Retirement funds shift to address social and environmental challenges

Retirement funds have a powerful role to play as SA’s economy seeks to rebuild to be stronger and more resilient after Covid-19.

The pandemic has taken a heavy toll on lives and livelihoods worldwide. It has shone a light on gaps and vulnerabilities that were already emerging, such as those in healthcare systems, supply chains, business models and access to critical services, from education to the internet.

If not addressed these gaps will only be widened by the effects of climate change and economic stress caused by the Covid-19.

The pandemic has also provided an opportunity to reassess how economies and societies should be strengthened.

The investment community, especially retirement funds and their asset managers, can make a big difference in the rebuilding process. Representing more than R4-trillion in assets under management, SA’s retirement industry is the world’s fifth-largest pool of retirement capital and the largest investor in the JSE.

It exerts significant influence on SA’s market, and is well placed to help drive a shift to a green, low-carbon and socially inclusive economy, which can deliver sustainable returns in an increasingly uncertain future.

The good news is that SA’s retirement-savings sector, inspired by the Pension Fund Act, are steadily moving from passive to active investors, selecting investments that address the country’s biggest social and environmental challenges.

Coal exposure

A 2020 study by the International Finance Corporation (IFC) and SA’s Financial Sector Conduct Authority found that of 139 responding funds representing 74% of assets under management, 81% had already invested in renewable energy, allocating about R40bn to the sector.

An overwhelming 82% said they would like to increase allocations to green and climate-focused investments, and 94% expressed interest in growing their portfolio to include investments with positive social impacts. About half said they were open to decreasing their exposure to coal.

This is a good start, and reflects an evolving mindset among fund managers to focus on impact as well as returns.

But the study also identified hurdles holding back this ambition to invest in social and sustainable projects and businesses such as lack of investment opportunities in SA that meet governance requirements and investments that are big enough, with enough liquidity.

The survey also highlighted the need to build the capacity of the investment community so they can better integrate environmental and social strategies into their overall investment plans.

So how can we help funds align their investments with their ambitions?  The recently updated Responsible Investment and Active Ownership (RIO) guide, an online guide for SA’s retirement sector, provides step-by-step insights and resources for a retirement fund to do this effectively.

The guide, produced by the Batseta Council of Retirement Funds of SA with funding from the Swiss state secretariat for economic affairs and support from the IFC, lists critical steps retirement funds can take, including:

• Developing an investment policy that sets out their commitment to environmental, social & governance risk management and proactive green investment strategies.
• Selecting partners that share a goal of increasing support to environmental and social development, and monitoring investments and their impact.
• Signing up to initiatives such as the UN-supported Principles for Responsible Investment and the Code for Responsible Investment SA.

The IFC estimates there is a $588bn investment opportunity in climate mitigation across selected sectors in SA up to 2030. This does not include investments needed to support climate change adaptation and resilience, which represent additional untapped green investment potential.

These investments can include supporting small businesses, investing in sustainable building projects, enabling access to healthcare and education, and backing women entrepreneurs and other start-ups.

Now is the time for institutional investors to take the lead on sustainable finance and set clear strategies and goals for sustainable investing to turn this opportunity into a reality. As our economies rebuild in response to the Covid-19 pandemic, collective ambition and commitment by SA’s retirement funds can do much to prepare us for what lies ahead.

• Labara is IFC country manager for SA, and D’Alton CEO of Batseta.