The UNEP/PRI/Generation Foundation South Africa Roadmap [pdf] report is part of the Fiduciary Duty in the 21st Century initiative that aims to bring an end to the debate over fiduciary duty and environmental, social and governance (ESG) issues considered by responsible investors. The Roadmap, which is based on consultation with industry, provides various recommendations on how to ensure institutional investors integrate ESG factors into their investment decisions.
Unfortunately, given that it makes some important recommendations, the Roadmap has not received much media attention in South Africa. It correctly identifies many of the challenges facing the adoption of ESG integration in South Africa, despite the change to Regulation 28 and other interventions: These include:
- Capacity constraints: capacity issues affect both asset owners and the FSB, which is seen as the “key regulator for advancing ESG factors in pension schemes”.The lack of a permanent, well-resourced secretariat of the Code for Responsible Investment in South Africa (CRISA) is also seen as a barrier to CRISA’s effectiveness. The Kigoda Responsible Investment Ranking 2017, which found considerable variation in the implementation of CRISA’s principles among ten of South Africa’s largest asset managers, supports this.
- Knowledge gaps: although awareness of ESG has increased, there are still considerable gaps in knowledge about how to implement ESG practices. Trustee training is seen as essential to fill these gaps.
- Structural issues: South Africa’s fragmented pensions sector means that investment consultants are extremely influential, but there is insufficient guidance on how trustees should interact with consultants.
Fortunately, there are already indications that steps are being taken to address some of these barriers. KudosAfrica, for example, has partnered with the ASISA Academy to deliver a BATSETA-approved Responsible Investing Fundamentals workshop for trustees. Chairman of CRISA John Olifant has also indicated that CRISA is “activating plans to have a dedicated secretariat to support the work of the CRISA committee.”
However, while the Roadmap’s framework to drive ESG integration in South Africa should be welcomed, it is necessary to note the lack of asset owner participation in the stakeholder interview process. The lack of ESG activity from asset owners is a perennial problem. Also worrying is that the FSB also did not participate in the interview process. Finally, when the list of South African interviewees is compared to those who, for example, contributed to the UK Roadmap [pdf], the lack of NGO voices in the South Africa Roadmap is very apparent. Hopefully, with the imminent launch of a shareholder activist NGO in South Africa, other voices from outside industry will be included in these initiatives in future
The South Africa Roadmap’s recommendations
1. Regulatory guidance:
a. The South African Financial Services Board (FSB) should:
i. provide practical guidance to enhance the impact of Regulation 28 on the investment practice of South African pension schemes and actively monitor progress in scheme practice;
ii. review the implications of the size and structure of pension schemes on governance quality.
b. The FSB should review investment manager mandates to ensure that they reflect the expectations for investment practice set out in Regulation 28.
c. South African industry associations and the FSB should provide practical guidance to trustees on interaction with investment consultants on ESG integration.
2. Enhanced stewardship:
The Code for Responsible Investment in South Africa (CRISA) should be supported with more resourcing and a permanent secretariat to enable its work on stewardship and responsible investment in South Africa.
3. Investor education:
ESG issues should be a core competency in the National Qualification Framework for trustee training. Training and accreditation groups and industry organisations, such as Batseta and the Association for Savings and Investment South Africa (ASISA), should collaborate to provide training and raise market awareness of ESG investment approaches.
4. Corporate governance and reporting:
South African stakeholders, including the FSB and the Johannesburg Stock Exchange (JSE), should review the quality of the reporting of material ESG factors following the report of the international Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).