A critical assessement of socially responsible investing in South Africa

This research deals with socially responsible investing (SRI) in its broadest context in South Africa and includes an analysis of the risk-adjusted performance of local SRI funds. SRI refers to an investment strategy whereby investors integrate moral as well as environmental, social and governance (ESG) considerations alongside conventional financial criteria in evaluating investment opportunities. Typical SRI strategies include screening, shareholder activism and cause-based (targeted) investing. The primary objective of this research was to obtain a deeper understanding of SRI in South Africa as it represents a powerful means whereby private sector capital can be channelled into areas of national priority. Data and methodological triangulation strategies were adopted to investigate the research problem, respond to the research questions and test the research hypotheses of this study. The phenomenological component of the research consisted of an extensive literature review as well as in-depth, face-to-face interviews conducted with twelve SRI fund managers and industry experts. The positivistic dimension of this research centred on the construction of the first complete database of SRI funds in South Africa, the sourcing of quantitative primary data and the testing of eight pairs of null and alternative hypotheses. Risk-adjusted performance was evaluated by means of the Sharpe, Sortino and Upside-potential ratios during three sub-periods, namely 1 June 1992 to 31 August 1998, 1 September 1998 to 31 March 2002 and 1 April 2002 to 31 March 2006. Forty-three SRI funds have been launched in South Africa since June 1992 and it is estimated that SRIs constitute approximately 0.7 percent of the total investment capacity in the country. It was found that most local SRI funds combine a cause-based investment strategy with a positive or best-of-sector screening approach. ESG screens were found to focus on the promotion of broad-based Black Economic Empowerment and the development of social infrastructure in South Africa. The FTSE/JSE SRI Index and the Financial Sector Charter were identified as the most prominent drivers of SRI in South Africa, whereas a lack of skills and a shortage of new SRI opportunities, asset classes and funds were seen as impediments to the growth of the local SRI sector. The empirical evidence shows that: - local SRI funds underperformed relative to their respective benchmark indices during the first two sub-periods but significantly outperformed them during sub-period three (the resurgence period of SRI in South Africa); - local SRI fund performance is not significantly different from that of a matched sample of conventional (non-SRI) funds; and - local SRI funds significantly underperformed relative to the general equity market in South Africa during sub-period two (the decline period of SRI in South Africa) but performed on a par with the FTSE/JSE All Share Index during sub-periods one and two. The findings of this research therefore suggest that investors can consider SRI funds as part of a well-diversified investment strategy. It is strongly recommended that a Social Investment Forum be established in South Africa to address the educational needs of stakeholders in the local SRI sector. It is also recommended that local asset managers adopt a focused differentiation strategy to take advantage of the growing SRI sector in South Africa