ISSUES, strategies and frameworks
Key ESG topics globally and in South Africa
The types of ESG issues that are relevant to investors can vary widely across countries, industries and companies. This section provides short articles of ESG issues that are commonly encountered in RI implementation around the world and in South Africa.
The term “ESG factor” is used here to mean material and relevant investment risks and opportunities for asset owners over the short, medium and/or long-term, and, for the purpose of this tool and in line with the interpretation of Regulation 28 and the FSCA Guidance Note, ESG factors are considered as financial factors.
A prudent investor should integrate these factors into their investment and risk management process.
How to identify and prioritise material ESG topics:
In order to do establish what ESG topics are most relevant to the pension fund, trustees should explore views on megatrends (at the macro / national level), including those of environmental and social nature that are influencing the future investment environment and real economy impacts (impacts at sector and business level), to determine how their institution can best generate returns.
Relevant questions to explore while reviewing this section include:
- What are the key ESG risks and opportunities in South Africa? Are there ESG-related issues of particular interest to our members? How do these impact the asset classes / sectors / businesses in our investment portfolio?
- How do we ensure we monetise future financial returns by participating in megatrends?
- How do we integrate externalities into our investment return framework?
- Are ESG factors assessed as part of the financial return or separately?
- How will the ESG performance of investments impact our financial models and company valuations?
A changing global environment and growing effort to reduce global warming will require an economic shift for carbon-intensive economies such as South Africa’s. South Africa
This section provides an overview of the different RI styles that can apply to Listed Equity, Fixed Income and Alternative Investments including Private Equity, Property and Infrastructure.
Responsible Investment (RI) and ESG integration are used as umbrella terms that encompass a range of investment styles and strategies that take into account ESG issues and that can be applied to all asset classes across the whole portfolio.
Neither Regulation 28, the FSCA Guidance Note, nor CRISA are prescriptive about the precise styles or techniques that should be used by pension funds, this is up to the pension funds to decide in line with their investment beliefs, strategy and policy, see Section 1 on Developing a Policy
The main RI techniques for portfolio construction and ownership decision-making are:
- Screening (both negative and positive)
- Active Ownership (shareholder engagement and proxy voting)
Trustees are not expected to become experts in the detail, but must know enough to be able to make decisions, ask questions and hold service providers to account.
When starting out with RI it is important to first ensure that the basic ESG risk management and engagement frameworks have been implemented across all the major asset classes in the pension fund’s portfolio.
Pension funds need to look critically at each asset class and evaluate what is possible given liquidity, risk, returns and influence.
- Robust and efficient risk management and engagement, starting with listed equities, with phased implementation across all asset classes, is likely to represent the overall most impactful starting point of the ESG integration journey by South African pension funds.
- In South Africa, the best exposure to assets that are socially inclusive, low carbon and resource efficient, i.e. the “Green Economy” may be in the Unlisted Markets (Private Equity and Infrastructure). Here pension funds also have board seats and potential to exert control.
For a proposed phased and strategic implementation in asset allocation strategy see the Sample Action Plan in Section 2 of this tool.
These different approaches are not mutually exclusive and are often used in various combinations and overlays as illustrated below.
Thematic investments and its sub-sets mean selected investment in companies with a commitment to chosen responsible business products and/or services, such as environmental technologies. Thematic
Application of ESG Strategies Across Asset Classes
The different ESG strategies are not mutually exclusive and are often used in various combinations and overlays. The matrix below provides a general indication of the suitability of each of these techniques to the different asset classes that pension funds will typically need to consider.
ESG techniques suitability for different asset classes
A range of existing standards and norms promotes good corporate practice from South African companies including the Broad-Based Socio-Economic Empowerment Charter for the South African Mining Industry (2004), the Amendment of the Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry (2010), the Financial Sector Charter (2003), and the DTI Codes of Good Practice (2007). This guide does not provide detail into these familiar codes.
Instead, focus is drawn to key national and international initiatives and standards related to RI, or promoting responsible business practices, that a responsible investor may wish to consider when determining the composition of their investment portfolios.
Sustainable Development Goals The Sustainable Development Goals (SDGs), also known as the Global Goals, were adopted by all United Nations Member States in 2015 as
Regulation 28 and the FSCA Guidance Note The National Treasury has articulated clearly that the aim of retirement fund investment regulation is to ensure that