ANNE-MARIE D’ALTON: SA must regain lead in responsible investment or risk falling behind

This week marks exactly 13 years since the first Code for Responsible Investing in SA (Crisa) was launched, making SA a pioneer in the field. Crisa made the rainbow nation one of the world’s first countries to provide its institutional investors with a formal framework to integrate sustainability factors such as climate change or BEE into their investment processes.

While some parts of the country’s sustainable finance market have flourished since those pioneering days, there is concern that SA risks falling behind our peers in this space. One annual survey in January found the proportion of SA institutional investors who consider ESG (environmental, social and governance) issues has actually declined over the past year, dipping below 50% for the first time. 

The risk of stalling on sustainable finance could not come at a worse time. It is a time of more frequent extreme weather events, of increasing consumer action on sustainability issues, and while regulators in the rest of the world are catalysing sustainable finance in their markets with new waves of regulation. 

Pension funds and asset owners in particular are subject to this increasing volume of regulation. The European Sustainable Finance Disclosure Regulation (SFDR) requires pension fund trustees to develop and disclose a policy for the integration of sustainability risks into the investment decision-making process, to disclose how remuneration accounts for sustainability risks, and to prepare a statement describing the likely impact of sustainability risks on returns.

Many countries now have expectations for pension funds to have clear policies explaining how they implement responsible investment, to report on this implementation, and for pension funds to have a far stronger focus on specific ESG themes. The focus has mostly been on climate change thus far, but attention is increasingly being paid to nature conservation as well as to diversity and equality-related issues.

Finance taxonomy

Given the significant size of the SA pension fund sector, and that SA has the highest carbon intensity in the G20 and some of the highest levels of inequality, the country cannot afford to lag behind as global markets evolve. We need to ensure pension funds effectively manage their ESG-related risks and opportunities. But we also need to make SA an attractive destination for foreign investment. We should thus provide a world-leading market and policy framework for sustainable finance. 

Many building blocks are already in place. The SA Green Finance Taxonomy is a critical part of this new landscape. Now two years old, the taxonomy provides a catalogue of assets, projects and sectors that can be defined as “green” in accordance with international best practice and national priorities. This enables SA businesses to demonstrate their credentials to domestic and international investors.

Another part of the picture is the Financial Sector Conduct Authority’s (FSCA’s) far-reaching, sustainable finance road map that published a detailed update in April. The road map sets out the scale of the opportunity associated with the further growth of sustainable finance in SA, and the practical actions — implementing the taxonomy, encouraging better corporate ESG reporting, addressing greenwashing — that can be taken to build a robust policy and regulatory sustainable finance framework.

Regulation is only one part of the picture. The investment industry has a critical role to play through showcasing leadership and working with partners to drive change. One example of this is the publication on Thursday of a new tool, created for pension funds trustees with the support of the International Finance Corporation (IFC), which is part of the World Bank, and the Swiss Secretariat for Economic Affairs (Seco).

Guides funds

Hosted on Batseta’s website Responsible Investment & Ownership, the free tool enables retirement fund trustees in SA and those assisting them to quickly and easily assess their progress in implementing ESG requirements — such as those under Regulation 28 of the Pensions Funds Act.

It guides funds in a step-by-step process on how they can develop a comprehensive ESG-integrated investment policy, set targets to address material ESG risks such as climate change, and establish the governance, management and oversight processes required to achieve those targets. It also explains how pension funds can use their influence to encourage change across the investment market as a whole and through into the real economy. 

Our work with the IFC and Seco goes beyond this. It also includes capacity-building support to help SA pension fund trustees build knowledge and understanding of sustainable finance and to drive best practice beyond the leaders.   

Sustainable finance is about opportunity, for our pension funds, companies and society. If SA markets can recapture a position of global leadership on sustainable finance it will allow our finance industry to play a leading role in enabling a just transition to a thriving, net-zero SA, helping us fast-track to energy security away from the current backdrop of power shortages, improve competitiveness and attract the foreign investment needed to reduce poverty, inequality and create jobs.   

As we celebrate Mandela Day it is a perfect time for SA investors and regulators to come together and ensure we capture these opportunities and regain our pioneering spirit on sustainable finance.

• D’Alton is CEO of Batseta Council for Retirement Funds for SA, a nonprofit organisation supporting principal officers, trustees and fund fiduciaries within the retirement industry.