Development finance institution the International Finance Corporation (IFC) has launched the Integrated Environmental, Social and Governance (IESG) programme in South Africa to support and enable pension funds to play a greater developmental role in South Africa, said IFC South Africa and Southern Africa country manager Adamou Labara.

"The importance of integrating ESG into pension funds' processes cannot be overemphasised. Given the areas in which they invest and their footprint, they have the reach and impact to lead the financial sector [in integrating ESG principles into practices]," he said this week.

The timing of the launch is also favourable as, in 2021, the IFC supported the publication of the National Treasury's Financing a Sustainable Economy paper through environmental and social risk management, he noted.

"Pension funds in South Africa are exposed to several ESG risks, including extreme weather, inequality, labour issues, pollution and stranded assets, through their investments. This is also a global problem.

"It is critical to mitigate these ESG risks to ensure the pension fund sector contributes to promoting a sustainable and more resilient economy in South Africa, and also improves financial stability to maximise returns on investments," he said.

Improving the ESG performance of investment organisations, specifically pension funds in this case, therefore, can result in greater development of economies and better risk management.

"There is a growing understanding among stakeholders that pension funds, which are owners of capital worldwide, can promote more resilient economies through their investment decisions," Labara emphasised.

The IESG programme aims to enhance ESG integration practices at pension funds to boost sustainable growth in South Africa through capacity building and development of good practice guidelines.

The IFC, in partnership with local retirement industry responsible investing nonprofit organisation Batseta, will present training courses for pension fund trustees and consultants on integrating ESG into their investment practices and processes.

The first course will be presented in Johannesburg on May 9 and 10, and the second in Cape Town in July.

However, trustees and consultants in the pension fund sector who want to investigate how to integrate ESG into their processes ahead of the courses can view the Responsible Investment and Active Ownership (RIO) Guide, which is provided by Batseta, said IFC IESG South Africa programme coordinator Ben Gaffney.

The RIO Guide is a tool anchored in national and international regulation and best practice. It covers the requirements in Regulation 28 of the Pension Fund Act, as well as the regulator Financial Sector Conduct Authority (FSCA) Guidance Notice on Sustainability of Investments and Assets in the Context of a Retirement Fund’s Investment Policy Statement.

The tool further incorporates the guidance provided under the Code for Responsible Investment (CRISA), which is further reinforced and complemented by the King (IV) Report on Corporate Governance for South Africa and the Sector Supplement for Retirement Funds. The tool has also drawn significantly on international practice and experience available from the global investor network Principles for Responsible Investing (PRI).

"South Africa’s retirement fund industry is one of the largest in the world. The investment decisions of the country’s retirement funds have a direct and indirect bearing on pensioners, society and environment they will retire in.

"The size of the industry means that retirement funds have unprecedented power to champion and secure sustainable long-term returns by insisting on high standards of environmental care, social concern and better governance in the assets in which they invest," said FSCA retirement funds supervision divisional director Olano Makhubela.

As the world moves to net-zero economies, the retirement industry must prepare. CRISA has been revised and the FSCA is a proud endorser of and encourages retirement funds to use them along with the RIO Guide and the National Treasury's South African Green Finance Taxonomy.

These will enable issuers and investment organisations to track, monitor and demonstrate green activities in a more consistent and standardised way.

"Investment organisations, pension funds, companies and individuals must not wait for laws and regulations to do the right thing. No one wants to retire in a wasteland.

"However, not all is lost and, while it is difficult for countries like South Africa, we need to get [IESG investing] and the Just Energy Transition right. If we do not, we will not have a planet fit to live in, and this is the only planet we have.

"The FSCA will continue to provide guidance and good practice frameworks to bring about positive change to society, the environment and companies," he said.

Further, the IFC is promoting good practices to develop sustainable economies throughout Africa, with IESG programmes in Egypt, Ethiopia, Ghana, Kenya, Morocco, Rwanda and Tunisia, among others, added Labara.

"The IFC works to enhance ESG practices in key sectors on the continent, such as in manufacturing, agriculture and housing.

"The IESG is following a similar format that involves the development of good practice guidelines, regulations and the building of capacity in the industry, especially among consultants who provide ESG support to individual firms," he said.