South Africa's institutional investors have been challenged
to conduct their business on a new playing field following
publication of the Draft Code for Responsible Investing.
David Geral, a partner at corporate law firm Bowman Gilfillan,
alerted delegates to a recent seminar in Johannesburg of the
Code's main principles:
Institutional investors should incorporate environmental,
social and governance (ESG) considerations into their investment
analysis and activities as part of the delivery of superior
risk-adjusted returns to the ultimate beneficiaries;
Institutional investors should demonstrate their ownership
approach in their investment arrangements and activities;
Where appropriate, institutional investors should consider a
collaborative approach to promote acceptance and implementation of
the Code's principles, and those of other codes and standards
applicable to institutional shareholders; and
Institutional investors should be transparent about their
policies, how they are implemented and how the Code is applied to
enable stakeholders to make informed assessments.
"The common law and statutes impose a duty on some
institutional investors, such as pension funds, to act at all times
in the best interests of the person to whom the duty is owed,"
said Geral. "And that duty must be applied to the exclusion of
all competing interests."
He stressed that the duty is owed to the fund, its members and
Geral said that the Code builds on those
"best-interests-of-members" requirements in the Pension
Funds Act, that hint at proper decision making and risk management
processes, rather than specific outcomes.
Geral referred to a 1984 English case, Cowan and others v
Scargill and others, as especially instructive in pointing to
the best interests of the beneficiaries.
"When the purpose of the trust is to provide financial
benefits for the beneficiaries, as is usually the case,
the best interests of the beneficiaries are normally their
best financial interests."
And when it came to the power of investment, that power had to
be exercised so as to yield the best return for the beneficiaries
judged in relation to the risks of the investments in question.
Geral said that "benefit" was a word with wide
meaning. The court acknowledged that arrangements which work to the
financial disadvantage of a beneficiary may yet be for his benefit.
Hence, benefit can be other than pure financial gain. But
then it is criticalto prove the non-financial benefit and to define
who it benefits.
"Fettering of discretion to access available assets in
principle is invalid conduct for a fiduciary. A trustee is not
expected to forego personal views and principles. Those views and
principles should be recognised and, where she cannot exercise fair
and impartial judgement owing to a conflict of beliefs, she should
Geral summarised common law cues thus:
Determine trustees' powers refer to the fund's
Determine the best interests of the beneficiaries of the
"Benefit" should be measurable and regularly measured
and reported on;
Irrelevant interests are irrelevant, no matter how beneficial
they are perceived to be to the "world at large";
It is wrong to fetter permitted investment discretion.
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