ESG Country Snapshot: South Africa

Despite strong signals on responsible investment, what is the impact on the ground?

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The latest in our ESG Country Snapshot Series.

South Africa has long been seen as one of the most advanced jurisdictions in the world in terms of ESG, with initiatives such as the King Code on corporate governance and the Code for Responsible Investing in South Africa (CRISA) rightly seen as leading the way.

But despite strong signals from government, regulators and financial associations, there are those who warn they might not translate into meaningful action. So what is the state of play of responsible investing in South Africa?

South Africa’s “HLEG”:

All eyes are on a forthcoming a Treasury framework document on sustainable finance, a discussion paper that will, it’s hoped, set the direction of travel.

The much-anticipated paper, expected next month, is informed by the recent work of South Africa’s own High Level Expert Group-style working group, a taskforce of financial industry representatives that was convened by the Treasury to help “define sustainable finance in a South African context”.

Members of the working group, which met five times over 2017, includes representatives from the Treasury, the Johannesburg Stock Exchange, the South African Reserve Bank and other savings, retirement and banking bodies.

It grew out of a meeting between financial industry groups and regulators, convened by the International Finance Corporation (IFC), the private sector-focused arm of the World Bank, in June 2016.

Louise Gardiner, a sustainability consultant with the IFC who worked on the project, compared the working group to European Commission’s HLEG on Sustainable Finance, which fed into Europe’s sustainable finance action plan.

She said that, once the paper is published, work-streams would be initiated in which regulators will engage with their relevant sectors to see how it can be turned into practical steps.

Dino Lazaridis, an economist at the Treasury, described the discussion paper as a “first signal” to the country’s financial sectors. He added that another policy paper would follow before any regulation is introduced.
Scenario Analysis:

The Treasury is also currently exploring another hot topic: scenario analysis. It is collaborating on a project with the University of Cambridge Institute for Sustainable Leadership’s (CISL) Centre for Sustainable Finance to “embed environmental scenario analysis into routine decision-making”.

CISL, which is also working with Mexico as part of the initiative, seeks to empower both countries’ financial institutions and regulators with tailored scenario analysis “primers”, said Nina Seega, CISL’s Research Director for Sustainable Finance.Regulation:

A 60-day consultation on the draft of the government’s proposed Climate Bill has just ended, headed up by the Department of Environmental Affairs. It seeks to catalyse “the long term, just transition to a climate resilient and lower carbon economy and society”.

But the proposed bill has been met with criticism in some quarters.

Environmental law firm the Centre for Environmental Rights said in its response to the consultation that the bill was focused on “creating a bureaucracy” rather than “responding urgently to the need to address climate change” and holding emitters and government accountable.

The new climate bill follows the draft Carbon Tax Bill, released late last year by the Treasury.

“If they come into force, they will have an impact because it is harder to ignore an act than a voluntary code of principles,” said Tracey Davies, Executive Director of Just Share, one of two shareholder activist NGOs in the country. But she warned that there “will be lobbying and delays by industry, especially on the carbon tax bill”.

She feared years of negotiations could result “in something that is very weak in five to 10 years time”.

Pension Funds:

The new Financial Sector Conduct Authority (FSCA) – formerly the Financial Services Board (FSB) – has also recently closed a consultation that should impact responsible investment. It’s a draft directive that would compel pension funds to report on how they implement ESG.

The FCSA and the Prudential Financial Authority (PA) were launched this year as part of a new “Twin Peak” regulatory landscape developed in response to the global financial crisis to make the country’s financial regulatory system safer and less fragmented.

The FCSA’s proposed ESG directive, if enacted, would mandate funds to include a raft of sustainability provisions in their investment policy statements.

This would include: how they apply ESG factors to assets they intend to buy; how regularly they measure the compliance of their assets to their sustainability criteria; active ownership policy.

It would also require pension funds to report on how ESG provisions were being met in both financial statements and annual trustee reports.

The draft directive is an amendment to Resolution 28 of South Africa’s Pension Fund Act and is expected to come into effect in the third or fourth quarter of 2018, according to a spokesperson at the FCSA.

But some have expressed concern over a get-out clause at the end of the draft directive, under which funds can apply to the regulator to be exempted from any of its requirements. How the regulator enforces this caveat – if it remains in the final version – could be key in determining its effectiveness.

Linda Mateza, Head of Investments and Actuarial Services at the Government Employees Pension Fund (GEPF), the largest in Africa, with R1.6trn ($110bn) in assets, told RI that the country’s pension funds are “definitely receptive” to responsible investment but that many are still “grappling with the implementation”.

