The South African government is subscribing to a green recovery as the blueprint for rebuilding and growing the economy with sustainability, resilience and inclusion as key priorities. The president articulated the direction of the recovery plan in the joint sitting of Parliament on 15 October 2020. While it is crucially important to focus on the implementation of the eight-point plan, a green recovery directive is sound thinking.
In assessing the above point, the Presidential Economic Advisory Council released briefing notes in October 2020, and it is poised in pointing out what used to be a choice is now mandatory. Those countries not adapting to a green transition will find themselves behind and excluded. They will be behind on the innovation curve, the cost curve and thus be laggards. Thus, the question is not whether, but how.
“As a signatory to the 2015 Paris Climate Agreement, South Africa has a commitment to reduce greenhouse gas emissions by 2030. Considering this, we recognise that South African specific climate change risks and social concerns are as important as governance concerns. The materiality of ESG risks matter,” says Premal Ranchod, the head of ESG research at Alexander Forbes Investments.
Regulation 28 promotes responsible investing of pension fund assets by specifically requiring the need to consider environmental, social and governance (ESG) factors. Regulation 28 is cognisant of risk and aligned with the long-term investment time horizons of pension fund investors.
“Evolution in regulatory environments around the world are a key sign that the importance of ESG integration and measurement of impact in an investment process is growing. There are definite positive effects it can have on both pension funds and societies,” Ranchod says.
Sustainable finance may not yet be as mainstream locally as it is globally, but it is gathering momentum.
“Green finance investments can find expression through impact investments or specific thematic investments. The Global Impact Investing Network defined impact investments as ‘investments made into companies, organisations and funds with the intention to generate measurable social and environmental impact alongside a financial return. Examples include commercially viable impact investments, but can extend to infrastructure and renewable energy contributing toward positive impact," he says.
A recent global development has shown that several providers of investment products have begun creating products in the public markets that are linked to making a positive public impact. In South Africa, the green bond market exists as a niche. Recently, a Sustainable Development Goal (SDG) bond instrument was successful in funding R2bn of sustainable finance in Africa. In June 2020, the JSE also launched a sustainability segment, as a platform to raise capital. The long-term goal is for capital markets to have worthy niche ideas become the mainstream.
Products can be developed with specific reference to the 17 United Nations Sustainable Development Goals. According to the Impact Management Project, a forum for building global consensus on impact measurement, an enterprise’s intention around impact, positive or negative, intentional or not, can be classified into those who:
Thematic investing can also extend to include environmental or social imperatives by virtue of a specific theme that is being explored. For example, a fund with a social theme can be found in microfinance, urban regeneration, property and social infrastructure.
Environmental themes are another example and can be explored through water and waste management as well as renewable energy. Allocations to these investments under Regulation 28 brings diversification to traditional listed investments. It also plays a pivotal role in enabling environmentally appropriate social development, fostering economic opportunities in the green economy.
“In sourcing viable investment opportunities, there are also ESG considerations to be made. The investment research and ratings of asset managers, or investee companies that provide developmental assets and sustainability themed investments (clean energy, education, health, transportation, low-cost housing, and other social infrastructure) must be considered strongly.”
The economic recovery plan requires the contribution of robust governance frameworks in listed and unlisted investments.
Listed shareholders who have concerns around ESG issues have power and can vote, attend annual general meetings or write shareholder letters to the management to raise these issues. Listed bonds currently do not have this avenue for recourse and more stewardship effort by the industry is needed to level the playing field.
“Where appropriate, institutional investors should consider a collaborative approach to promote acceptance and implementation of the Principles for Responsible Investment (PRI), the Code for Responsible Investing in South Africa’s (CRISA) principles and other codes and standards applicable to institutional investors.”
Raising transparency is of paramount importance to citizens and investors alike. Ranchod highlights that an institutional investor should be transparent about the content of its policies, how they are implemented and how the Code for Responsible Investing in South Africa principles are applied to enable stakeholders to make informed decisions.
“Green finance, as an avenue for investment, brings differentiation to the South African market. It allows pension fund investors to access compelling return profile at acceptable levels of risk, while acting in the best interests of the society and environment within which we operate,” says Ranchod.
