe how you manage potential conflicts of interest.

We have a conflicts of interest policy in place and reference this in our annual client disclosure letters. 

Our business was set up to specifically address some of the shortcomings in the asset consulting industry, which includes conflicts of interest. We do not spend time managing conflicts of interest - we avoid them.

Integrity is one of our founding principles and we formally measure staff on how they embrace and promote our founding principles.  

In addition to our conflicts of interest policy, we have a Code of Ethics and Founding Principles document, which seeks to reiterate to staff that client interests always rank ahead of business interests. This naturally serves to lower the incidence of conflicts of interest. 

Where a potential conflict of interest does arise, we promptly disclose such conflict to clients and offer to recuse ourselves from the decision. We also go as far as suggesting that the client obtains a second opinion before making a final decision. 

As an aside, we promote what we call "'dual consulting'' in our industry, which is the appointment of two independent asset consultants to service large retirement funds. We have found that this model can be effective in limiting the impact of bias and conflicts of interest on the final client decision. It also helps to address information inequity and allows the client to access the respective strengths of each firm. 

14.3. Describe how you ensure that company employees do not derive any personal gain from the use of information collected during your work process.

Integrity is a founding principle and we employ staff who fit in with our culture, values and ethics. Staff must adhere to our Code of Ethics and Founding Principles and are formally assessed on how they embrace and promote our founding principles. 

The firm has policies on the protection of client and business information and staff sign-off on these policies. Staff could face debarment and dismissal for breaching client confidentiality and using information for personal gain. Staff must sign at least 2 separate declarations on client confidentiality prior to joining the business. 

14.4. Additional information. [OPTIONAL]


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