Regulatory and fiduciary duties
Are institutional investors and financial intermediaries legally required to consider ESG factors when making investment decisions? Must any additional non-financial principles and objectives be considered?
Pension Funds are required to consider any factor that may materially affect the sustainable long-term performance of the asset they are invested in or plan to invest in including, but not limited to, those of an ESG character. Regulation 28 to the Pension Funds Act supports the approach to deploying capital into markets that will earn adequate risk-adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities. As such, investments have to be cognisant of their suitability with reference to the fund’s current and future membership.
Prudential Standard GOI 3 requires an insurer’s investment policy to take into account any factor that may materially affect the sustainable long-term performance of assets, including ESG factors.
Subject to the general duty of care owed to its members and clients, there is no legal requirement for other institutional investors such as alternative investment funds or collective investment schemes (CIS) to take into account ESG factors for investors (unless its constitutional documents or mandate prescribe that).Voluntary standards and best practices
What voluntary standards and best practices are commonly followed in your jurisdiction with regard to integrating ESG factors and other non-financial principles into investment decisions?
The Code for Responsible Investing in South Africa (CRISA) is a voluntary code that applies to both institutional investors (e.g., pension funds, insurers and CISs) and their service providers (asset managers, fund managers and consultants). CRISA provides guidance on how institutional investors should execute investment analysis and investment activities and exercise their rights so as to promote sound governance.
The King Codes of which The King IV Report on Corporate Governance for South Africa, 2016 (King IV™) is the latest iteration, sets out ‘voluntary principles and leading/recommended practices’ as guidelines to promote good corporate governance across all kinds of organisations in South Africa. In terms of the Companies Act and the Johannesburg Stock Exchange (JSE) Listings Requirements certain companies are obliged to report on their application of King IV principles and recommendations in their annual integrated reports; however, many companies and other entities, including institutional investors, also utilise the King IV framework on a voluntary basis. The King IV principles promote the notion of the responsible corporate citizen, adopting a stakeholder approach and practising responsible investment to promote good governance and the creation of value by the companies in which it invests.
As of November 2019, there were 63 South African-headquartered signatories to the UN supported Principles for Responsible Investment.
The Association for Saving and Investment SA (ASISA) is a body voluntarily mandated by companies in South Africa’s investment management industry, long-term insurance industry and retirement fund industry. ASISA represents its members’ interests in discussions and negotiations with regulators, policy makers and other stakeholders. ASISA also has a number of codes, standards and guidelines that its members must abide by, which, among other things, promote the idea of responsible investment and ownership practices.
The South African Banking Association’s 2014 Guidance on Sustainable Banking has been an influential instrument in guiding sustainable banking practice. It is also not uncommon for financiers of South African capital projects to apply the Equator Principles in the assessment of the projects’ legitimacy and ‘bankability’.Measurement, reporting and disclosure
What voluntary and statutory measurement, reporting and disclosure frameworks are followed in your jurisdiction with regard to ESG and other non-financial factors?
A 2018 study carried out by Genesis Analytics and Impact Amplifier found very little use by investors, intermediaries and investees of formal impact measurement techniques in South Africa, with the UN Sustainable Development Goals, Impact Reporting and Investment Standards, Donor Committee for Enterprise Development standards, and ESG criteria (eg, MSCI ESG metrics) being the most commonly used. The majority of respondents cited the use of in-house metrics.
The Global Reporting Initiative standards and recommendations have been influential in the reporting of ESG and other non-financial factors in South Africa.
King IV is the primary voluntary instrument for companies that are not obliged to subscribe to it.
The CRISA principles are also commonly referenced among institutional investors, and publishing annual reports and disclosures on the application of CRISA is voluntary, with no formal oversight methodology or mechanism.
Most of South Africa’s significant institutional investors, including most notably the Government Employees Pension Fund and its state-owned asset manager the Public Investment Corporation, are signatories to the UN Principles for Responsible Investment.
