Issue: December 2011 / February 2012


Tools for the job

Worried about ESG implementation? Don’t be. The SA pensions industry and the International Finance Corporation are stepping in to make life easier for trustees.

Schwier and Kirima . . . project partners

Schwier and Kirima . . . project partners
The non-profit Principal Officers Association isn’t letting the grass grow under its feet on integration of environmental, social and governance (ESG) criteria into mainstream investment. Not only is the POA bringing together a multi-stakeholder platform of relevant Southern Africa parties (asset owners, trade unions, government and regulators), but it’s elicited the support of the International Finance Corporation (part of the World Bank) as a technical partner.

The IFC is a global leader in integrating ESG into emerging-market investments. Its expertise and resources will assist SA’s pioneering endeavours. At the same time, the POA is the right body to champion this local groundbreaker. For, much like companies’ chief executives, principal officers are the fulcrum of pension-fund boards.

Similarly, fund trustees perform much the same role as company directors. Under the revised Regulation 28, trustees now have a responsibility to take particular account of ESG criteria across all asset classes of fund investments. Climate-change risks and creation of sustainable livelihoods are amongst their considerations. It’s a whole new fiduciary duty, so requiring a whole new backup in awareness and competencies.

The easier this is made for trustees, the easier their jobs become; and the better the letter and spirit of ESG will permeate to society’s overall advantage. The ease is intended to be facilitated by development of tools and templates that will serve as a measure and enabler of sustainable investment structures, policies, procedures and reporting.
Wanjiru Kirima, who chairs the steering committee, explains: “Use of these tools would assist retirement funds with implementation and assessment of regulatory imperatives, and with continuous monitoring as well as reporting on the sustainable investment framework. The tools would typically consist of a basket of standardised guidelines, contracts, service-level agreements and reporting formats.”

As TT has frequently noted, Reg 28 takes critical aspects of the King III and CRISA voluntary codes into regulatory territory. For trustees, this needn’t be as intimidating as it sounds. Such service providers to retirement funds as asset managers and consultants should by now be pretty familiar with ESG processes in having perused King and committed to CRISA. But ultimately the responsibility for ESG adoption cannot be delegated and resides with the trustees themselves.

Retirement funds’ investment policy statements must indicate how they intend to apply ESG criteria and disclosures. Reg 28 also increases the asset-allocation ceiling from 2,5% to 10% for investment in private equity. These and other improvements mean there are numerous opportunities to integrate ESG into investment strategies, by no means suggesting that funds compromise returns.

The IFC, Kirima notes, is one of the world’s largest investors in emerging-market private equity. In managing these investments, it has developed private-equity processes and contract templates that integrate ESG.

Its ‘Sustainability Framework’ includes comprehensive policies and performance standards that have evolved from extensive stakeholder dialogue over the past decade. As a basis for the Equator Principles, the IFC framework has also informed the global market standard for project finance. Initially adopted by 10 multinational banks in 2003, these principles are now applied by almost 70 finance institutions representing more than 80% of project-finance transactions worldwide.

The POA project will comprise five phases, from researching SA-relevant needs to designing appropriate templates and training courses, with optimal industry participation. The Financial Services Board and National Treasury will advise on interpretation of Reg 28.

The training programme will have specific consultation channels and milestones. It will run over 24 months to ensure that participants have a number of opportunities during this period to attend.

In a nutshell, the objectives of the project are to build capacity amongst POA members and other Southern Africa investment practitioners. It will, says the POA, “generate tools and case studies to enable more effective investment practices and sustainable returns for pension funds and society”.