South Africa is on course to become the second country after the UK to publish a stewardship code. The Code for Responsible Investing by Institutional Investors in South Africa (CRISA) works on an apply-or-explain basis and consists of four principles.

• ESG policy - An institutional investor should incorporate ESG considerations into its investment analysis and activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries.

• Responsible ownership - An institutional investor should demonstrate its ownership approach in its investment arrangements and activities.

• Promoting the code through collaboration - Where appropriate, institutional investors should consider a collaborative approach to promote acceptance and implementation of the principles of this code and other codes and standards applicable to institutional shareholders.

• Disclosure - Institutional investors should be transparent about their policies and how they are implemented, and how the code is applied to enable stakeholders to make informed assessments.

The purpose of CRISA is to provide - together with other applicable governance standards - a voluntary framework that can be used to ensure the practice of good governance. The framework relates to the governance role of company boards, of institutional shareholders and the ultimate beneficiaries.

South Africa has had a corporate governance code in place since 1994 when the first King Code of Corporate Governance (King I) - named after South African judge Mervyn King - was published. King I was followed by King II in 2002 and the up-dated King III, issued on 1 September 2009. The King Codes are voluntary apply-or-explain codes aimed at companies.

"When we received the draft of King III, we realised that there was a huge gap in the governance system because it failed to include institutional investors," says David Couldridge, investment analyst at Cape Town-based Element Investment Managers, who serves on the CRISA Committee.

"To fill this gap, we worked with the South African Principles for Responsible Investment Network and engaged with the King Committee. As a result of our engagement, the final version of King III contained specific reference to the fact that it is necessary for institutional investors to be part of the governance system."

Following this, the South African Institute of Directors set up the CRISA committee to develop the code, comprising members from the investment industry, the Government Employees Pension Fund, the Johannesburg Stock Exchange, the Association for Savings and Investment in South Africa (ASISA), the Financial Services Board, the UN PRI, the Securities Regulation Panel and the Principal Officers Association (POA), as well as independents such as Mervyn King and Theo Botha.

"By making the committee as broad-based as possible, we hoped to avoid the regulator having to step in, as happened in the UK," says Couldridge.

The draft code was available for public comment from 1 September to 31 October. Since then, CRISA has been working with the submissions in order to release the final version of the code, which is expected to be published at the beginning of the second quarter 2011.

"A few investors are slightly uncomfortable with the amount of disclosure that our code is calling for," says Couldridge. "However, a number of organisations - such as UK-based consultancy Pirc - have been complimentary about how far the draft code has gone at this point."

The UK Stewardship Code was specifically set up from a governance point of view, but CRISA requires signatories to integrate ESG issues into their investment analysis.
South Africa is largely a commodities-based economy, dependent on coal for energy, suffering from water scarcity and dealing with material social issues such as black economic empowerment, HIV/AIDS and mining safety. "These are material, long-term issues that need to be taken into account by investors in their investment analysis and decision making," says Couldridge.