South Africa-Free Investing

By Ichiro Suzuki


In the 1980s, when the international community was enraged at the inhumane minority regime that ruled the Republic of South Africa, the investment community in the U.S. was fiercely vocal against apartheid. Pension funds that were beginning to show their muscles in the market moved to boycott not only investing in South African companies but also in non-South African companies with reasonable business exposures in the country. Driven by such an activist fever, consultants helped create lists of companies that cannot be invested for highly ‘socially responsible’ (in today’s popular jargon) pension funds, perhaps filling egos of those who were at the helm of those mega funds. Then, for performance measurement purposes, the industry came up with indices that exclude the banned companies. They were called South Africa-free indices, compiled by Morgan Stanley Capital International (MSCI) or the Financial Times.


There appeared to have been no science involved in compilation of the banned list. It looked highly arbitrary, though the remnants of the list cannot be found today. Major casualties of the banned list, not surprisingly, were multi-national corporations (MNCs) that boasted of extensive business networks around the world. Those in the consumer sector faced an especially high chance of hitting the list, and that meant losing investors. It is far from certain how a company A was on the list while Company B was not, with both of them being in the same industry without a manufacturing base in South Africa. Toyota was on the list but Nissan and Honda were not. No one knows what was the difference between Toyota and others. The car industry was a big casualty of South Africa-free investing. Cars were driven in South Africa, of course, for business or personal purposes. In the absence of local car makers, South Africa had to import everything that was driven. While manufactures of cars suffered, auto parts makers usually escaped the list. Again, this was not science, but was a product of political fervor of do-gooders.


After all, South Africa-free investing was dropped by the mid-1990s when the apartheid regime was brought to an end, with the rise of Nelson Mandela to power. It is not certain what benefit it brought to the beneficiaries of pension funds, like so many other politically motivated and high-minded moves in investments. At least, it made a statement to the world, but did not contribute to beneficiaries in the form of enhanced returns.


A generation after the end of South Africa-free investing, a new fad in the investment community is ESG (environment, society and governance), with particular focuses on climate change, diversity, etc. The investment community scrutinizes corporations’ effort to reduce carbon foot prints or election of female board members. These are obviously right goals to pursue, and probably will have more meaningful results over the long-term than South Africa-free investing.


That said, where are human rights that were the heart of South Africa-free investing back then? Doesn’t the investment community care about human rights these days? ESG is all about corporations’ specific businesses and conducts and does not seem to cover the issues like human rights very well. Or does climate change occupy too much of their time? At the very least, climate change affects everyone on this earth while the plight of those oppressed people in developing countries has little to do with pension fund beneficiaries’ daily life. Or perhaps, the number of black majority people who suffered under South Africa’s apartheid was far greater than the oppressed Uighur Muslims in China’s autonomous Xinjiang district. Regardless of how it can be compared to the apartheid South Africa, 45% of 25 million population in the region is Uighur Muslims. The number is very large and these people have been painfully persecuted. 


Perhaps the real reason behind quietness is the cost of ignoring China and standing up against the Chinese Communist Party. Should pension funds come up with indices that single out companies doing business with and in China, in the same tune with South Africa-free, that would make a number of great companies unqualified for investments. Car makers would make the list of companies with heavy exposure to China, and they won’t be missed that much. But beneficiaries would not afford to exclude Apple, Microsoft, Tesla, J.P. Morgan, Goldman Sachs, etc. On the other hand, Amazon, Alphabet (Google), Facebook and Twitter would be still investible, since they are banned in China. Since the mid-1970s South Africa was placed under economic sanctions by the developed world and was suspended from a variety of international organizations that included the United Nations and the International Olympic Committee. Despite its place on the African continent, South Africa was and still is a relatively small economy compared to those in North America and Europe. The same kind of uproar cannot be easily expressed against the world’s second largest economy that are capable of hitting back in a variety of ways. Not even Germany, beacon of human rights, is vocal against China though the country is moving to make German companies harder to be acquired by state-sponsored entities. Recently Donald Trump is on a collision course with Xi Jinping on the issue of Uighur Muslims though he has scant interest in human rights. This is the real world. It takes lots of guts and economic might to stand up against the world’s second largest economy run by an authoritarian regime. For the president of California Employees Retirement System (CalPERS), it is a lot cozier to be pushing corporate executives on climate change than preaching human rights to the Chinese Communist Party.


About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.

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