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Sustainability should be paramount in pension fund investment

There is little point in making provision for a comfortable retirement if the society and environment in which you live is untenable. Nor will you actually have a decent pension if the retirement industry doesn't make sustainable investments with positive social and environmental impacts. The two are inextricably linked.
Adam Bennot. senior associate, Alternative Investment Services, RisCura.
Adam Bennot. senior associate, Alternative Investment Services, RisCura.

From a public policy perspective, many stakeholders believe that impact investing can provide a public good, particularly in areas where the government lacks the resources. For pension fund trustees, the argument may be around why capital should be used to finance projects that should have been funded by government expenditure. The answer is quite simple. In South Africa, we have reached a point that if we don’t act now and make sustainable investments with positive social and environmental impacts, we are unlikely to generate stable, long-term returns.

The Covid-19 pandemic has harshly reminded us of the acute issues around health and how closely health outcomes are related to poverty, lack of adequate education, human rights, the environment and racial, gender and income inequality.

For long-term investors, of which pension funds are the quintessential example, sustainability should be an important concern. An unhealthy, unstable, and unsustainable economy cannot serve investors who have a multi-decade investment horizon, and who are concerned about the livelihoods of the next generation and beyond.

Knowing what you own

Fortunately, there has been a significant shift globally over the last decade in the way many investors are thinking about the utility of their investments. Conventionally, the focus was on risk and return with less concern for sustainability or the impact on people or the planet. Increasingly, investors are concerned with the effects their investments have. “Knowing what you own” has become a motto for impact investors.

According to Schroders’ Institutional Investor Study 2020, 67% of institutional investors believe the role of sustainable investing will become more important over the next five years.

Impact investing has transformed from a mere concept a decade ago, to a formalised investment strategy and mandate throughout the investment industry and according to the Global Impact Investing Network (GIIN), has a current estimated market size of $715bn.

The Covid-19 pandemic is having a profound and lasting impact on the South African economy, and we were already in a recession before it began. Our unemployment rate hit a new high of 30.1% in the first three months of 2020, even before Covid-19 related job-losses were accounted for, and recent estimates forecast around an 8% contraction in South Africa’s growth for the year. Without a thriving, inclusive economy, investors and asset owners will struggle to reach the required investment returns to successfully reach the ‘golden years.’

Thinking out the box

The medium-term budget made it clear that the government faces some tough decisions as the country teeters on a fiscal cliff. Debt servicing is likely to be nearly 16% of government expenditure, the single largest component and far weightier than allocations to health, education, and social assistance.

A paradigm shift in the way we save and invest is needed if we are going to build a sustainable and inclusive economy. It’s time to think out of the box and consider alternative investment strategies.

South African investors have experienced a persistently low-return environment for the past five years. There is unquestionably a need to invigorate returns to ensure we can leave a legacy for tomorrow.

We believe that investing for developmental impact can drive sustainable returns and help tackle the imbalances that characterise our country. Nor does impact investing mean forfeiting attractive returns.

An impact investing strategy offers a potentially powerful lever for retirement funds to diversify, spread their risk, and enhance returns all in a way that positively contributes to our struggling economy. Importantly, we can take advantage of the full mandate of Regulation 28 of the Pension Funds Act which allows up to 35% of assets under management to be allocated to alternatives, unlisted debt, unlisted equity & unlisted property.

Not only will moving even a small portion of institutional capital in South Africa have a ground-breaking effect on driving the United Nation’s Sustainable Development Goals (SDGs), National Development Plan (NDP), and the recently published Economic Recovery Plan, but it will also catalyse the impact investment industry. It could be the spark that launches South Africa as a leading global player in the impact space. Just as in the past when we implemented substantial enabling policies like the Code for Responsible Investing in South Africa (CRISA) and amendments to Regulation 28 to facilitate greater consideration of ESG factors, South Africa can become a global impact industry leader.

About Adam Bennot

Adam Bennot is a senior associate, Alternative Investment Services at RisCura.

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