John Taylor, Lead Specialist: Business Development at YALA Consultants and Actuaries

As a pension fund trustee in South Africa, you’re navigating a complex landscape where Environmental, Social, and Governance (ESG) factors are no longer just buzzwords but critical components of your fiduciary duty. We have some guidance to help you understand the unique challenges and opportunities ESG presents in the South African context.

While global ESG trends are important, South Africa faces distinct challenges that shape its unique ESG landscape. On the environmental front, the country grapples with severe water scarcity, a heavy reliance on coal for energy, and significant threats to its rich biodiversity.

Socially, South Africa continues to struggle with high unemployment rates, stark inequality, and the long-lasting effects of historical injustices.

In terms of governance, the nation has been rocked by recent high-profile corporate cases and the far-reaching implications of state capture, which have eroded trust in both private and public institutions. Governance issues can have devastating effects, as demonstrated by the Steinhoff matter, which wiped out billions in pension fund value virtually overnight.

These factors combine to create a complex and nuanced ESG environment that demands specialised attention from pension fund trustees. This environment creates a unique risk profile for South African investments that generic ESG approaches may overlook.

Why ESG matters for South African pension funds

By integrating ESG considerations into a pension fund’s investment strategy, it is better equipped to identify and mitigate South African-specific risks before they impact returns.

ESG isn’t just about avoiding risks; it’s about seizing opportunities unique to South Africa’s transforming economy. As the country transitions away from coal, renewable energy investments present significant growth potential. Companies leading in water efficiency technologies are well-positioned in a water-scarce environment.

Businesses with strong Broad-Based Black Economic Empowerment (BBBEE) credentials and robust community engagement strategies could potentially thrive in South Africa’s evolving socio-economic landscape.

South Africa’s National Development Plan (NDP) sets ambitious goals for reducing poverty and inequality. As significant investors, pension funds play a crucial role in achieving these objectives. ESG-aligned investments can contribute substantially to national development by fostering job creation in sustainable industries, supporting infrastructure development with positive social impact, and empowering previously disadvantaged communities.

This alignment between ESG investment strategies and national development goals is not just good citizenship; it’s smart long-term investing in the country’s stability and growth, which ultimately benefits pension fund members.

Practical steps for South African trustees

John Taylor, Lead Specialist: Business Development at YALA Consultants and Actuaries suggest the following steps which trustees can consider in evaluating their ESG obligations and their practical implementation.

1. Develop a South Africa-specific ESG framework

Generic ESG scorecards often miss crucial local factors. Work with your investment consultants to develop a framework that considers:

• Water stress levels in different regions
• Community relations, especially in mining areas
• B-BBEE scorecard performance
• Exposure to sectors at risk from carbon taxes

2. Engage with asset managers on local ESG expertise

Don’t just ask about ESG policies, probe for specific South African knowledge:

• How do managers balance the complex needs of South Africa in terms of ESG factors?
• How do they assess a company’s strategies for managing climate change risks specific to South Africa?
• How do they evaluate a company’s water management strategies in drought-prone regions?
• How do they assess a company’s readiness for Eskom’s unstable power supply?

Regulatory Landscape: Beyond Regulation 28

In South Africa, Regulation 28 of the Pension Funds Act mandates responsible investing as a fiduciary duty for pension fund trustees, requiring them to consider factors potentially impacting long-term performance in accordance with the principle of prudent investing.

Additional guidance includes Guidance Notice 1 of 2019 issued by the Financial Services Conduct Authority (FSCA) on sustainable investing and PF Circular 130 on good governance, which provide essential frameworks for compliance and governance in pension fund management.

Regulatory bodies, such as the United Nations Principles for Responsible Investment (PRI) and the Code for Responsible Investing in South Africa (CRISA), second edition, further emphasise the integration of ESG considerations in investment practices.

A unique opportunity for South African trustees

ESG integration is not just a global trend to follow; it is a critical tool for navigating South Africa’s unique investment landscape. By developing a nuanced, locally relevant approach to ESG, you can better protect and grow your members’ retirement savings while contributing to a more sustainable and equitable South Africa.

Remember, as a trustee, you’re not just a financial steward but a key player in shaping the country’s future.

ENDS