Over the last five years, the incidence of environmental, social and governance (ESG)-related litigation involving pension funds globally has grown about 100% per year. In South Africa, it is no longer a question of if, but when, the first retirement fund will face litigation.
Globally, individual fund members, climate activists, social justice activists, various consumer groups and regulators are taking their concerns to the boards and managers of retirement funds.
In many of these cases in the United States, the focus is on stopping trustees from introducing ESG considerations into their investment strategies, although most of those cases have been unsuccessful. In the US, although there has been active resistance to ESG-focused investment decision-making, the courts are finding that there is nothing wrong with this in principle from a fiduciary perspective.Â
It is different in Australia and Europe, where most cases are about challenging retirement funds and trustees for not being clear or aggressive enough in their ESG-aligned investment policy statements or implementation. There have also been issues where products and benefits have been incorrectly or optimistically described as ‘green’ when they are not.Â
In the UK, the Modern Slavery Act has had a significant impact on supply chain due diligence and management.
In South Africa, there has not been litigation against retirement funds concerning sustainability or ESG policies. However, the Constitution sets out fundamental socioeconomic rights, enshrined in the Bill of Rights. These rights (for example, the rights to access to healthcare, food, water, social security, dignity, the rights of children and the right to be protected against slavery) can be infringed or enhanced by the investment activities of retirement funds.
Our Constitution has a horizontal application. This means that when individuals or stakeholder groups perceive that their rights are being infringed, they can challenge not only the State but also corporations, including retirement funds.
The Constitution also allows for representative litigation. This means that those who bring claims do not need to be directly impacted themselves but may bring claims on behalf of others who are impacted or vulnerable and unable to protect their rights.
The combination of horizontal application and representative litigation means that the country is ripe for class actions or other forms of representative litigation on behalf of groups who are adversely impacted, or who believe there should be a more proactive and assertive approach towards positive mitigation and adaptation strategies by retirement funds through their investment portfolios.
Retirement funds therefore need to be very clear about whether, and how, their investment footprint is potentially harming any of the rights in the Constitution or any stakeholder or community.
Too little ESG investment?
It is concerning that, in the absence of regulatory enforcement or explicit regulatory criteria, it appears that too little is happening in terms of sustainable or impact investing by retirement funds.
There are palpable and exciting opportunities available for retirement funds as institutional investors. Their investable universe, more so than for other investors, is increasingly becoming one in which conservation, biodiversity, renewable energy, people development and community impact are highly relevant, without hampering financial returns.
There is also a growing number of advisors in this space who can assist retirement funds to carve an investment philosophy and implementation approach that aligns with ESG concepts. According to a report by Empowerment Capital titled ‘Pension funds, venture capital and seizing the moment’, South African pension fund allocations to all alternative investments, including venture capital, are less than 2%, whereas in the US, venture capital exposure is over 60% from public pension funds. In the European Union, it is 18%, and in the United Kingdom, it is 12%.Â
It does appear that opportunities are being missed in very high-growth industries or products where a fund could contribute a relatively small portion of its overall portfolio to potentially high-impact investments. This could return high social and environmental impact in addition to positive financial impact.Â
Finding the opportunities
South Africa has a National Development Plan (NDP) with very clearly defined outcomes for 2030. Since the beneficiaries of retirement fund investments are most likely to reside in this country, they will be hoping for the NDP to deliver some of these outcomes. There are measurable outcomes that investments can be indexed against with reference to this plan.
Further, the country’s Green Finance Taxonomy, while not law, has been published and provides clear metrics for impact and climate risk mitigation, to assist in disclosure, reporting and investees’ performance. It is likely that these metrics will become normalised and standardised and potentially legislated in the foreseeable future, and they can be used reliably as a guide in the interim.
Start simple and collaborate
The Kenyan draft Green Finance Taxonomy (KGFT) includes a paragraph that emphasises the importance of starting simple. It suggests that investors should select specific investments where there is quality granular data and test this on a small portion of the portfolio. As one becomes more familiar with this kind of investing, it can be decided whether to go bigger or further or to change the investment, but importantly such decision-making will then be informed and evidence-based, and neither investing nor refusing to invest could be challenged as an ideological stance rather than legitimate investment decision-making.
Collaboration is also an option. In 2020, the Principles for Responsible Investment commissioned Bowmans to provide a report on the regulation of shareholder collaboration in South African law (covering the rules around market abuse, horizontal relationships, inside information, antitrust on information exchange, the acting in concert rules for the JSE, and the takeover mandatory offer rules, among others). We found, as a rule, that there is no impediment to responsible and carefully managed collaboration by institutional investors.
The message to institutional investors and retirement funds is to understand their role in society, how their investment activity could cause harm, and how it could advance ESG interests. What retirement fund trustees and investment advisors should not do is nothing and hope that the fund or board will not be the first regulatory or activist test case.
This article was first published in Forward Law Review.