A number of investors have adopted the principles and recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). While the TFCD is not mandatory or encapsulated in legislation, a number of lenders require disclosure to be in line with the TFCD requirements and many require climate change impact assessments to be provided before advancing funds. The Equator Principles are also relatively commonly applied in relevant investments.
The Sustainable Development Goals inform the National Development Plan, a national government blueprint for socio-economic development until 2030, and they are becoming more commonly adopted by developmental NGOs, corporate foundations and municipal governments in defining investment objectives.Ratings, indices and guidelines
What ratings, indices and guidelines are used to benchmark adherence to ESG principles and other non-financial factors in your jurisdiction?
Regarding sustainability benchmarks that are taken into consideration in South Africa, the MSCI South Africa ESG Leaders Index is a capitalisation-weighted index that offers exposure to companies with high ESG performance relative to other South African entities. It shows that ESG leaders recorded 14.45 per cent annualised gross returns over a 10-year period compared with 9.75 per cent for MSCI South Africa – an index tracking the performance of South African equities.
In 2015, the JSE partnered with FTSE Russell to produce the FTSE/JSE Responsible Investment index series, which comprises all eligible companies who achieve the required minimum FTSE Russell ESG rating.
Earlier this year, the JSE released for public comment the proposed amendments to its debt listing requirements for the new Sustainability Segment, which will include sustainability instruments under the International Capital Market Association green bond principles, social bond principles and sustainability guidelines. The new segment aims to facilitate trades in sustainability-linked instruments and provide a platform to raise funds for sustainable projects.Incentives, benefits and financial support
Are any fiscal incentives or other benefits available in your jurisdiction to encourage institutional investors and financial intermediaries to integrate ESG and other non-financial factors into their investment decision-making?
There are no fiscal incentives specifically encouraging investors to integrate ESG and other non-financial factors into their investment decision-making.
The main tax incentive for investors is the venture capital company regime, but it does not specifically include ESG criteria.
Some other fiscal incentives do refer to ESG type criteria, but they are focused on the taxpayer itself, not on investors. These include limited deductions and allowances available for expenditure related to renewable energy, energy efficiency savings, environmental rehabilitation and conservation.
Special economic zones (SEZs) also enjoy certain tax incentives, including a preferential 15 per cent corporate tax rate. Certain SEZs are, for example, intended to incentivise cooperation between the manufacturing and renewable energy sectors, as part of the South African government’s Renewable Energy Independent Power Producers Programme.
In addition, ‘small business funding entities’ that provide funding for small, medium or micro-sized enterprises, on a non-profit basis and with an altruistic or philanthropic intent could qualify for an income tax exemption.
While the Department of Trade and Industry offers a number of incentives, none of these expressly focuses on ESG criteria. However, a number of these incentives, such as the Black Industrialists Scheme, include ESG-type criteria such as job creation and green technology.Impact investing
In addition to ESG factors, what considerations and practices are commonly integrated into impact investment strategies?
The following considerations or practices are commonly integrated into impact investing strategies in South Africa:
- a theory of change or strategic impact objective;
- an impact theme (eg, education, health, access to finance, housing, renewable energy – often aligned with one or more sustainable development goals);
- due diligence;
- location and geography;
- impact measurement and management;
- structuring and tax considerations;
- financing and funding;
- return expectations and exits;
- ticket and investment sizes;
- investment type; and
- underlying asset classes and impact classes.
The objectives of the B-BBEE laws (to address inequalities brought about by the apartheid system and toempower previously disadvantaged individuals through job-creation, supplier development, investment, favourable credit terms, accelerated payment arrangements, enterprise ownership and management, etc) are commonly integrated in impact investment strategies. Companies report on such activities to independent Broad-based Black Economic Empowerment (BEE) verification agencies that award BEE or ‘Empowerment’ accreditation at various levels of compliance and achievement.