CURRENTS: Editorials: Edition: March / May 2020

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Tough to follow

US lead in ESG disclosures

Compared to the gentle guidance of the Financial Sector Conduct Authority for retirement funds to consider environmental, social and governance (ESG) factors in making their investments decisions, the approach of the Securities & Exchange Commission has adopted an entirely different and ruthless approach that regulates the ESG disclosures of public companies. Similarly applied in SA, retirement funds would know a whole lot better what they need to consider.

Public companies under SEC jurisdiction must disclose, for instance:

Compensation terms and conditions for executive management and board members;

Ratio of the chief executive’s compensation to the median of the total cost compensation of all other employees.

There are also regulations that require disclosures in company-specific ESG matters. Amongst these are for miners on mine safety, payments made to governments for extraction of natural resources, and even on the source of certain minerals where the Democratic Republic of Congo gets special mention under the supply-chain rule intended to prevent mining from funding domestic conflicts. Moreover, all ESG disclosures are subject to antifraud rules. These include lying directly or by omission. A fact is “material” if there is a “substantial likelihood” that it would have been viewed by “the reasonable investor as having significantly altered the ‘total mix’ of information available”. Companies can still publish sustainability reports that burnish their image as responsible corporate citizens, like in SA. But these reports would nonetheless be subject to the anti-securities fraud rules, unlike in SA. The SEC has raised the bar for ESG disclosures. A prod from SA investors could get the FSCA and JSE to begin thinking as kindred spirits.

Strange exception

According to its latest annual report, one of the FSCA values is transparency. But this value apparently doesn’t extend to the R70m claim brought against it by the Pepkor retirement fund. The claim was for losses allegedly suffered by the fund as a result of the regulator’s negligence in the Trilinear debacle, due for trial in the high court last November (TT Oct ’19-Jan ’20). The outcome? The court case has been withdrawn and the Pepkor fund is bound not to disclose whether a settlement has been reached.

ARC as anchor

In the global portfolio of multinational employeebenefits consulting firm Mercer, the 34,4% it held in Alexander Forbes would hardly have amounted to a rounding number. Wanting to offload, as part of its routine investment review, it found a willing buyer in African Rainbow Capital.

Certainly preferable to piecemeal disposals through the market, in a R1bn “shareholder reorganisation” ARC will replace Mercer as the largest

single shareholder in Forbes. ARC will hold 33,9%

and Mercer 4,5%, Forbes and Mercer agreeing that

their “strategic alliance” remains unaffected.

A strong motivation of ARC is broadening access

to financial services. Substantial investments are

TymeBank in banking, Rand Mutual Assurance and

African Rainbow Life in insurance, and Afrocentric in healthcare. “Regulatory reform, on the management of pension funds, will deliver positive outcomes for SA and Forbes is well placed to benefit from them,” believes ARC co-chief executive Johan van Zyl. “In particular, new regulation introduces lower fees as pension-fund members are able to save inside their pension funds and thus have significant savings over the period of their working lives.” At present, he adds, ARC has no intention to hold more than 50%. But the transaction does give Forbes a new anchor shareholder, and a black-empowerment one at that. He also notes that ARC’s investment strategy is to acquire “strategic shareholdings”, not to operate businesses. It leaves this to capable leadership and management teams. Such a leader, as Van Zyl well knows from their Sanlam years, is Forbes chief executive Dawie de Villiers. He’s happy that ARC “fully supports our advice-led strategy”. As the empowerment shareholder in Sanlam also, ARC isn’t short of strategies to support.