Regulation 28, which becomes effective on 1 January 2012, requires pension funds to consider ESG issues when making investment decisions. It is an attempt by Government to ensure that funds invest their money responsibly. They should consider the environment and the social good in where they decide to put their money, and they should have regard for governance considerations in deciding which companies are worthy of their trust. But the cynics amongst us have already labelled this as nothing more than a tick-box exercise. Simply put, a fund could say: “Yes, we have considered ESG issues”. The task is completed and it is business as usual.
Pension funds could be forgiven for this kind of behaviour. No doubt trustees and Principal Officers are very busy people and we all know that change demands extra effort and more time. And as pension funds are separate legal entities, they are perfectly entitled to make their own decisions and operate on their own terms, provided they don’t fall foul of the law. But unlike the law, which changes slowly, lagging behind society as it develops and evolves, the world has changed quickly and remarkably and, as we know too well, things will never be the same again. We live in a global village and we’re all aware of what’s going on in each other’s back yards. Far more importantly, however, we know what is happening to the planet, and that only a concerted effort by everyone who inhabits it will avert us from disaster.
Whether we like it or not, this new environment of easy communication and rapid transfer of knowledge has made it clear that the attitude of “business as usual” simply will not do. We are more accountable to each other than ever before and cannot bury our heads in the sand when we are challenged to re-evaluate the way we do things. If we know we can do better, we have no option but to rise to the occasion. And this is where thought leadership becomes extremely important for pension funds.
As connected as we are today in terms of swift communication technology, it is just as easy for disjointed messages to be spread rapidly along the information highway which sow confusion, fear and misunderstanding. Imagine a scenario where Regulation 28 has been replaced by something more draconian that demands compliance with certain strict requirements in a short space of time. Without a coherent, well thought-through, industry-wide strategy, the task of meeting those requirements could turn into a nightmare for an individual pension fund. Without a space where trustees and Principal Officers can meet in a collegial setting to share ideas and plot their own future, the prospect of negotiating the new world of financial regulations seems bleak indeed.
Pension funds do not only have the law to guide them in how they operate. Over and above Regulation 28 there are also guidelines and principles that industry players have developed in order to help guide their behaviour.
The UN PRI
The United Nations Principles for Responsible Investment is just such an example. But South African signatories to the UN PRI are limited mainly to asset managers, rather than asset owners. Furthermore, the number of asset managers who have subscribed is fairly small. This implies that active engagement with ESG issues in the investment industry is lacking. There is therefore a need to raise awareness of the business case for sustainable investment amongst asset managers.
The CRISA Code
Closer to home we have launched the CRISA Code (Code for Responsible Investing in South Africa) . The Code ensures that institutional investors who have subscribed to it will implement policies to guide their day-to-day actions when it comes to responsible investing. A core principle is that institutional investors incorporate ESG considerations into their investment analyses and activities. Institutional investors are the ones who have to ensure that the overall corporate governance system is effective, including responsible management of environmental and social performance.
The fact that so few asset managers have signed the UN PRI indicates a distinct lack of preparedness for taking responsibility for how money is invested. But can one blame the asset managers of the asset owners themselves are not being vociferous enough about responsible investing?
This is why the Principal Officers Association has teamed up with the International Finance Corporation to drive a project which aims to mainstream ESG issues in the retirement industry. This objective will be achieved through the development of a ready-made framework which pension funds will be able to access to help them place ESG issues squarely on their investment agenda. The aim is to empower pension funds and their boards of management to manage their own futures proactively. Rather than being dictated to by regulators and law makers, pension funds and trustees can influence the future of retirement funds if they embrace the concept of thought leadership and play an active role in plotting the way forward for the financial regulations that will affect them.
The IFC-POA partnership has specific objectives. The first of these is to build capacity amongst POA members and other investment practitioners in South Africa so that integration of ESG principles is an achievable reality. The next is to develop learning tools and cast studies to provide for more effective ESG investment practices. The third objective is to monitor the integration of ESG practices in mainstream investment policies within the retirement industry.
The development of tools and templates will serve both as a measure and an enabler of sustainable investment structures, policies, procedures and reporting. The utilisation of the tools would assist retirement funds with the implementation of regulatory imperatives, the assessment of implementation progress, as well as continuous monitoring and reporting on the sustainable investment framework. The tools would typically consist of a basket of standardised guidelines, contracts, service level agreements, and reporting formats.
The project will be structured over four phases, with each phase informing the next one. Phases will overlap. The duration of the project is 24 months and will end in April 2012.
Analysis of current (non-ESG) retirement industry investment practices in South Africa
Identification of material ESG issues for the retirement industry in South Africa and appropriate private sector responses, including risk mitigation and new business models, which could represent profitable investment opportunities for pension funds.
Analysis of international experience and recommendations on where, why and how ESG considerations could be injected into SA pension fund practices
Tools and templates to assist pension funds to implement/integrate ESG into their processes, procedures and contracts with relevant stakeholders in the investment supply chain
The POA sees this initiative as an industry wide one. Therefore a Steering Committee will oversee the strategic direction of the project. The Committee comprises representatives from the following organisations:
Association for Savings and Investment for South Africa (ASISA)
Banking Association of South Africa (BASA)
Financial Planning Institute (FPI)
Institute of Retirement Funds (IRF)
Institute of Directors for South Africa (IoDSA)
Pension Lawyers Association (PLA)
South African Institute of Chartered Accountants (SAICA)
Government Employees Pension Fund (GEPF)
Department of National Treasury, (NT)
Financial Services Board (FSB)
Botswana Public Officers Pension Fund (BPOPF)
Debswana Pension Fund
Government Institutions Pensions Fund, Namibia (GIPF)
The ultimate aim of the partnership is to obtain large-scale buy-in from the retirement industry. The principles-based approach is key because principles cannot be outsourced. It is important for asset owners themselves to become empowered so that they are able to give clear instructions and properly defined mandates to their asset managers. This is an industry-wide initiative and, as such, the inputs from all stakeholders are valuable and will be consulted on.