The FSCA is taking a number of steps, beyond introducing amendments to Regulation 28, to encourage pension funds to invest in green and other ESG investments

The South African Financial Sector Conduct Authority (FSCA) may be credited with being an "early adopter" in recognising the influence that ESG (Environmental, Social and Governmental) considerations should be having on financial services sector regulation.

At a recent event hosted by the South African Sustainable Finance Intensive (SASFI), Mr Olano Makhubela, Divisional Executive: Retirement Funds Supervision of the FSCA noted that Regulation 28 of the Pension Funds Act, 1956 (Regulation 28) was introduced into law as early as 2011.  At the time, it was novel in many respects. It specifically promotes responsible investing of pension fund assets, based on a sustainable, long-term, risk-aligned, and liability-driven investment philosophy. It establishes a solid foundation for sustainable investment by pension funds that is aligned with ESG objectives.

Given the estimated ZAR 4-trillion of assets currently under the management of South African pension funds, this industry is well placed to play a leading role in ESG investment by the financial services sector.

Recently, the FSCA published Guidance Note 1 of 2019, entitled: "Sustainability of investments and assets in the context of a retirement fund's investment policy statement". It provided further guidance to pension funds on the FSCA's expectations of pension funds on ESG reporting and disclosure.

In 2021, the FSCA, in partnership with the IFC, released the Sustainable Finance Practices in South African Retirement Funds Survey brief (the Brief) which provided an overview of the progress on sustainable investing by South African retirement funds, as well as barriers and opportunities to unlock the significant potential for green investment. According to a FSCA press release, the Brief indicates that "South African retirement funds, despite various known constraints and challenges, are nevertheless well-positioned to take advantage of new trends in sustainable investing."

Fast-forwarding to 2022, Mr Makhubela referred to the proposed amendments to Regulation 28 which introduce "infrastructure" as a distinct and separate new asset class into which pension funds may invest. He said this amendment was not intended to force pension funds to invest in infrastructure but to telegraph the FSCA's support for infrastructure investments. Since infrastructure investment can play an important role in facilitating the achievement of ESG-related goals, it is reasonable to expect that the introduction of "infrastructure" as a distinct asset class will encourage pension funds to become more active ESG investors.

Mr Makhubela also contextualised the increased investment allowance that the proposed amendments to Regulation 28 introduce for pension funds' investment in private equity. He said the private equity industry plays an important role in funding renewable energy projects.

In future, the FSCA is likely to consider ESG considerations in the toolkit that it produces to guide pension fund trustees in their decision-making.  It will issue guidance notes (as opposed to directives), allowing it to develop and fine-tune its approach through learning from and engaging with the industry. Mr Makhubela expressed the FSCA's ongoing support for creating an enabling environment for green and other ESG investments.

This approach is aligned with and supported by the efforts of the JSE Limited as is highlighted by their recent publication of the JSE ESG Guide on Reporting and Disclosure - ESG Guide. We summarise key points from these in a recent update.

Written by Dawid de Villiers, Partner at Webber Wenzel

For other ESG related development in the sector, read our recent update ESG disclosure framework in the pipeline for South African financial services companies.