The primary objective of a retirement fund is to provide sufficient income to members at retirement. This requires a long-term approach to investing, securing an adequate real rate of return and navigating the various risks and opportunities presented over a number of decades.

Regulation 28 of the Pension Funds Act requires trustees of retirement funds to consider a range of issues when designing an appropriate investment strategy, including environmental, social and governance issues. More recently, the FSCA issued Guidance Note 1 of 2019 on the sustainability of investments and assets in the context of a retirement fund’s investment policy statement. The note provides guidance on the FSCA’s expectations for compliance with Regulation 28 and disclosure and reporting requirements for retirement funds on sustainability factors.

One of these factors is in relation to climate change.

Science has shown a direct link between human-made green-house gas emissions and global warming. Indeed, at present the average global temperate has increased by 1.1 degrees Celsius above pre-industrial (1850-1900) levels. Global initiatives aim to limit warming to well below 2 degrees Celsius, given the severe implications on global economies and humanity beyond these levels. The recent floods in KZN are an example of the implications to the economy and livelihoods of such events – and events like this will become more frequent and severe as global temperatures increase, especially if they exceed 2 degrees Celsius above pre-industrial levels.

The presentation demonstrates the long-term implications of climate change on retirement fund returns – with every 1% per annum return impact translating to an impact in retirement income of 28%. It also sets out key areas trustees should focus on the manage the risks and opportunities presented, including the practical implications for trustees in implementing the Task-force for climate-related financial disclosures (TCFD).

Although there are some challenges in implementing the TCFD there have been recent improvements in company disclosure standards as well as the increasing data available to monitor ESG risks. It is therefore important that trustees be proactive and work together with their asset consultant, multi-manager and asset managers in embedding the latest practices in their investment strategies. This is because other sustainability factors such as biodiversity and inequality risks will be next on the agenda and likely to follow a similar approach to how the TCFD framework has been adopted globally. It is therefore important that trustees have an approach to incorporate sustainability factors into the running of their fund using TCFD as a start.

In conclusion, the presentation highlights how the sustainability agenda around the world is rapidly moving, with key issues linked to risks and returns affecting long-term investment returns. Despite this, a recent World Bank report has highlighted that there is still a significant catch-up required by funds in Southern Africa in relation to managing sustainability risks, opportunities and disclosure compared to international best practice. Funds that are proactive in aligning to international best practice will serve their members well over the long run and also ensure that they meet the high standards required in meeting their fiduciary duties.

Outcomes:

1. an understanding of what sustainability is

2. an understanding of the impact of ESG issues on employee benefits

3. an understanding of where the current gaps are

4. practical considerations on how to address these gaps