Responsible investors are becoming increasingly concerned about the impact of their decisions on the environment into which they will retire.
Institutional investors have recognised the importance of environmental, social and governance (ESG) factors in their asset allocation decisions.
Trustees are increasingly expressing a preference for investing in companies that implement environmentally conscious strategies, such as efficient water usage, waste management and lower carbon emissions.
Trustees are also more keenly aware of what their asset managers are doing to ensure that their portfolios are geared towards ESG. Forward-thinking advisers incorporate these considerations when crafting client strategies.
The possibility that regulation 28 of the Pension Funds Act will mandate/prescribe rules around ESG targets is partly to thank for the shift in institutional investors’ and advisers’ thinking. This shift is also being driven by three features of our rapidly changing world.
The first feature is that the myth that good returns and doing good for society are mutually exclusive has been debunked. There are many examples of investments that have had a positive impact on society while generating healthy returns.
Several South African institutional investors have seen the fruits of their ESG-focused strategies. These include the Renewable Energy Independent Power Producer Procurement Programme, National Treasury's Jobs Fund initiative, and Agri-fund initiatives supporting farmers.
The increased demand for green investment options is evidenced by Nedbank’s issuance earlier this year of the country's first Green Bonds - R1.7 billion worth of bonds were issued to fund renewable energy projects. The issuance was three times oversubscribed at R3.8 billion.
The second driver is the realisation that, as we live longer, we are destined to tread in our own footprints, so to speak. It isn't only a question of shaping a world for future generations; it's also a question of creating the environment we will retire into.
Many people don't fully appreciate the long-term nature of pension funds today. Their investment horizon is 80 years. We need to be aware of how significantly the world will change in that period.
There is no point in retiring with a decent pension if the society and environment into which we retire is unhealthy and unsustainable.
We, as current savers, will ultimately see the fruits of our ESG-savvy asset allocations. Ensuring that trustees are able to make informed decisions to maximise both the impact and the return from their investments is a challenge.
The third driver is that pension fund members, particularly millennials, are demanding a greater focus on ESG, and the environmental impact of their investments is a primary concern.
A challenge retirement fund members and trustees face is that there are limited options available in terms of green investment funds in South Africa.
It's important for trustees to note the important role they play in this area. And, unless there's strong demand, there's no incentive for service providers to roll out the products.
Nompumelelo Khumalo is an associate consultant at RisCura.