Regulation 28 Directive: Just Share calls for pension funds to have a public position on climate change

In February 2011, South Africa’s then Minister of Finance, Pravin Gordhan, announced important changes to Regulation 28 of the Pension Funds Act. The amended regulation set asset allocation limits for pension funds, to manage the risk to which a fund’s assets are exposed, and also provided that:

Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance (ESG) character.

This regulatory imperative to incorporate ESG factors into investment decision-making was a groundbreaking move in South Africa, and reflected the growing recognition that ESG factors can have a significant impact on the long-term performance of a fund.

In March 2018 the Financial Services Board (now the Financial Sector Conduct Authority), released its long-awaited Draft Directive on Sustainability Reporting and Disclosure Requirements. Guidance on the implementation of Regulation 28 is essential: despite the progressive content of the regulation, pension fund trustees do not appear to be providing the asset managers who manage their investments with mandates that are sufficiently clear and robust on the integration of ESG factors into their investment decisions. There is also very little oversight of the implementation of responsible investment policies.

In addition to a number of other comments, Just Share submitted that it is now essential for every pension fund to have a public position on climate change, and that this position should be articulated in each fund’s investment policy statement.

Regulation 28(2)(c)(ix) of the Pension Funds Act Regulations states that pension funds must, “before making an investment in and while invested in an asset consider any factor which may materially affect the sustainable long term performance of the asset including, but not limited to, those of an environmental, social and governance character”.

The Financial Stability Board’s Task Force on Climate-Related Financial Disclosures describes climate change as “one of the most significant, and perhaps the most misunderstood, risks that organizations face today” [fn1] If they are to act in the best interests of their members, and comply with Regulation 28, pension funds must therefore be required to familiarise themselves with the risks and opportunities posed by climate change, and to develop strategies to manage the long term impacts of climate risks on the value of their funds.

Just Share NPC: comments on the Draft Directive (Pension Funds Act, 1956) on Sustainability Reporting and Disclosure Requirements

  1. (Executive Summary)
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