Operating for five decades is a significant milestone for any business and it has provided us with a meaningful opportunity to reflect on the history of our firm, our evolution and how we add value to clients. As we present our latest Stewardship Report, Duncan Artus discusses our approach to investing responsibly and some of the key issues that stood out in 2023.
As active managers who seek to understand businesses, we have always taken a keen interest in how companies are governed and the impact they have on society. Since our inception, we have held the view that a company that does not operate in a sustainable manner cannot sustain its profitability. This long-term mindset sits at the heart of our investment philosophy.
At Allan Gray, we invest on behalf of our clients. They are the beneficial owners and, as the custodian of their capital, we represent their interests as shareholders at all times, including when we engage with the management and boards of companies. We are proud of our long history of standing up for shareholder rights when the situation demands it, to grow and protect value. We discussed this in detail in an article titled “Navigating valuations and values since 1973” in our Q3 2023 Quarterly Commentary.
A key focus in 2023 was the proposed Companies Amendment Bill. This has been a multi-year consultation process, during which we have highlighted both our support for aspects of the Bill, as well as concerns about the potential unintended consequences for shareholders in other areas. In 2023, we submitted our remaining concerns and presented them to the Portfolio Committee on Trade, Industry and Competition. We were one of only three asset managers to do so in South Africa, demonstrating the extent of our efforts to advocate for the protection of shareholder rights. Governance analyst Nicole Hamman details our related research and engagements in a case study.
Case studies bring the theory to life
The late Charlie Munger of Berkshire Hathaway famously said, “Show me the incentive, and I’ll show you the outcome.” I have seen very little in my career to contradict this statement. We spend a significant amount of time analysing the governance and incentive structures of the companies held in our clients’ portfolios and giving input where appropriate. I believe this has added value to the portfolios over time. In Annexure 2 of our 2023 Stewardship Report, we provide a case study of our engagement on remuneration with Life Healthcare. Our previous stewardship reports offer other examples, including engagements that have spanned several years. We also offer more insight into our proxy voting activity for the year in Annexure 5 of the report.
It is important to bear in mind that environmental, social and governance (ESG) considerations are dynamic. Our Investment team researches company-specific ESG risks and opportunities prior to investing and continues to research and monitor these factors – as well as additional issues that may arise – once our clients have invested. In Annexure 4 of our latest Stewardship Report, we present a case study on Sasol, demonstrating how we weighed up the ESG considerations, as well as how frequently we have engaged on ESG matters over the past seven years, given their materiality to the investment case. Through our Glencore case study, we demonstrate our belief in the value of investing in “ESG improvers” as opposed to “ESG leaders” (the latter of which have become more popular), provided we can see a path for the gap to close.
A glimpse at our processes, thematic research and tools
High-quality research and engagements are supported by strong processes and tools. We continue to build on these each year. For example, in our 2022 Stewardship Report, we noted that we planned to improve our record keeping on state capture in 2023. Subsequently, we added nearly 150 records to our internal database of persons of interest based on the Zondo Commission. If they come up for election to a listed company’s board of directors, our system will flag their details for the covering analyst to ensure an additional level of scrutiny. We also engaged with the Independent Regulatory Board for Auditors (IRBA) and updated our internal database to incorporate all IRBA-sanctioned auditors over the past few years. This improves our oversight on voting recommendations to clients on auditor appointments.
Our previous report also noted that the macroeconomic backdrop in South Africa had deteriorated, which is of relevance to the valuation of and the extent to which we expose our clients to “SA Inc” companies. Thematic ESG research supports the Investment team in quantifying such risks. For example, we wrote a report and held an internal meeting on Eskom’s operational and governance outlook and have performed our own modelling of loadshedding scenarios. We summarise our views on the loadshedding outlook in our Q4 2023 Quarterly Commentary piece titled “Eskom: Are brighter days ahead?”. We also continue to research and engage with listed companies on water risks, particularly those affecting Gauteng – the economic centre of our country.
Over time, our ESG analysts have supported the Investment team with thematic research into electric vehicles, nuclear energy, mining safety benchmarking, political donations by listed companies, and many more topics that provide useful context for and may even influence our investment decisions. We continue to believe that this type of research will add more value to our clients over the long term than a tick-box or scorecard approach to ESG evaluation.
Communicating our efforts and research
Finally, we recognise the importance of sharing our perspectives with clients and interested third parties. In 2022/2023, we wrote and published several new ESG documents on our website. These are:
- ESG FAQs, which include a series of climate FAQs
- A report on climate initiatives in the financial sector, highlighting if or where we align with each initiative
- A carbon accounting primer, highlighting the pros and cons of methodologies to set carbon targets at an investment portfolio level
- An annual carbon accounting report, separate from the annual stewardship report, for those looking for more technical climate-related reporting
We strive to make a difference
Responsible investing and being a responsible corporate citizen can mean different things to different people, but investment management is a business inherently built on trust. An asset manager needs to act and be seen to act with the highest integrity and standard of ethics. We are committed to this, not only in how we engage with the companies we hold on our clients’ behalf, but also in how we conduct ourselves as a business.
I believe Allan Gray can continue to make a positive contribution to our industry, the economy and broader society. For many of our employees, myself included, the knowledge that our founder, the late Allan WB Gray, generously ensured that a significant portion of our profits is used for philanthropic purposes makes our jobs feel more purposeful.