Angelique Kalam: Having fun, making money from socially responsible investing

Socially Responsible Investing (SRI) is often dismissed as a competitive investment strategy based on poor perceptions around investment returns and efficacy. In reality, this couldn't be further from the truth. The practice seeks to develop and uplift society by investing to not only better areas of environmental, social and corporate governance as well as protecting human rights but has the dual objective of competitive financial gain. SRI is very different from other development strategies which tend to be charitable (e.g corporate social investing) in nature rather than investing. Angelique Kalam, manager of sustainable investment practices at Futuregrowth Asset Management explains to us how this works in practice. Candice Paine

I'm Candice Paine and I'm sitting with Angelique Kalam who is Manager of Sustainable Investment Practices at Futuregrowth Asset Management. Angelique, we've been having interesting conversations around things like SRI and ESG. Explain to us; what is SRI? What is social, responsible investing?

Social, responsible, investing is when an investor decides to put their money into a vehicle that provides some sort of social upliftment, and has some sort of developmental impact in addition to receiving some sort of commercial return.

That's a mandate, which an investor would give to an asset manager. What process does the asset manager go through when looking for those investments?

We have quite a wide process. We form part of the bigger investment process. There isn't a separate process in terms of sourcing deals (on the credit side). The company would come to us. We have a range of social, responsible investments across asset classes. Actually, we have the largest infrastructure Debt Fund. We have a property fund as a power Debt Fund, and agriculture etcetera. A Pension Fund client would come to us and say they're interested in investing and they choose a specific mandate (one of those portfolios that I've mentioned) and invest. How we'd go about it is we have a very defined mandate per portfolio. For the infrastructure bond fund, that specific mandate says that we can invest in infrastructure type of investments as well as developmental. Infrastructure is actually, quite broad. Infrastructure relates to education, water and sanitation, power, energy, and healthcare etcetera. That's a very broad mandate. When we look at transactions that we could possibly fund, it would fall within the scope of that specific mandate. The companies that we'd advanced a loan to (in the case of the Debt Fund)…when we conclude that transaction, that transaction would be allocated (firstly) to a mandate like the Debt Fund.

In a South African context, you would imagine that we need so much development. We need so much infrastructure and so much upliftment, that it would be easier to find investments. There must be many coming your way. What are the risks to socially responsible investing?

So many companies and individuals come to us for funding. Unfortunately, that not many of these deals or companies are at an investable stage. We have a fiduciary responsibility to our Pension Funds clients and we operate within a very strict risk parameter so we can't invest in any company. Yes, this company might tick all the right boxes in terms of social upliftment and development etcetera, but it could be a start-up company or it one, which hasn't been around for very long, and they're not profitable. Every single company that comes across our door for funding…we can't necessarily invest. There are so many of them, but we have to turn them away because they're not investable.

One of the other questions that must arise often would be around liquidity. There's obviously a long lead-time before you start seeing the kinds of returns that you would expect from these investments. It's kind of, a double-edged thing. What is the time frame and am I looking at inferior returns if I'm being socially responsible about my investing?

On the range of developmental funds, which we offer and actually, for any investment manager (because we are fiduciaries) we can't offer funds to Pension Fund clients that could provide a subsidised return. We can't do that because it's against our fiduciary duty. First and foremost, let me say that with any SRI vehicle that's offered by an investment manager, we have to provide a commercial risk-adjusted return.

Okay, so they are comparable to any other investment out there.

They're very comparable and you can actually go through all the surveys. The Debt Fund I've been speaking about has a 19-year track record. It might not be comparable in terms of the type of underlying investments because this fund has a combination of listed and unlisted, but it is the top-performing bond fund in the country. If anyone sells you an SRI fund that says you're going to be rich, achieving a subsidise return; that's absolute nonsense.

This talks to your process and the due diligence that you go through to uncover these superior opportunities within the social, responsible space.

That does. The previous question that you asked was around liquidity, and so yes, the Debt Fund as a case in point; there's a combination of listed and unlisted. With the unlisted, some of the investments are quite illiquid, which means that if you were investing, you wouldn't be able to get your money out necessarily, overnight as opposed to investing in vanilla listed bond fund. Since the vehicle, that the Debt Fund is held in is a pooled vehicle, our institutional Pension Fund clients that are invested in there, buy/purchase units in this specific fund. The Fund's mandate says that there has to be a 20 percent liquidity allowance, which allows the underlying Pension Fund clients to be able to exit and come in, etcetera. If a very large Pension Fund is invested in the Debt Fund and needs to exit, then that exit would need to be managed so that the underlying unit holders, i.e. Pension Funds, are not adversely affected in terms of performance, due to a big exit.

You've spoken a lot around Pension Funds. Assuming the man in the street (the retail client) can't actually access socially responsible investing of the type you were speaking about, but their Pension Funds may hold them being invested in it. Is that correct?

That's correct. There's not a lot of offering out there in terms of Retail Unit Trusts. There are probably a handful of them but yes, if you belong to a Pension Fund and you have your representatives/trustees, they would be able to access… You, as a Pension Fund, would be able to access these types of investments through your Pension Fund.

Angelique, we've spoken about the positives of socially responsible investing and the screening that you do from a developmental and an upliftment point of view. However, there are also negatives in industries, which you try to avoid. What would those be?

For example, in our specific SRI Funds, the Debt Fund, and the Developmental Equity Fund, the mandate there specifically says that we won't invest in any tobacco-related or gambling-related companies, so that's an exclusion. As a broader industry, Pension Funds have given us (or said, specifically), "When you manage our money, please exclude any gambling-related industries. As a Pension Fund, they can actually, very specifically say, "We don't want to hold any gambling-related entities in our portfolio". It doesn't have to be an SRI Fund, necessarily. Pension Funds can actually be quite proactive in terms of deciding that there are industries that they want avoid because it's not good for their members (or for the health of their members.

Okay, so there are ways that you can promote sustainable investment practices within an investment, without actually closing off the entire universe of investments, by just selecting which industries you'd not like to be involved in as an investor.

Definitely. For example, the whole Sharia investment space: that's a very good example where individuals have decided, for specific ethical and moral reasons that they don't want to invest in certain things such as alcohol, tobacco, etcetera. They have therefore directed their money to that specific Sharia-compliant Funds. That's on the retail side but yes, Pension Fund trustees can do something quite similar and actually, be quite vocal but they have to do that upfront in outlining their investment objectives. What we find is that most Pension Funds don't set that objective out front, so they're rather vague and they have quite a lot of discrepancies amongst themselves, as Trustees. When they set that object upfront as part of their investment policy statement, they will be quite clear in being able to communicate to their investment managers, what their mandate is in terms of what to exclude if they have specific exclusions.

I'm sure this is where Futuregrowth's expertise comes in too, in working with those Trustees to just set up those mandates and guide them as to what is possible and what isn't possible within the realm of what they're trying to achieve.

Yes. In cases where clients (Pension Funds) don't work directly through consultants, we've definitely played that role. In other cases where there is a consultant, we have collaborated with the consultant and the client in providing guidance in that regard.

Angelique Kalam is Manager of Sustainable Investment Practices at Futuregrowth Asset Management. Thank you so much for your time today.