The Nigerian pension industry, having been nurtured from its foundation in 2004 to its present standing, should be focused on consolidating towards a promising and more predictable future. The choice of sustainable investment and excellence in Corporate Governance practices as the vehicles of that consolidation is by no means fortuitous. Sustainable investments have become steady vehicles for channeling long-term patient capital, such as pension funds, to projects that would develop nations and guarantee healthy living in the environment. While the inefficiencies of the pre-pension reform period could be traced to a large extent on poor governance, albeit mostly in a public sector, the adoption of good Corporate Governance as a hallmark of its existence has assured the stability of the Nigerian pension industry.
It is instructive to note that the key objectives of the Contributory Pension Scheme (CPS), which is the key outcome of the pension reform, are aligned with goal number one (1) of the seventeen (17) Sustainable Development Goals (SDGs). The CPS is geared towards the reduction of poverty and improvement of quality of life at old age by ensuring that every person who has worked in either the public or private sector receives his/her retirement benefits as and when due and assisting employees to save towards having a sustainable old age income. This conference, therefore, provides an opportunity to stress on these objectives and emphasize the roles and responsibilities of Directors of Pension operators in achieving them.
Global Perspectives on the Concept of Sustainable Investments
The global perspective of the concept of sustainable investing is becoming more important by the day as an effective means of achieving desired positive impact on the global environment. The sustainable investment approach considers Environmental, Social and Governance (ESG) factors as well as the long-term health and stability of the economy as a whole. It recognizes that the generation of long-term sustainable returns is dependent on stable, well-functioning and well-governed social, environmental and economic systems. In addition, it allows for the inherent social, environmental and economic risks in every investment to be correctly determined and priced.
Recent findings from a survey, Schroders Global Investor Study 2017, on twenty-two thousand (22,000) investors from thirty (30) countries around the world indicates that sustainable investing is less widely understood despite the fact that people exhibit sustainable behaviours in everyday life like, reducing or recycle household waste and buying organic food, for example. The study also discovered changing global perceptions of sustainable investment with 80% of investors stating that sustainable investing is more important to them now than it was 5 years ago, while 65% have increased their sustainable investments over the same period. The global study also indicated that people are keen to improve their knowledge about investments that make a positive impact.
The global value of sustainable investment assets according to the “Global Sustainable Investment Review 2016” stood at over $22.89 trillion. This represented an increase of over 25 percent since 2014. In relative terms, responsible investment now stands at 26 percent of all professionally managed assets globally. This is a pointer that clearly, sustainable investing constitutes a major force across global financial markets. Some African countries are steadily making progress in the sustainable investments sphere, especially South Africa, Nigeria and Kenya.
In terms of market characteristics, the report revealed that although the institutional investments account for the large portion of the socially responsible investments compared to the retail investments, the relative proportion of the retail investments had also grown. Evidently, Canada, Europe and the United States had doubled their investments from 13 percent in 2014 to 26 percent in 2016. Similarly, the global asset allocation is flipping more towards bonds, largely as a reflection of the rise in green bonds over time. The Canada and Europe experience shows that most of the assets are in bonds (64 percent) and equities (33 Percent), which was a shift from 50 percent of equities and 40 percent of bonds in 2014.
The Nigerian Experience
In study conducted by the Global Impact Investing Network (GIIN) in December 2015, Nigeria leads the way in impact investing in West Africa. The study found out that there were 28 impact investors active in the country with total investments valued at about $1.9 billion in deployed capital across 181 direct investments since 2005. In addition, additional $2 billion had been deployed in indirect investments through funds and intermediaries. However, impact investing is still playing small in Nigeria compared to other smaller African countries such as Ethiopia. This may not be unconnected with the fact that only a fraction of the investors are local, and the country’s ease of doing business is still very low, thus, attracting foreign investors needs additional reforms in our system.
