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Comments on Reg 28 Sustainability Directive

16 May 2018

The Registrar for Pension Funds Dube Phineas Tshidi published a Draft Directive on Sustainability Reporting and Disclosure Requirements at the end of March 2018. The Directive is intended to ensure compliance with Regulation 28(2)(c)(ix) of the Pension Funds Act, which states that a pension fund must “…before making an investment in and while invested in an asset consider any factor which may materially affect the sustainable long term performance of the asset including, but not limited to, those of an environmental, social and governance character.”

Kigoda Consulting submitted the following comments in response.

Comments on Draft Directive no. XXX of 2018: Sustainability Reporting and Disclosure Requirements

  1. Kigoda Consulting, a responsible investment advisory firm, welcomes the move by the Financial Services Board/Financial Sector Conduct Authority and the Registrar of Pension Funds to prescribe sustainability reporting and disclosure requirements as outlined in the Draft Directive no. XXX: Sustainability Reporting and Disclosure Requirements (“Draft Directive”).
  2. While Regulation 28 requires pension funds to “consider any factor which may materially affect the sustainable long term performance of the asset including, but not limited to, those of an environmental, social and governance character”, from our experience, which includes providing training to trustees on responsible investment practices, implementation of this principle, which is contained in Regulation 28(2)(c)(ix) is highly variable.
  3. Our central comment is that the Sustainability Reporting and Disclosure Requirements set out in Draft Directive are unlikely to be sufficient to meet the objective of allowing the Registrar to monitor compliance and enabling stakeholders to ascertain compliance with the principle contained in Regulation 28(2)(c)(ix). Further interventions, especially those that ensure that the quality of reporting and disclosures are of an adequate standard, will be required.
  4. We encourage the Registrar to reflect on the situation in the United Kingdom where the Financial Reporting Council (FRC), which sets the UK Corporate Governance and Stewardship Codes, has tiered signatories to the Stewardship Code based on the quality of their Code statements. This was undertaken in order to improve the quality of reporting and encourage greater transparency. In 2017, the FRC removed the lowest tier after the majority of signatories improved their statements.
  5. The Draft Directive requires pension funds to report on their sustainability performance in their annual trustee reports to members, but to enable stakeholders to ascertain compliance, we believe that it will be important that this information is made available to the wider public on an annual basis. This could be achieved by posting the reports on the Financial Sector Conduct Authority’s website.
  6. Given the overlapping objectives, the Draft Directive should also consider the extent to which the reporting requirements could be addressed through the pension funds’ disclosure according to the Code for Responsible Investment in South Africa (CRISA).
  7. In addition, there are certain areas in which the Investment Policy Statement Requirements can be improved.
  8. The Investment Policy Statement Requirements should also reflect the following:
    1. Which assets are covered by the Investment Policy Statement;
    2. That the active ownership policy should cover the responsibilities set out in the Definitions including engagement and voting, but also collaborative engagement;
    3. When the Investment Policy Statement was approved and by whom i.e. board of trustees;
    4. The pension fund’s position towards climate change and the associated investment risks;
    5. How and when the pension fund reports on sustainability issues, e.g. annually and publicly or only to select stakeholders.
  9. Clause 6.2 should be changed to reflect that the Investment Policy Statement covers the application of ESG factors also to existing assets, not just assets the pension fund intends to acquire.

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