Responsible investors are becoming increasingly concerned about the impact of their current decisions on the environment they will retire into. Evidence of rapid climate change is stacking up and any investment decision not factoring this in may be short-sighted.
Institutional investors have recognised the importance of ESG factors in their asset allocation decisions for some time now.
Trustees are increasingly expressing a preference for investing in companies that implement environmentally-conscious and, ultimately, sustainable strategies such as efficient water usage, waste management, and lower carbon emissions.
Today's trustees are also more keenly aware of what their asset managers are doing to ensure that their portfolios are geared toward ESG. Forward-thinking advisors incorporate these considerations when crafting client strategies.
The possibility that Regulation 28 will mandate/prescribe rules around ESG targets is partly to thank for the shift in institutional investors' and advisors' thinking. I believe this shift is also being driven by three fundamental features of our rapidly changing world.
Myth of returns vs social good
The first feature is that the myth that good returns and doing good for society are mutually exclusive has been debunked. There are many examples of investments that have had a positive impact on society, while also generating healthy returns.
Several South African institutional investors have seen the fruits of their ESG-focussed strategies. These include the Renewable Energy Independent Power Producer Procurement Programme (REIPPP), National Treasury’s Jobs Fund initiative, and Agri-fund initiatives supporting farmers.
The increased demand for green investment options is evidenced by Nedbank's issuance earlier this year of the country's first Green Bonds — R1.7bn worth of bonds were issued to fund renewable energy projects. The issuance was three times oversubscribed at R3.8bn.
The investment horizon is 80 years
The second driver is the realisation that, as we live longer, we are destined to tread in our own footprint, so to speak. It isn't only a question of shaping a world for future generations, it's also a question of creating the environment we will retire into ourselves.
Many people don’t fully appreciate the long-term nature of pension funds today. Their investment horizon is 80 years! We need to be aware of how significantly the world can and will change over that period.
There is no point in retiring with a decent pension if the society and environment we retire into are unhealthy and unsustainable.
We, as current savers, will ultimately see the fruits of our ESG-savvy asset allocations. Ensuring that trustees are able to make informed decisions to maximise both the impact and the return from their investments is a challenge and an opportunity that modern-day investment advisors embrace.
Members are demanding green investment options
The third driver is that pension fund members, particularly millennials, are demanding a greater focus on ESG, and the environmental impact of their investments is a primary concern.
A challenge retirement fund members and trustees face is that there are limited options available in terms of green investment funds in South Africa.
It’s important for trustees to note the important role they play in this area. If trustees aren’t demanding these products, it seems that the demand isn’t strong. And, unless there’s strong demand, there’s no incentive for service providers to roll out the products.
It’s important for members and trustees to make their voices heard on this matter and make sure their investments are geared towards the long term, with due care and regard given toward the environment they’ll be retiring into.