he majority of Southern African retirement funds will soon be well equipped to integrate environmental, social and corporate governance (ESG) sustainability factors into their investment decisions and ownership activities within the next two years.
The training programmes and practical tools needed to help principal officers and trustees of retirement funds comply with new requirements of the revised Regulation 28 of the Pension Funds Act and the Code for Responsible Investing in South Africa (CRISA) are currently being developed by the Sustainable Returns for Pensions and Society Project.
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 Africa retirement industry launched the Sustainable Returns Project, which Kirima describes as a collaborative effort to implement a world-class system by learning from each other and evolving together.
Initiated by the POA, the project includes a pioneering partnership with IFC (International Finance Corporation), a member of the World Bank Group. The project is supported by the Association for Savings and Investment South Africa (ASISA), the Government Employees Pension Fund (GEPF), National Treasury, the Financial Services Board (FSB), Institute of Retirement Funds (IRF), trade unions and a number of other key stakeholders. The Project Management Committee (POA, IFC, ASISA & GEPF) oversees the daily operations and tracks and monitors the project’s development.
The project highlights for trustees the importance of integrating ESG issues into investment decisions and helps them understand both the risks and opportunities these issues pose over the long term to the value of the investment portfolios entrusted to them. Once trustees appreciate this, the project will provide them with the tools needed to develop investment mandates that guide asset managers in applying responsible and sustainable investment practices. Key ingredients will be the policies funds develop to explain their approach to ESG and the questions asset managers will need to answer in their regular reporting to funds.
This project will ultimately empower institutional money to meet financial commitments to members and future members through a deeper appreciation of the relationship to positive environmental, social and governance performance of investee businesses.
Kirima says only once all retirement funds, as the biggest asset owners, fully appreciate the importance of responsible investing can an initiative like CRISA truly come into effect.
Investment managers are bound by the investment mandates given to them by asset owners like retirement funds. Only once these mandates change to include ESG issues, can investment managers fully begin to implement CRISA.
“Currently we have a situation whereby our big retirement funds like the GEPF and EPPF have put in place systems that enable them to successfully integrate ESG requirements into their investment mandates and to then monitor the implementation and measure the outcomes. But the same is not true for many of the other retirement funds.”
Kirima says rather than wait for each and every retirement fund to reinvent the wheel and to come up with their own systems, the Sustainable Returns project, which has industry wide representation, will draw on local and international best practice to develop a common ESG toolkit for Southern African retirement funds to help with implementation.
“IFC is our technical partner. As the largest multilateral source of loans and equity finance for private enterprises in emerging markets, IFC is also a leader in applying ESG standards to investments. With help from local and international experts, IFC is supporting us to develop world-class tools relevant to Southern Africa. At the same time the large retirement funds represented on our steering committee are sharing with this project their experiences and systems currently being applied by their principal officers and trustees when considering ESG issues. National Treasury and the FSB are guiding this project to ensure the tools and training are achieving the regulatory goals.”
The two-year project consists of four phases, which will cover among other aspects the analysis of current investment practices within the retirement and pension fund industry in Southern Africa as well as the development and introduction of tools, templates and training. There is constant engagement with asset owners, asset consultants, and asset managers through the Top 100 pension funds in South Africa to keep them abreast of developments.
In May this year, the Sustainable Returns Project held a breakfast seminar, 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.”