The majority of southern African retirement funds will soon be well equipped to integrate environmental, social and corporate governance (ESG) factors into their investment decisions and ownership activities. An industry-led initiative, Sustainable Returns for Pensions and Society, responds to new regulations and aligns with efforts by the Johannesburg Stock Exchange (JSE).
In South Africa the pension fund industry is significant in terms of scale as well as the impact it has on the livelihoods of working South Africans. Long term investors, serving the interests of these ultimate beneficiaries, need to ensure they can deliver sustainable returns. This means anticipating the impacts of future trends such as climate change, water scarcity, food security and energy challenges. It also requires strong and sustainable local businesses.
The new Regulation 28 of the Pension Funds Act in South Africa contains prudential guidelines for retirement fund investments. It places in the mainstream the importance of managing risks and opportunities related to the ESG performance of investments across all asset classes. Retirement funds’ investment policy statements must now indicate how they intend to apply and deal with ESG criteria and disclosures.
South Africa is among the first countries worldwide to issue integrated reporting requirements and the JSE is playing a multifaceted role, aiming to exert influence and provide thought leadership to achieve corporate behaviour change.
The new regulation is reinforced by a number of national and international policy initiatives, including the South African National Growth Path Plan, the King Code of Governance Principles for South Africa (King III), the United Nations backed Principles for Responsible Investment (PRI) and a new Code for Responsible Investing in South Africa (CRISA).
CRISA serves as a framework for institutional investors to incorporate ESG in their policies and investment decisions, including engagement and proxy voting. Wanjiru Kirima, chairperson of the Sustainable Returns Steering Committee, says the new Regulation 28 and CRISA, both introduced last year, have expanded the fiduciary duty of retirement fund trustees significantly. This, she adds, requires a whole new set of competencies to help trustees properly implement ESG considerations.
To help trustees and principal officers achieve these competencies, the southern African retirement industry launched the Sustainable Returns Project in October 2011, which Kirima describes as a collaborative effort to implement a world-class system by learning from each other and evolving together.
An industry-led approach to responsible investing
Supported by funding from the Norwegian Government, the Sustainable Returns project was convened by the Principal Officers Association of South Africa (POA), the International Finance Corporation (IFC), the Government Employees Pension Fund of South Africa (GEPF), and the Association for Savings and Investment South Africa (ASISA).
It is led by a Steering Committee comprising the Financial Services Board (FSB), National Treasury of South Africa, Banking Association of South Africa (BASA), Botswana Public Officers Pension Fund, Congress of South African Trade Unions (COSATU), Debswana Pension Fund, Federation of Unions of South Africa (FEDUSA), Financial Planning Institute (FPI), Government Institutions Pension Fund Namibia (GIPF), Institute of Directors (IoD), Institute of Retirement funds (IRF), National Council of Trade Unions (NACTU), Pension Lawyers Association, South African Institute of Chartered Accountants (SAICA), Southern Africa Venture Capital Association (SAVCA), Telkom Pension Fund, and the Principles for Responsible Investment (PRI).
In May this year, the Sustainable Returns Project held a breakfast seminar at the JSE, supported by the FSB and National Treasury for the Top 100 Pension Funds. It was a well-attended seminar with a clear message from Olano Makhubela, Chief Director of Financial Investments and Savings, who stated:
“The National Treasury welcomes this much needed initiative and its inclusiveness, and greatly appreciates the involvement of all the stakeholders in this project. This welcome industry-led initiative follows the promulgation of the new Regulation 28 last year and seeks to give practical effect to one of the key principles in the Regulation, namely the need for pension funds trustees to take into consideration the role of the Environment, Society and Governance when they consider their investments.”