Despite these shortcomings, efforts had been expended in institutionalizing ESG Principles in Nigeria under the auspices of the Financial Services Regulation Coordinating Committee (FSRCC). In this context, the Nigeria Stock Exchange is leading the pack as it has already developed and issued an ESG Framework, which had been adopted by the Capital Market players. The Central Bank of Nigeria has also developed a Framework for banks and an internal Framework as a corporate. Similarly, the Securities and Exchange Commission has completed work on a draft ESG Framework that is yet to be approved.
The Nigerian Pension Fund Investment in Sustainable Instruments
The Nigerian pension industry is yet to develop a policy document on ESG Principles, which would have been mainstreamed in the investment Regulations to guide operators in deploying the pension assets in environmentally friendly assets. This notwithstanding, the industry appears to have embraced the global trend on sustainable investments through the window of FGN securities allowed in the current Regulations. The issuance by the FGN of its 1st N10.69 billion 5-Year Sovereign Green Bond in December 2017 to fund some environmentally friendly renewable energy projects, was a significant milestone. The investments by the pension industry in the Green Bond was in excess of N7.19 billion or 70%. This volume points to the pension industry’s acceptance of sustainable investments as it forays into the future. However, there remains a lot to be done in the integration of ESG factors into investment decisions of Nigerian pension funds, particularly at policy level and capacity building.
The Drivers and Barriers to Sustainable Investment
Several factors are responsible for driving investment views toward the sustainability of the future. These include the growing global concern over scarcity of natural resources, climate change, population growth, demographic shifts and extreme poverty. Most investors already recognize the materiality of these factors to long-term financing, hence, are introducing relevant ESG factors into investment decision making. There are also international agreements, such as, the United Nations Framework Convention on Climate Change (UNFCCC), Paris Agreement (supported by President Obama’s National Climate Action Plan on mitigating carbon pollution) and other related regulations form the basis.
Increasing products availability towards financing green products, climate-aligned bonds are attracting strong demand from investors. This has also come with improved sustainable investment opportunities and information to evaluate them. Other drivers include the growing ESG data availability and analytics to inform decision making; new sustainability-themed market indices; improving disclosure standards; and greater peer networks.
Notwithstanding the positive developments, there are some barriers to sustainable investment. One of such barriers is often the struggle to achieve a paradigm shift from traditional investments by disrupting the entrenched status quo; short-term biases; misconceptions and absence of accountability. Other barriers include capacity issues; the challenge of translating goals into investment portfolio; inadequate ESG data, disclosure standards; performance metrics; limited quality opportunities that integrate ESG criteria and structural disincentives.
Corporate Governance in the Nigerian Pension Industry
The significance of corporate governance is perhaps the most pertinent Environmental, Social, Governance (ESG) element in sustainability cannot be overemphasized. This is due to the fact that a strong corporate governance system of principles, policies and procedures is necessary in order to resolve potential conflicts and risks inherent in a company, thus, increasing sustainability within organizations. Realizing the novelty of the Contributory Pension Scheme, against the backdrop of pre-pension reform experiences, the Nigerian Pension Industry adopted a culture that strives to attain excellence in corporate governance. Indeed, the fiduciary duties of pension operators in managing and securing pension fund assets could not have been achieved with a weak governance structure.
It was, therefore, appropriate that the National Pension Commission instituted some measures that facilitated sound corporate governance including, stringent licensing requirements for pension operators, strict process of screening Board Directors as well as the fit and proper persons test for top management to determine suitability on critical roles. The issuance of the Code of Corporate Governance and the Code of Ethics and Business Practices for Licensed Pension Operators in 2008 further underscores this commitment. The adherence of the industry to these measures has resulted in the near absence of corporate governance deficits in the industry.
The resultant effect has been largely positive when compared with other institutions in the financial sector. It is instructive that the financial crisis of 2008 – 2009, which resulted in a regulatory intervention covering eight banks, had several corporate governance imprints. On the other hand, since inception of the pension industry, it recorded only one regulatory intervention, in 2011, occasioned largely by corporate governance breaches. It is noteworthy that this isolated incidence had no negative impact on the safety of pension fund assets under management. This was assured by the sound structures, inherent in the Scheme, which segregated pension fund assets from that of pension operators in addition to segregation of administration from custody of the assets.
