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South Africa: ESG ructions in the USA should not rattle South African investors

4 October 2023
– 7 Minute Read


The world’s largest asset manager, US-based BlackRock, has consistently endorsed core responsible investment (RI) principles and climate change mitigation. Last year, it was accused by 19 United States attorney generals (AGs) of violating its fiduciary duty by placing climate change considerations ahead of the interests of the members of their states’ pension funds and of not pursuing the administration of funds to the exclusion of any other interests.

The same AGs plus six more have since filed a suit in the federal court in the Northern District of Texas, where fossil fuels have particular relevance, contesting the legality of the Biden administration’s 2022 regulation permitting the use of ESG factors if they are relevant to a risk-and-return analysis. And it is not only the politicians. In May 2023, members of three public pension funds in New York City filed suits against the funds for breach of fiduciary duty based on divestment of fossil fuel investments.

The brouhaha in the US has understandably rattled South African investors and asset managers, but there are material legal and political differences to be considered.

‘Absolute financial returns’ vs ‘adequate risk-adjusted returns’ 

In a letter to BlackRock CEO, Larry Fink, the AGs stated that, ‘pensions must be invested only to earn financial return’ and that ‘mixed motives’, however noble, result in a breach of the statutory duty of care. 

In South Africa, Regulation 28 under the Pension Funds Act recognises RI as an aspect of common law fiduciary duty. The regulation has, since 2011, explicitly compelled the boards of South African pension funds to consider ESG factors before investing in an asset, and for the duration of the investment.

It would be foolish (and unlawful) to interpret this statutory duty as licence to ignore financial returns and embark on a purely philanthropic investment agenda, but its formulation does align with concerns such as retirement funds’ role in a just transition, not only in relation to fossil fuels, but also broader societal considerations around quality of retirement.  In this context the ‘mixed motives’ argument seems to present a significantly lower legal risk in South Africa than is portrayed in several US states.

An example is a retirement fund that generates good cash flow in retirement, but its pensioners must pay for transport to buy water because there is environmental and infrastructural degradation where they live. That fund could be said to have missed an opportunity to address water quality, reticulation, roads, bridges, etc. through relevant investments in the interests of the members, whose retirement benefits are otherwise diminished in financial terms directly, and indirectly in the measurement of their overall dignity and quality of life.

Further, the explicit standard in Regulation 28 is not ‘absolute financial returns’; it is ‘adequate’ risk-adjusted returns suitable to the circumstances of the fund.

US and South Africa have differing positions on the Paris Agreement 

The 19 AGs also argued that BlackRock was in breach of its duty of care by basing its investment approach on unverifiable climate-related facts. 

This was not a general broadside against climate science, it was somewhat more cynical.  They reason that the US has not adopted net zero policies, and even governments that have done so, have not taken necessary steps to implement their commitments. Further, the International Energy Agency has expressed concern that all the pledges already made will still not lead to a 1.5 degree stabilisation in global average temperatures. As a result, the AGs assert that it could not be reasonable for a prudent fiduciary to assume that the Paris Agreement will be implemented within the US, nor by all its signatories in full, by 2050. 

Therefore, they said, it is neither sincere nor prudent fiduciary conduct to make outliers of portfolio companies by encouraging them to target such outcomes.

South Africa, on the other hand, is a signatory to the Paris Agreement and has ratified it.

Our Government does have obligations, in the form of ‘nationally determined contributions’ (NDCs).

Therefore, it would not be an unaligned position – either commercially or legally – for a South African company to advance an assertive decarbonisation and/or net zero strategy. While it is probably even less likely that concerted efforts by South African companies could recalibrate the global climate challenge, that is not the test for the legitimacy of local fiduciaries’ conduct, whereas ignoring Regulation 28 is clearly a breach of that duty.

There are other relevant differences between the South African and US legal systems.

Constitutional rights relevant to ESG

South Africa’s constitution contains a number of fundamental socio-economic rights. It is important to note that those rights can be applied horizontally, between citizens and the State, and also between individual or corporate citizens.

Several ESG considerations, including climate change mitigation and adaptation, find expression in those rights, among them freedom from slavery, servitude or forced labour; fair labour practices; a healthy environment ‘protected, for the benefit of present and future generations’; healthcare, food, water and social security, and the constitutional injunction that ‘a child’s best interests are of paramount importance in every matter concerning the child’. They are actionable by individuals against those who infringe them at the expense of one person or a group of people.

The Financial Sector Conduct Authority issued Guidance Note 1 of 2019 (GN1/2019) to guide retirement funds in RI efforts. It does not prescribe limits. It does suggest that while there are no bad assets, it is bad not to be able to explain why you hold assets that appear to serve no positive investment or social purpose. 

GN1/2019 recommends that a retirement fund should, among other things, record and make available its sustainability philosophy and approach, as well as its active ownership policy. A fund should also justify its holding of ‘negative sustainability impact’ assets, and its remediation plan (or its reasons for lack of a plan).

Insurers and Collective Investment Schemes do not fall under Regulation 28 but Prudential Standard GOI3 also prescribes an RI approach for insurers’ portfolios, and the Public Investment Corporation Act provides that the PIC must ‘as far as possible, seek to invest to improve social development’.

South Africa’s National Development Plan (NDP) is not law, but our common law does take into consideration the legal convictions of the society when determining the acceptability or wrongfulness of conduct in a contractual and delictual context. Our NDP includes several detailed socio-economic imperatives and targets and is framed in the context of the common good of our society, including just transition considerations. This means there is merit to the argument that operational and investment decisions that align with the strategies and targets of the NDP are unlikely to be judged as contrary to the legal convictions of our society. 

Fiduciary risks of adopting an RI strategy are lower in South Africa 

It appears that the risks attaching to a fiduciary’s adoption of an RI strategy are relatively lower in our domestic context, especially in light of the alignment to constitutional socio-economic rights.

Turning to economic and social opportunity, Regulation 28, GN1/2019, the Sustainable Finance Taxonomy, the NDP and the like all encourage and support a more assertive approach to infrastructure and enterprise development in the nature of impact investment, meaning investments that are designed to deliver positive impact in one or more ESG categories.

The growth in financial products and structures such as green bonds, sustainability bonds, infrastructure and housing impact funds, social impact bonds and sustainability-linked loans, present opportunities for private sector remediation of social, environmental and governance challenges with backing from institutional investors and Government’s encouragement.

South African funds, it seems, need not be apprehensive about advancing ESG strategies, provided they do not throw caution to the wind.