How does a South African pension fund ensure optimal ESG impact through strategic asset allocation?

With so many ESG products and options available from service providers, where do I start? 

Investment instruments focused on impact investing offer exciting prospects from a sustainability perspective and while this is an excellent way of implementing RI practices, it is but one sub-set. 

When starting out with RI it is important to consider a tactical response on an ESG issue in relation to asset allocation. Pension funds can do so by first ensuring that the basic ESG risk management and engagement frameworks have been implemented across all the major asset classes in the pension fund’s portfolio, and to look critically at each asset class and evaluate what is possible given liquidity, risk, returns and influence. See illustration of this concept below.

For example:

  • 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. 

 

A practical example of a tactical response on an ESG issue in relation to asset allocation, in respect to climate change, could be:

  • South African Equity – hold Fossil Fuel players at least until 2028 but engage deeply in a collaborative fashion – demand portfolio CO2 reporting against a benchmark.
  • Local Private Equity – invest in renewable / green economy infrastructure – use board seats to drive change.
  • Local Fixed income – focus on Green Bonds – will help create a local market Offshore Equity – have 100% fossil fuel exclusion criteria and benchmark performance against 2 degree outcome.

 

For a proposed phased and strategic implementation in asset allocation see the Sample Action Plan in Section 2 of this tool. 

Illustration: Impact and Influence through strategic asset allocation 

 

Source: Old Mutual Asset Management (2020

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