It is also noteworthy that the Corporate Governance in the pension industry transcends pension operators and extends to entities in which pension funds are invested. The Investment Regulations have stringent prescriptions for entities that are eligible for pension fund investments. For instance, companies that qualify for equity investments by pension funds must maintain high standards of transparency and governance. Pension Fund Managers are, therefore, required to adequately take cognizance of sound corporate governance practices in their decisions to invest in entities or specialist investment funds. The consistent growth in pension fund assets from N1.1 trillion in 2008 when the Code of Corporate Governance for Licensed Operators was issued to N8.23 trillion as at June 2018, indicate the ever rising stake of the pension industry in the governance of the financial markets.
Accordingly, therefore, efforts must be channeled towards establishing a more structured process of ensuring that the pension industry collectively protects its interest in some major companies in which it invests through securing adequate board representations and ensuring they maintain excellent standards of corporate governance. It is also worthy of consideration that Pension Fund Custodians ensure the exercise of voting rights in a cohesive manner to enable the attainment of sustainable positive returns on investment. The imperative of doing this is evident considering the value of N710 billion in equity investments of blue chip companies quoted on the Nigerian Stock Exchange as at June, 2018.
The pursuit of excellence in Corporate Governance by the Pension Industry underscores the imperative of seeking continuous improvement in all aspects of regulation and management. Consequently, the Pension Industry should consider the following measures:
i) Adequacy of Board Size: Pension Fund Operators should ensure that their Boards comprise of adequate number of Directors with diverse qualifications and experiences. The inadequacy of Directors often results in recycling of members on various Board Sub-Committees, thus, limiting the quality of deliberations. It was understood at the formative stages that operators were constrained by cost due to low volume of business. However, the consistent accumulation of pension assets has reversed that trend with at least 12 out of the 21 Pension Fund Administrators each currently managing pension assets in excess of N100 billion.
ii) Independent Directors: The appointment of Independent Directors enriches the company’s policy decision making process. Pension Fund Operators should ensure their appointment as provided in the Code of Corporate Governance for Licensed Pension Fund Operators. This also contributes to the much needed diversity of the Boards.
iii) Board Evaluation: Attaining a culture of excellent corporate governance also entails instituting a reliable process of Board evaluation, which could be internal or external. Whatever option selected, it is important to highlight areas of deficiencies with a view to remedying same. The evaluation report should also be made available to the shareholders at the Annual General Meeting as a feedback on the performance of the Directors.
iiii) Disclosure: Ensure greater disclosure to the shareholders, regulatory body and the funds members. The information should contain both financial and non-financial item to engender greater confidence.
v) Implement comprehensive industry policy on information/data protection.
vi) Implement targeted capacity building for stakeholders in the industry.
vii) Sustain stakeholders’ engagement, documentations of feedbacks and implementation of recommendations.
Corporate Governance and Sustainable Investment
Traditionally, investors were only interested in financial ratings, however, many investors currently consider a combination of strong returns and ESG ratings. Thus, interest has tremendously shifted to assets of companies that are socially and environmentally responsible. The development of ESG ratings have given investors an objective tool to rate corporations on their ESG biases while taking investment decisions. Often, focus is given more on the business processes, culture and practices, rather than a company’s products. In general, a combination of all these considerations provides a win for the companies, the investor and the society.
In the report of a study by the Calvert–Serafeim Series issued in June 2016, it was found out that there is strong correlation between a company’s financials and its adherence to ESG Principles. The study highlighted that:
• ESG issues impact a company’s financials in terms of revenues, costs, and the cost of capital.
• Because ESG data is slow to be incorporated into stock prices, investors who accurately understand ESG implications typically have time to take advantage of opportunities and generate achieving positive stock returns that are greater than the market benchmark.
• A study from the Harvard Business School indicates that firms making investment in material ESG issues outperformed peers in terms of profit margin growth.
