A collection of Futuregrowth thought leadership pieces, media articles and interviews.

Retirement Funds and Climate Change: Requirements versus Choice

14 May 2019


The recent report “Pension Funds and Climate Risk” (JustShare/ClientEarth)(“the JustShare Report”) and accompanying Fasken legal opinion (“the Fasken Opinion”)(both in April 2019) discuss the duty of boards of South African pension funds to take climate change into account when making investment decisions.


Note: This article represents Futuregrowth’s view of how investors might incorporate environmental impact into their policies and practices.  It is not a legal view, nor have we sought legal advice on the matters herein.

Pension funds (“fund/s”), their boards of trustees (“trustees”) and their asset consultants are now actively reviewing the JustShare Report and the Fasken Opinion to re-assess their duties as regards the environmental impact of their investments.

Global warming is real

Futuregrowth considers that both science and evidence have sufficiently proven that global warming is a real phenomenon that creates meaningful risks, and that humankind’s activities are a root cause.  In addition to altering life on the planet, climate risks could have a material impact on retirement funds’ financial performance in the short-, medium- and long-term.  Notably, the consequences of environmental degradation or climate change could adversely affect fund members’ quality of life (see the article “Tipping Points”).

Futuregrowth has integrated the consideration of environmental impact into our investment process.  For example, in September 2016, we decided (and announced) that we would not invest clients’ funds into the mooted coal-fired independent power plants.  In addition to concerns around global warming, this decision was based on the lax South African regulatory framework on carbon emissions, pollutants and water usage (see link below).

Can funds or trustees have a fiduciary duty to protect the environment?

We distinguish between the legal and fiduciary duty of pension funds as set by regulation, versus trustees’ ability to make choices regarding the type of investments they hold (or exclude) within the ambit of the funds’ long-term objectives.

Required: legal and fiduciary duty

As regards considering climate change, pension fund boards are bound by regulation while fulfilling their core purpose:  

  • The legal duty as stated in Regulation 28 of the Pension Fund Act is to “… give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social or governance character. This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment.  …before making an investment in and while invested in an asset consider any factor which may materially affect the sustainable long term performance of the asset including, but not limited to, those of an environmental, social and governance character.”
    • Accordingly, trustees should be satisfied that they have an appropriate Investment Policy Statement (“IPS”) that encompasses analysis and risk assessment of the environmental, social, and governance (ESG) risks of investments. All ESG risks – including climate-related risks – will likely materially affect the long-term performance of funds. 
  • Trustees also have a fiduciary duty to act in good faith, loyally to the fund’s goals, and with care and diligence when making decisions that affect their fund. They should ensure that decisions align with the long-term interests of the fund.
  • Trustees have the power to delegate investment decisions to consultants and investment managers, but nonetheless should be able to demonstrate that they understand the risks, including climate risk, and have ensured that reasonable steps have been taken – in terms of processes, tools, and decision-making – by them or their agents to assess and manage these risks.
    • ESG assessments may not require exclusion of certain issuers or industries, and could rather be expressed through risk:return assessments (i.e. higher risk demands a higher return) or pro-active engagement with issuers on ESG-related matters.

Regulation 28 requires that ESG analysis is applied to the assets (and classes of assets) in a fund.  The important theme is the sustainability of each investment, and the duty to consider all risks – e.g. financial, operational, competitive, technology, environmental, social impact, governance – in the assessment of each investment’s sustainability.

However, Futuregrowth believes that pension funds cannot be required to take on a fiduciary duty for broad environmental protection.  While a fund and its managers may reduce holdings to carbon-emitting issuers on a risk:return basis in the pursuit of suitable returns, they are not required to do so because of global warming.  We believe it is an over-reach to argue that funds have a duty to exclude carbon-emitting investments solely because they may contribute to global warming or environmental degradation.

The Fasken Opinion confirms our view, even while the JustShare Report implies a wider duty upon Trustees.

Choice: Going beyond regulation

Within the context of its primary goals of serving the fund’s interest and, ultimately, the fund’s members, we believe trustees have the discretion to exercise choices in order to favour (e.g. developmental investments) or exclude (e.g. tobacco) sectors and investments.  Such preferences or policies should be outlined in the fund’s IPS and communicated to the fund’s investment managers via their investment mandates.  

Over the years, Futuregrowth has seen many examples of pro-active trustees’ choices to express positions on broad socio-economic matters.  For example, some funds have:

  • invested in assets or fund-products which channel capital into socio-economic development, black economic empowerment, infrastructure, clean energy, etc.;
  • taken the view that “sin” companies undermine their members’ health or well-being, and have thus chosen to exclude investments in industries such as micro-lending, gambling, tobacco, alcohol, etc.;
  • determined that it is suitable to encourage investments in the geographic region where their members actually live (e.g. biasing away from distant investments in favour of channelling capital into local development);
  • invested in specific services (e.g. a housing development) which their members might utilise in their day-to-day lives; and/or
  • allowed members to utilise their fund balances as security for loans, so as to access affordable home loans.

We consider it is appropriate for funds to consider the health and well-being of their members/beneficiaries as part of their purpose. 

Accordingly, if a fund were to take the view that global warming as a macro-risk could impair their members’ health or well-being or impair the long-term sustainability of the fund itself, then the trustees could choose to establish a pro-active policy to minimise carbon-emitting investments from the fund.

The Role of Government

While funds may choose to respond to environmental risks, they should not take on a fiduciary duty to protect the environment.  It is the responsibility of government to formulate and enforce policy, regulation, frameworks and measures to protect the natural environment.  Such regulations – which may affect individuals, companies, or pension funds – should define and enforce behaviours and actions which support the broad environmental goals.  South Africa has indicated a desire to transition to a low-carbon economy, and some of the government’s initiatives include:

  • South Africa’s support of the Paris Agreement and commitment under the Intended Nationally Determined Contribution specifies an intended emission range for the period 2025-2030, in order to meet specific targets to transition to a low-carbon economy. To achieve this, government also recognised that “an inclusive and just transition requires time and well-planned low-carbon and climate resilient development”.  For example, government has accepted responsibility to ensure that South Africa’s current energy mix becomes more diversified away from coal and other carbon-intensive resources as part of this just transition process.
  • In addition, the Carbon Tax Bill released by National Treasury is expected to come into effect during 2019, with an expected carbon tax in the range of R120 per ton CO2-e. This will also hold corporates accountable in terms of their commitment to becoming more resilient in light of the climate risks we face as a country and economy.

The salient point is that it is the suitable role of government to protect the natural environment for future generations.

Futuregrowth’s approach to climate risk

In accord with the requirements of regulation 28, Futuregrowth seeks to assess all risks, including ESG risks, as part of our fundamental investment process, and to integrate such considerations into a risk:return framework.  Further, we have chosen to have a position on climate risk which incorporates our belief that global warming is a real factor affecting investments (risks and returns) and the sustainability of the country (and the world) for all citizens.  Thus, our Responsible Investment (RI) philosophy includes the goal of reducing carbon-emitting investments. 

Note: As a PRI signatory, we are aware of the mandatory PRI reporting requirements of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) that is coming into effect in 2020, and we are committed to supporting the TCFD principles as part of our overall RI strategy.