The government, regulators, the private sector, labour unions and civil society last month unanimously adopted a policy position that is possibly the most fundamental reform of capitalism and investment in South Africa in 100 years.
Here’s a question: can you think of a time in the recent past when these groups unanimously agreed on radical policy reforms? Impossible? Yet last month they did agree on a policy position – the introduction of responsible investment (RI) for pension fund investors.
As an investment philosophy, RI holds as self-evident that financial valuations are affected by the role companies take in their approach to environmental care, societal issues and good corporate governance. Any investor holding BP shares before Deep Horizon, Lonmin before Marikana, or Enron before its collapse would find it hard to disagree.
Pension funds are the biggest investor group in South Africa. In 2011 the Pension Funds Act was changed: Regulation 28 of the act now requires fund trustees to take environmental, social and governance (ESG) issues into account in their investment processes.
This followed the voluntary adoption a year before by the pension industry of the Code for Responsible Investing in South Africa (or Crisa), which set out similar principles.
While the principles are clear, practical compliance has not been easy to implement or understand. Last month, representatives from the government, private industry, civil society and labour congregated in Johannesburg for the launch of Responsible Investment and Ownership (RIO): A Guide for Pension Funds in South Africa that introduces a new investment paradigm for pension funds.
This guide provides step-by-step instructions to help pension funds incorporate the philosophy and practice of responsible investment.
The guide was produced by the Sustainable Returns initiative led by the Principal Officers Association (POA) and the International Finance Corporation (IFC) in collaboration with the financial services industry and with the support of 18 bodies including the Treasury, the Financial Services Board, Government Employees’ Pension Fund (GEPF), Asisa and Cosatu.
It is aimed at principal officers and trustees who are new to the subject of RI, and asset managers who need a comprehensive introduction as they prepare to take clients’ funds through the first steps of planning and implementing an RI strategy. Though the specific context is South Africa, it is also relevant to pension funds in Botswana, Namibia and other African countries, and takes account of international practice and lessons of experience.
The launch comes at a time when RI is gaining traction in the global economy. Independent research increasingly points toward a financial imperative to take ESG issues into account when assessing risks and returns. Recent studies by Deutsche Bank, EY (formerly Ernst and Young) and Harvard Business School among others have shown that portfolios with high ESG ratings are subject to better financial returns than those with low ESG ratings (in some cases experiencing outperformance is as great as 5 percent).
In the public sector, the result has been an increasing push from policymakers to institute regulations for responsible investment practices. The private sector’s growing acceptance of RI as the new global standard for investment has stemmed from the implications of associated positive financial returns for asset owner fiduciary duty, and is evidenced by an almost 500 percent growth in the number of signatories to the UN Principles for Responsible Investment (UNPRI) in the last 10 years.
None of this is breaking news in South Africa, which has long been a leader in the field of sustainability and responsible investment. GEPF, the largest pension fund in the country, representing over R1.2 trillion in assets, has been a signatory of the UNPRI since 2006. The JSE is an international pioneer in ESG adoption and has demanded sustainability report submissions from listed companies since 2010 (making it the first exchange in the world to implement such an initiative).
The stage is set for South Africa’s pension fund industry to become a global example of responsible investment in action. Currently, the majority of the country’s pension funds are at an early stage in the journey towards RI implementation, and many trustees and principal officers are new to the subject – something that the RIO guide aims to address.
The guide seeks to empower pension funds to be active promoters of sustainable development in the region, to ensure sustainable financial returns for members and become global leaders in the shift to responsible investing.
In the next phase of the Sustainable Returns project, leading South African pension funds will participate in a pilot programme to apply the guide as an implementation tool to expand their responsible investment policies and practices.
They will receive technical support and the opportunity to work with peers in this space. This will be just one more way in which South Africa is establishing its prominence in the RI space.
In an initiative separate from but related to the launch of the RIO guide, the country took yet another leading role in the RI field by hosting the UNPRI conference in Cape Town two weeks ago. This is the first time since its inception in 2006 that the conference has been held on the African continent.
In attendance were over 400 participants, among them representatives of over $35 trillion (R349 trillion) of assets under management. The conference provided an opportunity for stakeholders across the public and private sector to discuss the future of responsible investment in Africa.
The result of the conference was, once again – for the second time in the space of a single month – that representatives of government, industry, civil society and labour found themselves in agreement with one another: responsible investment is a new reality for pension funds and other long-term investors.
The implication is that, no matter your role, whether you’re designing, implementing, championing or just complying with new investment practices, RI is the new reality. Getting on top of the relevant issues is a worthwhile investment on the part of any investor, business or pension fund member.
- About the SRPS Project
Sustainable Returns for Pensions and Society is an industry-led initiative to integrate ESG considerations into the mainstream of retirement industry investment practices in southern Africa.
The project features a pioneering partnership between the POA and IFC to position southern African practitioners at the forefront of global best practice.
- About the Principal Officers Association
The POA is a non-profit organisation, and the only one of its kind in South Africa, that aims to promote the common interests of principal officers of retirement funds. The POA’s membership of 425 principal officers and associate members represent more than 6.2 million retirement fund members in South Africa.
- About IFC
IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector. We help developing countries achieve sustainable growth by financing investment, providing advisory services to businesses and governments, and mobilising capital in the international financial markets.
Mark de Klerk is the chairman of the Sustainable Returns for Pensions and Society project.