Let us find a better way

21 October 2019

As clients become more educated and informed about the financial services industry, they start holding insurers and retirement funds to account. Ethical questions are being asked about how the industry’s biggest names are making a difference to society beyond growing investments.

Growing investments for retirement are how retirement funds make money. However, equally important to clients is leaving a legacy behind for future generations. It is no use saving for retirement if there is no society, environment or social order (fabric of law) to retire to. 

This issue took centre stage at the recently held Financial Sector Conduct Authority (FSCA) Retirement Funds Conference. Environmental and Social Governance (ESG) investing is no longer paying lip service. 

The future is now

There is a long held belief that the youth is the future of society. However, Malcolm Fair – MD at RisCura – pointed out that this future is closer than anyone realizes. 

“For active retirement funds, there are young investors that will be receiving payments until 2028. For members who are close to retirement, they will be receiving payments until 2050. The time to focus on ESG investing is not tomorrow, or the next day, it is now,” said Fair. 

He added that ESG investing was necessary and was a possible answer to the prescribed assets debate that is quietly gaining momentum in the industry. 

“Some of the core investments of ESG funds include investment into key economic infrastructure such as State Owned Enterprises, priority sectors that are drivers of economic development as well as the energy sector whose investment is independent from key economic infrastructure investment. If governed properly, it can generate significant income that can be used in job creation and nation building,” said Fair. 

He added that for this to work and for ESG investing to have an impact on society, funds need to be aligned with the concerns of investors in order to make sure that social objectives are met. 

In addition, this will help reduce the barriers that are currently present when it comes to investing and addressing governments concerns around financial inclusion. 

Star performers

The sole purpose of the investment industry is to grow pots of cash. However, as Olano Makhubela – Executive: Retirement Funds Supervision at the FSCA – pointed out, this should never come at the expense of creating a brighter future. 

The caveat that Makhubela referred to is not unreasonable and is perfectly attainable by companies who should be addressing these concerns outside of the growth of the ESG investment movement. 

However, it seems as if the fact that ESG is gaining momentum is serving as an extra incentive for funds that are focused in this area. Dr Susan de Witt – Innovative Senior Advisor at the Bertha Centre for Social Innovation and Entrepreneurship at the Graduate School of Business in Cape Town – pointed out that ESG focused funds fractionally outperform their peers who do not have this focus. 

Because of this, and the visible benefits that are associated with ESG Investing, Dr De Witt says that this issue should be more than just a moral issue. 

“I strongly believe that ESG concerns should be included in every retirement fund’s fiduciary duty. By creating a more inclusive investment platform, we have seen the visible evidence of the sustainability of socially responsible investing. It is the future. It can inject significant cash into the economy thereby safeguarding it and reaching the goals that were set out in the National Development Plan that have been very illusive (when it comes to investing) up to this point,” said Dr De Witt. 

Global case studies

Denmark’s PKA pension fund is one of the largest administration companies for occupational retirement schemes in Denmark with about US$ 23 billion in assets under management. PKA is one of Denmark’s biggest investors in sustainability themes, about 5% of its assets (close to US$1.2 billion) is invested in the Green Economy. 

The fund has been proactive in carving out new green investment opportunities via public private partnerships. A recently published article pointed out that in 2011, PKA partnered with Danish pension fund peer (PensionDanmark), to buy a 50% stake in an offshore wind farm from state-controlled energy firm Ørsted A/S (formerly DONG Energy) for around US$1 billion. 

The article added that the funds signed a 15 year contract with DONG for operation and planned maintenance of the farm. The farm should be able to meet around 4% of Denmark’s annual power consumption needs. 

The article points out that the project is underpinned by long-term government support. The Danish government guarantees the price of the electricity, which helped to underpin the deal. This type of energy deal is likely to be popular in Denmark because government policies have made sure it is a viable model. PKA views this as a long-term contract with a reasonable financial promise of about six to seven percent returns per annum over 20 years. 

If we bring this into the South African context, a lot of concerns have been raised about Prescribed Investing (investing in Prescribed Assets) and rightly so. There is no guarantee that our investment will be used responsibly. 

However, if South African funds can follow the Danish example, there will be a solution for the country’s aging power infrastructure and the need to gain illusive alpha. No pension fund will turn their noses up to an investment that has returns of up to six or seven percent an annum over a 20 year period. 

Writer's Thoughts:
Case studies are showing that ESG investing has demonstrable benefits. However, South Africans have a natural reluctance against forced investments. How much value will ESG add to our market at the end of the day? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts

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