The FSCA may be credited with being an “early adopter” in recognising the influence that ESG (environmental, social and governmental) considerations should be having on financial services sector regulation.
At a recent event hosted by the South African Sustainable Finance Intensive, Olano Makhubela, divisional executive: retirement funds supervision of the FSCA, noted that regulation 28 of the Pension Funds Act was introduced into law as early as 2011. At the time, it was novel in many respects. It specifically promotes responsible investing of pension fund assets, based on a sustainable, long-term, risk-aligned and liability-driven investment philosophy. It establishes a solid foundation for sustainable investment by retirement funds that is aligned with ESG objectives.
Given the estimated R4 trillion of assets under the management of South African retirement funds, this industry is well placed to play a leading role in ESG investment by the financial services sector.
Recently, the FSCA published Guidance Notice 1 of 2019 (PFA), titled “Sustainability of investments and assets in the context of a retirement fund’s investment policy statement”. It provided further guidance on the FSCA’s expectations of retirement funds on ESG reporting and disclosure.
In 2021, the FSCA, in partnership with the International Finance Corporation, released the Sustainable Finance Practices in South African Retirement Funds Survey brief, which provided an overview of the progress on sustainable investing by South African retirement funds, as well as barriers and opportunities to unlock the significant potential for green investment.
According to a FSCA media release, the brief indicates that “South African retirement funds, despite various known constraints and challenges, are nevertheless well positioned to take advantage of new trends in sustainable investing.”
Fast-forwarding to 2022, Makhubela referred to the amendments to regulation 28 that introduce “infrastructure” as a distinct and separate new asset class into which pension funds may invest.
He said this amendment was not intended to force retirement funds to invest in infrastructure but to telegraph the FSCA’s support for infrastructure investments. Since infrastructure investment can play an important role in facilitating the achievement of ESG-related goals, it is reasonable to expect that the introduction of “infrastructure” as a distinct asset class will encourage retirement funds to become more active ESG investors.
Makhubela also contextualised the increased investment allowance that the amendments to regulation 28 introduce for retirement funds’ investment in private equity. He said the private equity industry plays an important role in funding renewable energy projects.
In future, the FSCA is likely to consider ESG considerations in the toolkit that it produces to guide pension fund trustees in their decision-making. It will issue guidance notes (as opposed to directives), allowing it to develop and fine-tune its approach through learning from and engaging with the industry.
Makhubela expressed the FSCA’s ongoing support for creating an enabling environment for green and other ESG investments. This approach is aligned with and supported by the efforts of the JSE as is highlighted by their recent publication of the JSE ESG Guide on Reporting and Disclosure.
Read: ESG disclosure framework in the pipeline for financial services companies
Dawid de Villiers is a partner at Webber Wentzel and specialises in financial services law and regulation.
