Category Investments

Umbrella funds heed the infrastructure and sustainable investing call

30 June 2022 Gareth Stokes

There is growing evidence that South Africa’s standalone and umbrella funds are heeding government’s call to invest more in local infrastructure, and the world’s call to invest for environmental and social sustainably. The 41st Sanlam Benchmark survey noted that investment in infrastructure had increased across the retirement sector, with umbrella funds increasing their asset allocation to this category from 4.7% to 15.5%, and standalone funds from 6.6% to 10.6%. “Investments in assets that can impact the environment and society have increased somewhat too, but there is still a gap in knowledge around what ESG investing means,” noted the report.

Environmental- and sustainability-focused

The 2022 Benchmark survey polled 83 principal officers of standalone funds; 100 participating employers in umbrella funds; 15 asset consultants; 15 healthcare consultants; six top umbrella fund sponsors; and 500 online consumers, making it perhaps the most comprehensive cross-discipline report on the local retirement funding universe. The survey launch, which took place in both the physical and virtual realms, offered valuable insights into member contributions; the take-up of flexible group risk benefits; and investment trends, among others. In this newsletter we focus on a frank environmental- and sustainability-focused discussion with one of Sanlam’s investment partners, Dutch-based Robeco Asset Management. 

The discussion took place against the backdrop of global warming and the role that allocators of capital, including retirement funds, will play in achieving a just transition to net-zero. Reducing global carbon emissions is seen as non-negotiable to keep average global temperature increases in check. “Global warming is evidenced by the extreme weather patterns that many parts of the world have been dealing with; in the past few years, for example, parts of South Africa have experienced unprecedented drought,” noted Darryl Moodley, Head: Tailored Investments and Sanlam Corporate, during his introductory remarks. He noted that Robeco was a leading global sustainable investment manager, and a partner to Sanlam Investments on its sustainability journey. 

Climate change could wreak havoc on Africa

Climate experts are confident that there is a link between the rising frequency and severity of extreme weather events and climate change, which they say is due to global warming caused by excess levels of carbon emissions in the atmosphere. Lucian Peppelenbos, Climate Strategist at Robeco, avoided a lengthy discourse on the cause and effect of extreme weather by taking a more pragmatic approach. “The point is that our economies and societies are embedded in nature, we depend on nature; and if nature gets disrupted, society gets disrupted,” he said. “That is why it is so important to tackle climate change, particularly in Africa”. Peppelenbos was quick to remind the audience that while Africa contributed relatively little to global warming, it was disproportionately exposed to the adverse impacts of climate change

Moodley noted that climate change and what could be done to address it was creeping on to the agendas at both retirement fund board trustee meetings and corporate board meetings. “We are starting to see a growing awareness in the local market, though not at the level of awareness that we are seeing globally,” he said. There were, however, some concerns among South African stakeholders about the disconnect between the developed market’s transition away from fossil fuels versus South Africa’s need for a just transition. Anecdotally, many Africa-based businesses feel that a zero tolerance approach to net-zero carbon emissions could do more social harm than environmental good. “We often hear talk about enabling a just transition from an economy that is based on fossil fuels to one that is more sustainable, and in particular, one that is able to achieve the net-zero targets set out in the Paris by 2050,” noted Moodley, before asking what the just transition meant in terms of a developing country such as South Africa. 

The net-zero investment ‘bonanza’

Peppelenbos conceded that net-zero could be perceived as a threat by countries whose economies were heavily dependent on coal. The challenge, it seems, is in balancing the short-term disruptions of transition, with the long-term benefits it brings. “Over the short term, the net-zero transition means more costs [and] the displacement on labour markets; but long-term the transition is all about growth, innovation and new jobs,” he said. Rather than resist transition, local firms should investigate opportunities in biofuels, electrifying transportation systems, green infrastructure, renewable energy and similar. More importantly, they should set about participating in the global net-zero transition investment ‘bonanza’ totalling around USD25 trillion. 

“The net-zero transition is full of growth and full of opportunity; the just transition [is based] around leaders in business and politics who look beyond the short-term costs to ensure affordability and the inclusion of society in the transition, to mobilise people around the long-term agenda of value creation,” said Peppelenbos. In a South African context, retirement funds, retirement fund trustees and investment consultants to the industry will play a big role in achieving this transition. A concern raised during the discussion was whether retirement funds could, or indeed should, accept responsibility for a country’s economic development agenda. After all, government is responsible for the development agenda, while retirement fund trustees have a fiduciary duty to the financial interests of their members. 

No climate, no fund

“Governments need to introduce the right policies to make markets work towards net-zero,” said Peppelenbos. “That means pricing carbon, it means setting strict standards for industry, and it means taking away BREAK subsidies from fossil fuels into green innovation”. He noted that net-zero transition was a shared responsibility between consumers, industry and investors: “We all need to show leadership, we all need to take action to change business as usual”. On a more practical level, it is in the interest of retirement funds to avoid catastrophic climate change given the long-term nature of their liabilities. The best way to address this risk would be to integrate environmental factors into investment decision making of retirement funds, and making tackling climate change a fiduciary duty of retirement fund trustees. 

“As stakeholders in the retirement fund industry, we all have a crucial role to play in envisioning a new future and actively advancing climate issues within our circles of influence,” concluded Moodley. And the 2022 Benchmark survey showed promising signs that retirement fund members and trustees are getting the message. It showed that

67% of standalone retirement funds and 53% of umbrella funds are interested in investing in alternative asset classes over the next three years to achieve infrastructure and impact investing outcomes. The final call to action to asset managers, intermediaries, investment consultants and retirement fund trustees: Do not wait for the perfect date, plan or solution; because the biggest risk of climate change is inaction. The future is low carbon! 

Writer’s thoughts:
The 2022 Sanlam Benchmark presentation departed from its usual assessment of members’ contributions and benefits, to talk to some of the broader themes affecting retirement funds circa 2022. Are you happy to explore these ‘big picture’ themes, or do you prefer comment on how retirement funds and their members are progressing towards sustainable retirement outcomes? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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