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Improved disclosure required to advance responsible investment practices in South Africa

22 August 2018

This article was published in PensionsAfrica September/October 2018 edition.

South Africa is regularly promoted as a leader in the field of sustainable and responsible investment. Compared with many of its emerging market peers, it is. In 2011, Regulation 28 of the Pension Funds Act was amended to require 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” before making an investment or while invested in an asset. The launch of the JSE SRI Index in 2004 and the creation of the Code for Responsible Investing in South Africa (CRISA) in 2011 are also viewed as ground-breaking.

But progress in applying sustainable and responsible investment practices appears to have stalled in recent years. There are some asset managers that seem to be taking responsible investment seriously, but most asset managers and owners, including pension funds, do not seem to have made it much further than developing a responsible investment policy, and many have not even done this. When questioned, asset managers complain that many pension funds’ mandates do not stipulate that environmental, social and governance (ESG) factors must be integrated into investment decisions. Investment consultants are criticised for not playing their role in advising trustees on their fiduciary and legal duties in this regard. As a result, while South Africa can claim to have a leading framework for sustainable and responsible investment, implementation is lacking.

FSCA draft directive

Fortunately there are some indications that this situation will improve. Earlier this year, South Africa’s Financial Sector Conduct Authority (FSCA) called for comments on a draft directive on sustainability reporting and disclosure requirements, which sets out various requirements that will allow the Pension Fund Registrar to monitor compliance with the principles of Regulation 28. The directive, in its draft form, requires pension fund’s investment policy statement to show how its investment approach ensures “sustainable long term performance”, how it applies ESG factors, and how it measures compliance of its assets with these ESG factors. It will also require the investment policy statement to address the “active ownership” policy. Active ownership refers to the voting policy on governance issues and the engagement policy. In addition, pension funds will be required to disclose how these issues are addressed in their mandates.

If applied, the draft directive will also make important changes to how and what information must be provided to stakeholders. The annual trustee report will not only have to disclose any changes to the investment policy statement, but will also have to detail how the fund has applied ESG factors and ensured compliance with Regulation 28. This is important as, apart from a handful of examples, most pension funds fail to report on sustainability factors, and the majority of investors in a pension fund scheme will not know whether or not the various fund managers tasked with investing their assets support responsible investing practices, or how they are applied.

Push for transparency

International developments will increase pressure on local funds to improve transparency and disclosure too. While the draft directive has been broadly welcomed, some responses to the FSCA have recommended that the directive explicitly address climate change. This is part of a global trend. The Paris Agreement on climate change, for example, aims to make “finance flows consistent with a pathway toward low greenhouse gas emissions and climate-resilient development” in its bid to keep global average temperature increases to well below 2oC above pre-industrial levels.

In its submission to the FSCA, Just Share, a new non-profit shareholder activism and responsible investment organisation, submitted that “it is now essential for every pension fund to have a public position on climate change, and that this position should be articulated in each fund’s investment policy statement”. In addition, the Principles for Responsible Investment (PRI), which is a global network of responsible investors, called for the directive to incorporate the recommendations of the G20’s Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD).

The TCFD states that “disclosures by the financial sector could foster an early assessment of climate-related risks and opportunities, improve pricing of climate-related risks, and lead to more informed capital allocation decisions”. The TCFD report, which was released in June 2017, sets out four recommendations on climate-related financial disclosures that are applicable across sectors and organisations. The recommendations are:

  • Governance: Disclose the organisation’s governance around climate-related risks and opportunities.
  • Strategy: Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material.
  • Risk Management: Disclose how the organisation identifies, assesses, and manages climate-related risks.
  • Metrics and Targets: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

South Africa, which is a member of the G20 and was instrumental in the formation of the Financial Stability Board, will be encouraged to implement the recommendations of the TCFD. The European Commission released proposals in May 2018 that will require disclosure not only of how financial institutions integrate ESG factors into investment decisions, but also of the sustainability or climate impact of their investments and portfolios. Treasury has already indicated that the regulatory framework is under review to assess how to address climate related disclosures, but if the FSCA is to stay at the forefront of developments in this sector, it will need to address these issues in its directive.

Role for CRISA?

Regulatory guidance is only one of several areas where action is required though. The Fiduciary Duty in the 21st Century programme, which is a three-year project coordinated by the PRI, UNEP FI and the Generation Foundation to ensure that ESG issues are addressed by institutional investors as part of their fiduciary duty, has also identified other areas that require intervention. The South African Roadmap also proposes that practical guidance should be given to trustees on how to interact with investment consultants on ESG integration, and that responsible investment training should be provided to trustees (this is now available through a Batseta-approved course from ASISA).

The Roadmap also calls for a permanent secretariat to be established to support CRISA. In 2017, a Kigoda Consulting study showed that while many asset managers claim to endorse CRISA, there is limited analysis on how they perform against CRISA’s five principles. CRISA is voluntary, and there is no formal oversight of implementation. As a result, there is a wide variation in the quality of disclosures regarding the implementation of responsible investment practices. In the UK, the Financial Reporting Council (FRC) tiered signatories to the Stewardship Code based on the quality of their Code statements to address quality issues. In 2017, the FRC removed the lowest tier after the majority of signatories improved their statements.

Implementation is key

Over the past 18 months, South Africa has been rocked by various corporate governance scandals that have undermined trust in auditors, regulators and other financial sector actors. A renewed push by regulators, pension funds, investment consultants and asset managers to strengthen South Africa’s framework for responsible investment will assist in reversing this. Adopting the recommendations of the Roadmap and strengthening the requirement of the FSCA’s draft directive on sustainability reporting and disclosure will be important steps to boosting transparency. However, while improvements to the responsible investment framework are required, it is implementation that is now key.


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