• Investments based on immaterial ESG issues are not, on average, value-relevant.
There no doubt that there is a strong connection between corporate governance and social responsibility and the two compliment each other. Investors would appear to do well with regard to an ethical approach and a goal that reflects a balance of the interests of the key stakeholders as well as a close look at accountability and transparency. However, they need to achieve their objectives of meeting financial targets while prioritising their social goals.
The Draft Nigerian Code of Corporate Governance
The Financial Reporting Council of Nigeria (FRC) is empowered by the FRC Act, 2011, to ensure good corporate governance practices in the public and private sectors in Nigeria. Accordingly, the FRC constituted a Committee, which I was privileged to Chair, to formulate and draft a Code of Corporate Governance for Nigeria. The Committee comprised representatives from various regulatory agencies including the National Pension Commission. The Nigerian Code of Corporate Governance 2018, which is at its final approval stages by the FRC, seeks to institutionalize the highest standards of corporate governance practices in Nigerian companies, particularly those not already covered by sectoral codes of corporate governance. It is expected that by entrenching high corporate governance standards, the Code will rebuild public trust and confidence in the Nigerian economy, thus facilitating trade and investment and contributing to the ease of doing business.
Since the Code is intended to apply to companies in diverse sectors of the economy, the draft Code adopted a principles-based approach, rather than setting rigid rules, that specifies minimum standards and requires companies to adhere to the spirit rather than the letter of the Code. The implementation of the Code is based on the ‘Apply and Explain’ principle, which assumes application of all principles, and requires entities to explain how the principles are applied in reporting their financial records.
The ‘Apply and Explain’ philosophy requires companies to take responsibility for demonstrating how the specific activities they have undertaken, best achieved the intended outcomes of the corporate governance specifications in the Principles. This will assist in preventing a ‘box ticking’ exercise while ensuring companies deliberately consider how they have achieved the intended outcomes or otherwise. Although the Code recommends practices to enable companies apply the principles, it recognizes that these practices can be tailored to meet individual needs and are thus, scalable by enabling users choose how best to apply the recommended practices to suit the type, size and growth phase of each company while still achieving the outcomes envisaged by the Principles.
The ‘Apply Principles’ imply that all principles specified in the Code are ideals that Companies should strive to attain in their governance practices. They should be regarded as basic and fundamental to good governance, and application of the principles is, therefore, assumed. On the other hand, ‘Explain Practices’ require Companies to provide explanations for the recommended practices that have been implemented or how these or other chosen practices implemented have delivered the expected outcomes of the Principles.
The Nigerian Code of Corporate Governance is applicable to all public companies; private companies that are holding companies of public companies and other regulated entities; concessioned or privatized companies; and regulated private companies as defined in the Code. The adoption of the Code will be monitored by the FRC through the Nigerian Stock Exchange, sectoral regulators and other trade associations that are empowered to impose appropriate sanctions based on any determined exceptions.
In addition, the FRC may conduct reviews on the implementation of the Code where deviations from the Code recur. Other monitoring mechanisms adopted by the FRC shall be based on its review of the level of adoption of the Code. Furthermore, sectoral regulators may issue Guidelines derived from the Code that set out corporate governance requirements for their respective sectors and compliance with said Guidelines will be enforced by the respective sectoral regulator with appropriate sanctions as may be prescribed therein. It should be noted that where there is a divergence between the provisions of the Code and any sectoral corporate governance code, the stricter provision shall apply. I therefore, urge the Pension industry to be supportive of the Nigerian Code of Corporate Governance when it is eventually issued.
In conclusion, Pension Operators must operate with high Corporate Governance standards due to the pension industry’s stringent rules and regulations that stem from the sacrosanct nature of the funds. Meaning that the funds must be available as and when due for payment of retirement benefits. It is our hope that this conference will provide a springboard for achieving the desired Pension Industry for Nigeria through sustainable investment and excellence in corporate governance.
Director General of National Pension Commission (PenCom).