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.”
“Sustainable Returns Project breakfast seminar for Top 100 Pension Funds” - Held at the JSE on May 8, 2012, supported by the FSB and National Treasury
back row to front row:
Mark de Clerk, Acting Chair, Principal Officers Association (POA)
Cecilia Bjerborn, Sustainable Investing Specialist, IFC
Olano Makhubela, Chief Director: Financial Investments and Savings, National Treasury
Anne-Marie D’Alton, CEO, Principal Officers Association (POA)
Ryan Short, Partner, Genesis Analytics
Wanjiru Kirima, Chair, Sustainable Returns project
Sbu Luthuli - CEO and Principal Officer, Eskom Pension and Provident Fund (EPPF)
Samantha Jagdessi, Project Manager, Sustainable Returns project
Jurgen Boyd, Deputy Executive Officer, Financial Services Board (FSB)
Leveraging leadership by the Johannesburg Stock Exchange
South African listed companies are already accustomed to ESG considerations in the King Code of Corporate Governance (King III), which requires an integrated approach to managing business risks and opportunities. As a result of the incorporation of these requirements into the JSE’s Listing Requirements, listed companies are now also required to produce an integrated report for their financial years starting on or after 1 March 2010, or explain why they do not.
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. It recently reaffirmed this approach by becoming one of the founding signatories of a voluntary commitment by stock exchanges to promote sustainable investment through dialogue with investors, companies and regulators. The JSE signed this commitment during the Sustainable Stock Exchanges event in Rio de Janeiro in June of this year, and was joined by other founding signatories, BM&FBOVESPA, NASDAQ OMX, İstanbul Menkul Kıymetler Borsası (İMKB) and the Egyptian Exchange.
The JSE was the first emerging market and the first stock exchange to launch a sustainability index. Launched in 2004, the SRI Index remains the JSE’s flagship sustainability initiative, one which has contributed significantly to the local sustainability agenda and provides investors with a broad-based assessment of corporate policies and practices against a range of ESG indicators.
As Corli le Roux, Head of SRI Index and Sustainability at the JSE, explains, “The Index is deliberately developmental, with the criteria evolving as sustainability priorities progress. For example, in 2010 a number of indicators focused on climate change were introduced. The Index also progressively raises its inclusion thresholds so as to incentivise companies to advance their adherence to the criteria.”
According to le Roux, “Stock exchanges, as facilitators of investment and saving are uniquely placed to facilitate interactions and promote transparency. They bring a high level of credibility, objectivity and independence to assessments of company policies and performance.” This positions South African companies well to respond to the growing requests for information from responsible investors.
According to le Roux, “Stock exchanges, as facilitators of investment and saving are uniquely placed to facilitate interactions and promote transparency.
Promoting better engagement between companies and investors on ESG issues is one of the chief goals of the new CRISA code. Among other things, CRISA calls on more asset owners to commit to and communicate about their approaches to sustainability.
A significant feather in the cap of the SRI Index initiative has been the JSE’s collaboration since 2008 with the Government Employees Pension Fund (GEPF), the largest asset owner in South Africa, one of the largest pension funds in the world, and a founding signatory of the United Nations backed Principles for Responsible Investment (PRI). The collaboration has seen the GEPF support the research and analysis of the SRI Index process and to use that to feed into the GEPF’s active ownership practices.
Considered a leader in driving and implementing responsible investment, the GEPF’s involvement in the evolution of the Index has cemented it as a benchmark in the South African context. JSE and GEPF have both established important foundations that are now being leveraged by the wider retirement industry through the Sustainable Returns project.
A level playing field for retirement fund ESG integration
As Sustainable Returns Chair Wanjiru Kirima points out, 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.
“Currently we have a situation whereby our big retirement funds like the GEPF 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 is drawing on local and international best practice to develop a common ESG toolkit for southern African retirement funds to help with implementation. To do so, the project has enlisted support from IFC, a global standard setter in sustainability for project finance in emerging markets and one of the largest investors in private equity in Africa.
“IFC is our technical partner. 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.”
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.
As the largest multilateral source of loans and equity finance for private enterprises in emerging markets, IFC, part of the World Bank Group, is also a leader in applying ESG standards to investments. IFC’s Sustainability Framework articulates a strategic commitment to sustainable development and informs IFC’s approach to risk management. IFC’s Performance Standards, an integral part of the Framework, have become a global benchmark for E&S risk management used by over 100 financial institutions worldwide, including 77 Equator Principles adopters.
Importantly, IFC’s approach is revised periodically in consultation with stakeholders around the world. Effective on January 1, 2012, the latest updates reflect evolution in good practices for sustainability and risk mitigation in private sector investments in emerging markets over the past five years. They incorporate modifications on challenging issues that are increasingly important to sustainable businesses, including supply-chain management, resource efficiency and climate change, ecosystem services, labor practices and human rights.
Over two years, the Sustainable Returns project will analyze current investment practices in the retirement and pension fund industry in southern Africa and internationally, and will develop tools, templates and training to help principal officers and trustees hit the road running. 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.
Key instruments will be the policies funds develop to structure and explain their approach to ESG and the reporting requirements they put in place for asset managers.
The project highlights for trustees the importance of responsible investing and draws attention to the risks and opportunities posed by ESG issues 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 and guide asset managers in applying responsible and sustainable investment practices. Key instruments will be the policies funds develop to structure and explain their approach to ESG and the reporting requirements they put in place for asset managers.
This initiative will ultimately empower institutional money to meet financial commitments to members and future members through a deeper appreciation of the relationship between investment returns and the positive ESG performance of investee businesses.
For more information, contact Samantha Jagdessi, Project Manager, Sustainable Returns for Pensions and Society, firstname.lastname@example.org