Climate change, has environmental as well as economic impact
By Bruce Cameron (Semi-retired founding editor of Personal Finance of Independent Newspapers and co-author of the best-selling book, The Ultimate Guide to Retirement in South Africa.)
Every year Alexander Forbes publishes a Hot Topics Insight, which is aimed mainly at trustees and administrators of funds, who also attend a seminar on the publication at which skilled professionals of Alexander Forbes deliver presentations.
The topics should not be restricted to trustees and administrators. It is important that everyone gets a chance to see what their trustees and administrators are doing.
Bruce Cameron will write about the latest Hot Topics report of Legal and Regulatory Insights to show what you should also be considering.
In South Africa trees are dying at a distressing rate and this in turn could have an impact on the members of a retirement fund.
The reasons Vickie Lange, Alexander Forbes head of Institutional Best Practice, says it because a polyphagous shot hole borer (PSHB) from Southeast Asia, has since 2017, been infecting and killing the trees of the country. This is an example of a new risk brought about by climate change, which has environmental impact as well as economic implications.
It is estimated that 90 percent of the trees in Johannesburg could be wiped out. The destruction of so many trees on an international scale could see effects on the heating of the earths surfaces and how global carbon emissions should be restrained; and in the end this partially comes back down to how your retirement funds invest on your behalf.
In a recent guidance note from the Financial Service Conduct Authority to retirement funds, it warned that retirement funds must invest only in underlying investments that will ensure that you receive returns both now and into the future – and climatic change is one of the many factors.
Recently Rosemary Hunter, a former deputy Registrar of Pension Funds and a retirement fund lawyer, gave the opinion that funds regulated by the Pension Funds Act must take into account material risks from climate change into their decisions, including investment decisions.
A failure to do so would amount to a breach of fiduciary duties by a board of trustees under both regulatory and common law principles.
The investigation was carried out on the instructions of Just Share, a non-profit South African shareholder activism and responsible investment organisation, and ClientEarth, a non-profit environmental law organisation.
Lange says sustainable investment means that business in which funds invest, is conducted in a way that will not compromise the ability of future generations to meet their needs.
This however is only one of many factors that need to be taken into account by trustees in adhering to what is called sustainable investment.
High on the list of sustainable investment is carbon emissions. Using the move from a high carbon economy to a low carbon economy, Lange says, fund trustees can have a positive impact on the move. However, she warns, that there could be investment implications, both good and bad, in the drive for a green infrastructure and how trustees consider (or fail to consider) this within the investment strategy of their funds.
She says the funds need to develop an action plan that will need to evolve as more information comes to light.
A good place to start with the fund’s total exposure to high carbon investments and how this needs to transition to low carbon investments.
The guidance note is based on Regulation 28 of the Pension Funds Act, which is mainly aimed at ensuring your retirement fund has diversified investments. However, the regulation requires quite a bit more from retirement funds.
This includes that investment decisions must be based on a sustainable, long-term, risk-aligned and liability-driven philosophy; and in doing so that must consider environment, social and governance (ESG) factors.
Funds are encouraged to explain how they are doing this to fund members through the publication of the fund’s investment policy statement and any changes that are made.