Looking at some of the corporate behaviour across the South African listed market, one could be forgiven for presuming that South African asset owners are asleep at the wheel. Many of the country’s listed companies could stand to improve performance with respect to a host of environmental and social metrics. Three of the country’s largest listed companies are even the subject of international collaborative investor engagements on ESG. This includes Sasol, one of the southern hemisphere’s largest emitters, alongside two of the country’s largest mining companies, Gold Fields and AngloGold Ashanti – the former in its fifth year of engagement on climate strategy and latter is being engaged on the potential for human rights violations across its value chains.

To have large, listed entities namechecked by international investor groups is not a good thing and does not bode well for the long-term sustainability – or investment attractiveness – of the market. This in the context of a market that is home to some of the continent’s largest pension funds, banks and insurers – many of which even have publicly stated developmental mandates (and, by the way, none of whom have opted to take part in the aforementioned collaborative engagements). Given the level of influence that they should hold, and the absence of evidence that they are taking advantage of opportunities that exist to exercise this influence, it would seem that asset owners in the country are at best behind the curve, and at worst negligent.

But there’s more to it. It’s not so much that asset owners don’t want to exercise their influence but more that asset owner influence is being systematically diluted throughout the value chain –  primarily through over-delegation.

Asset owners are relying on asset consultants and asset managers for everything from drafting investment and impact policies to setting targets and, of course, engaging with investee companies on the funds’ behalf. There is nothing wrong with delegation. Finding organisations that can support in effectively exercising influence is critical – especially in cases where internal capacity is limited. But a serious problem arises when delegation of responsibility mutates into near-complete abdication thereof, which in this case is rendering asset owners – despite occupying the top of the investment food chain – largely disempowered.

Having an asset consultant advise on how best to achieve financial and impact objectives is an example of delegation of responsibility, which – if done effectively – can be empowering. Having an asset consultant either dictate, limit or simply ignore these objectives amounts to an abdication of responsibility, which is disempowering. Having asset managers engage portfolio companies on the fund’s behalf, keeping stated objectives in mind, allows for empowerment through delegation. Having asset managers do this with zero accountability, enabling them to advise their clients as to what is “good enough” has the effect of disempowering the asset owner. In an industry where responsibility is power, asset owners are giving theirs away, and as it systematically leaches out of the system, the potential for negative impact on their beneficiaries grows. This disempowerment leaves trustees in a tricky position, with limited say in how decisions are made but carrying all of the legal responsibilities when things go wrong.

This situation exists as the result of numerous factors. To start, the policy and regulatory environment is not ideally set up to encourage innovation by asset owners when it comes to non-financial returns, leaving them feeling bound to focus solely on financial returns – even when they have stated impact mandates.

Further, asset owners are often stretched in terms of technical skills and so it is prudent to look for guidance from experts to whom the asset owner leadership can defer. This can create an unfortunate power dynamic where asset owners become beholden to their consultants and stop trusting themselves to make the right decisions.

Asset consultants are in their own predicament: they work on narrow margins and so it makes sense for them to offer cookie-cutter advice that they can replicate at scale (especially in the context of a limited investable universe where major strategic differences across clients will be rare).

Finally, the asset managers relying on consultants are hamstrung by institutionalised myopic thinking, which is the result of internal incentive schemes. The system is inadvertently working to strip asset owners of decision-making power.

Even if an asset owner does have substantive ambitions for improving company behaviour with the intention of achieving systemic change (ie, an impact objective) which is aligned to the asset owner’s fiduciary duty to its members, business as usual will mean that these expectations are considered separate from and subordinate to financial return. After all, the requirement is still for managers to report on financial performance in relation to a benchmark that has no consideration of corporate behaviour, and to do so quarterly, which is fundamentally at odds with the long-term nature of systemic socioeconomic and environmental challenges. This creates a perverse incentive: no one ever lost a mandate for not getting a company to behave better, but they sure have lost mandates for financial underperformance. The result is that even the most ambitious objectives at the asset owner level are so insipid by the time they make it to underlying investee companies, that there is no real expectation for companies to change. And so – in the absence of disruptive policy and regulation – nothing changes. In this situation, all of the influence that asset owners hold is lost across the value chain before it has a chance to deliver anything meaningful.