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Tough times and polarised politics in the US have thrust investing informed by environmental, social and governance (ESG) issues into the spotlight, just as it seemed about to ease into its role as the “new normal” of the investment world.

The world’s largest asset manager, US-based BlackRock, has consistently endorsed core responsible investment principles and climate change mitigation. In 2022 it was accused by 19 US attorneys-general of violating its fiduciary duty by placing climate change considerations ahead of the interests of the members of their states’ pension funds, and of not pursuing the administration of funds to the exclusion of any other interests.

The same attorneys-general, plus six more, have since filed a suit in the federal court in the northern district of Texas, where fossil fuels have particular relevance, contesting the legality of the Biden administration’s 2022 regulation permitting the use of ESG factors if they are relevant to a risk and return analysis.

And it’s not only the politicians. In May members of three public pension funds in New York filed suits against the funds for breach of fiduciary duty based on divestment of fossil fuel investments.

The brouhaha in the US has understandably rattled SA investors and asset managers, but there are material legal and political differences to be considered.

In a letter to BlackRock CEO Larry Fink in August 2022 the attorneys-general stated that “pensions must be invested only to earn financial return” and that “mixed motives”, however noble, result in a breach of the statutory duty of care. 

In SA regulation 28 under the Pension Funds Act recognises return on investment as an aspect of common law fiduciary duty. The regulation has, since 2011, explicitly compelled the boards of SA pension funds to consider ESG factors before investing in an asset, and for the duration of the investment.

It would be foolish (and unlawful) to interpret this statutory duty as licence to ignore financial returns and embark on a purely philanthropic investment agenda, but its formulation does align with concerns such as retirement funds’ role in a just transition, not only in relation to fossil fuels but also broader societal considerations about the quality of retirement. In this context, the “mixed motives” argument seems to present a significantly lower legal risk in SA than is portrayed in several US states.

An example is a retirement fund that generates good cash flow in retirement, but its pensioners must pay for transport to buy water because there is environmental and infrastructural degradation where they live. That fund could be said to have missed an opportunity to address water quality, reticulation, roads, bridges and so on through relevant investments in the interests of the members, whose retirement benefits are otherwise diminished in financial terms directly, and indirectly in the measurement of their overall dignity and quality of life.

Further, the explicit standard in regulation 28 is not “absolute financial returns”; it is “adequate” risk-adjusted returns suitable to the circumstances of the fund.

The 19 attorneys-general also argued that BlackRock is in breach of its duty of care by basing its investment approach on unverifiable climate-related facts. 

This is not a general broadside against climate science, it is somewhat more cynical. They reason that the US has not adopted net-zero policies, and even governments that have done so have not taken necessary steps to implement their commitments. Further, the International Energy Agency (IEA) has expressed concern that all the pledges already made will still not lead to a 1.5°C stabilisation in global average temperatures.

As a result, the attorneys-general assert that it could not be reasonable for a prudent fiduciary to assume that the Paris Agreement will be implemented within the US, nor by all its signatories in full, by 2050. Therefore, they said, it is neither sincere nor prudent fiduciary conduct to make outliers of portfolio companies by encouraging them to target such outcomes.

SA, on the other hand, is a signatory to the Paris Agreement and has ratified it. Our government does have obligations in the form of nationally determined contributions. Therefore, it would not be an unaligned position — either commercially or legally — for an SA company to advance an assertive decarbonisation and/or net-zero strategy.

It appears that the risks attaching to a fiduciary’s adoption of a return on investment (ROI) strategy are relatively lower in our domestic context, especially in light of the alignment to constitutional socioeconomic rights.

Turning to economic and social opportunity, regulation 28, the National Development Plan and the like all encourage and support a more assertive approach to infrastructure and enterprise development in the nature of impact investment, meaning investments that are designed to deliver a positive effect in one or more ESG categories.

The growth in financial products and structures — such as green bonds, sustainability bonds, infrastructure and housing impact funds, social impact bonds and sustainability-linked loans — present opportunities for private sector remediation of ESG challenges with backing from institutional investors and the government’s encouragement.

It seems SA funds need not be apprehensive about advancing ESG strategies, provided they do not throw caution to the wind.

Geral is head of banking & financial services regulatory at Bowmans SA.

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