The UNPRI was one of the first organisations to promote the concept of ESG integration during 2006 with the launch of PRI, and set the scene for South African investors to consider these principles, one of the six principles being.

 "We will incorporate ESG issues into investment analysis and decision making processes." Currently there are only two asset owners, Government Employee Pension Fund and Eskom Pension Fund, who are signatories to the PRI. Sadly ESG integration is being driven largely by service providers within the industry, with twenty five investment managers and seven professional partners which include asset consultants, who are signatories to the PRI.

During 2011 we saw the release of the revised Regulation 28 which advocates that consideration of any factor, including that of an ESG nature, should be considered as part of the overall risk mitigation process.

The new Regulation 28 is enabling, providing retirement funds with enough flexibility to consider investments that will earn a suitable risk adjusted return while at the same time giving consideration to any factor that will affect the sustainability of the fund going forward.

More recently, during July 2011, we saw the launch of the Code for Responsible Investing in South Africa (CRISA). The Code is voluntary and provides a framework for institutional investors to consider the latest best practice in governance which fiduciaries should apply when executing their investment decisions. The principles also advocate consideration of ESG factors ie "An institutional investor should incorporate sustainability considerations, including ESG, into its investment analysis and investment activities as part of the delivery of superior riskadjusted returns to the ultimate beneficiaries."

Beyond these voluntary or regulatory codes is simple economics as investors realise that there are various types of risks, or potential benefits, that come from responsible practices. Contrast, say, the environmental and shareholder damage wrought by the BP Gulf of Mexico disaster with, for example, a wind-power company.

As money runs from higher risk and less sustainable businesses to lower risk and more sustainable businesses, it's likely that the cost of capital will shift as well.

Thus, ESG screening is becoming a mainstream activity.

Despite all the guidance currently available through the PRI, Reg. 28 and CRISA for retirement funds, there remain considerable challenges facing the industry when considering the practicalities of integrating ESG, such as:

• Investment processes should be adapted to include ESG screening, assessment of transactions for suitability of mandates, evaluating and pricing for ESG risks.
• Engaging investee companies on ESG matters is an aspiration to ensure that companies understand that their corporate behaviour affects the terms of pricing, buy and sell decisions and the investors view on risks associated with the investment. Engagement is a long term objective with no quick results overnight. The purpose of engaging investee companies on these issues is to bring about sustainable change within these companies.
• Ongoing measuring and monitoring of investee companies to ensure that they continue to make progress.
• Reporting to stakeholders on ESG issues.

 In order for ESG to progress to the next level the industry requires collaboration from all industry stakeholders to effectively ensure that it will be included in mainstream investing in South Africa.

Therefore, all stakeholders should play their part: asset owners should be writing their funds' view on RI and ESG into their investment objectives, mandates and contracts; consultants should be assessing managers' capabilities in this specialist area (to date there seem to be very few consultants who understand the landscape of responsible investments and ESG integration and are able to provide sufficient guidance to asset owners on this subject); and lastly, investment managers should be providing effective ESG solutions to clients by developing skills within their investment teams and deploying sufficient resources into this growing area. ESG screening is an additional process to normal financial analysis, and the specialised engagement, reporting and analysis is costly for all concerned.

We've come a long way, the spirit is willing to adopt a responsible investment approach, but talk is cheap and without sufficient demand from asset owners we will not see this area flourishing, instead we will stagnate and South African investors might be left behind.