PENSION FUND PORTFOLIOS AND CLIMATE RISK: INVESTING RESPONSIBLY TO MITIGATE CLIMATE RISK In brief:
This article provides high-level guidance for retirement fund trustees and fund members as to the duties of South African pension fund boards in accounting for climate-related risks and opportunities when investing on behalf of their fund and its members.
Climate-change risk: Legal obligations of retirement and provident funds A recent legal opinion commissioned by ClientEarth and Just Share NPC, published in April 2019, found that boards of pension or provident funds (hereafter referred to as “boards�) are required by South African law to incorporate climate-related risks and opportunities into their investment decision-making processes when investing on behalf of their funds. Furthermore, the legal opinion also argued that failure to include material environmental, social and governance (ESG) risks, such as climate change, into investment decisions would likely result in a breach of fiduciary duty by the board, under both common law principles and Regulation 28 of the Pension Funds Act (PFA). Therefore, given the principles of Regulation 28, boards have a legal obligation to consider climate risk when making investments as it relates to pension fund investment portfolios.
Regulation 28 of the Pension Funds Act, 1956 Regulation 28 under the PFA encourages the responsible investing of fund assets, grounded in a sustainable, long-term, risk-aligned and liability-driven investment philosophy. Moreover, regulation 28(2)(b) of the Act instructs that all funds need to have an investment policy statement and regulation 28(2)(c)(ix) indicates that the boards of funds should consider ESG factors before investing in an asset. A number of principles included in Regulation 28 set out the responsibilities and duties assigned to the fund and its board. A fundamental principle applicable to a board, or anyone to whom any investment-related powers and functions of a fund has been assigned (such as those of asset managers or asset consultants), is the following:
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