She said that one of the “big projects” for the GEPF this year is a review to ensure that its policy documents and mandates reflect its responsible investment policy as relating to ESG and its investment beliefs.

GEPF was one of the first signatories to the UN-supported Principles for Responsible Investment (PRI), joining in 2006.

But Just Share’s Davies advised caution about the directive and other ESG initiatives. She said: “It is certainly a general characteristic of South Africa that we have great policies, laws, and ideas but poor implementation.”

She cited the renowned King Code, which she said hasn’t prevented the “endless series of huge corporate governance failings” in the country, despite many of the companies involved claiming to be fully complaint with King Code IV.

Governance Failings:

Which brings us to the number of major governance failures over recent years, such as the collapse of retailer Steinhoff, last year. According to Fatima Vawda, Managing Director at 27Four, a provider of fiduciary management solutions to pension funds, these have cost domestic retirement funds more than R300bn (£16bn).

On top of this, the Public Investment Corporation (PIC), the investment manager of the GEPF, has itself become embroiled in a major governance scandal linked to VBS Mutual Bank, reportedly one of the country’s biggest frauds. The fallout has seen the PIC’s Executive Head for Legal Counsel, Governance and Compliance, Ernest Nesane, resign.

The number of governance failings in South Africa comes amid what Just Share’s Davies says is “pretty much non-existent” shareholder activism. She cited Just Share’s recent climate-focused shareholder resolution at energy giant Sasol as a rare example.

The resolution was rejected out of hand by the company, although it just sought disclosure.

She said: “On the biggest, most obvious issue that people can make a public stand on, climate change, robust shareholder activism is pretty much non-existent outside of the few NGOs and foundations trying to make a dent”.

Green Bonds:

Several green bonds have been launched in South Africa in recent years. There was a R1.5bn ($105m) bond by Johannesburg in 2014. Then last year Cape Town raised R1bn ($70m) to finance public transport, energy efficient buildings, sewerage, coastal conservation, and water management – a major issue in the wake of a recent drought.Shameela Soobramoney, who leads the sustainability work at the JSE, said the Cape Town green bond, the first to be listed on the exchange’s new green bonds segment, was around four times oversubscribed.

The JSE also saw the listing of its first corporate green bond this year by Growth Point Properties. The property investment firm issued a R1.1bn ($76m) bond to green the buildings in its portfolio, which was also over-subscribed.

Soobramoney was optimistic that more green bonds would come to market soon and added they are seen as attractive investments by foreign investors.

This view was echoed by Nicole Martens, the PRI’s Head of Africa. She said ESG is increasingly a way to “attract European off-shore capital”.

The JSE currently offers investors two responsible investing indexes as part of a partnership with index firm FTSE that dating back to 2015. The FTSE/JSE Responsible Investment Top 30 Index and the FTSE/JSE Responsible Investment benchmark Index replaced the JSE’s pioneering SRI index, which was one of the first of its kind for an emerging market when it was launched in 2004.


The Code for Responsible Investing in South Africa (CRISA) was launched in 2011 as a voluntary code to further ESG and stewardship.

Adrian Bertrand, the initiative’s Secretariat – himself formerly with the PRI and GEPF – said: “CRISA is currently looking at the quality of disclosures by retirement funds and investment managers around how they are implementing the CRISA principles.”

CRISA has been hosted by asset management body the Association for Savings and Investment South Africa (ASISA) since July 2017. It moved from its prior home at the Institute of Directors of Southern Africa (IoDSA) to be “more closely aligned with the investment industry,” Bertrand said.

CRISA Chair John Oliphant said the initiative had also increased the asset owner component of its committee, with the appointments of Ndabezinhle Mkhize, the CIO of Eskom Provident & Pension Fund and representation from the Government Institutions Pension Fund of neighbouring Namibia.

Oliphant, who is also a former Head of Investments at the GEPF and ex-board member of the PRI, hinted that he might soon look for his successor after over seven years leading CRISA – although nothing had been discussed yet.

Reflecting on his time overseeing CRISA, Oliphant expressed his view that “responsible investing is, to an extent, caught up between those who pay lip-service and those who take it more seriously”.

Oliphant’s concerns are echoed by others in South Africa and beyond. The success of the current sustainability push will be determined by the output from the various high-level consultations – and whether they get the teeth needed to deliver meaningful change.