Lobbyists bolster call for green investing with legal opinion
Lobby organisations Just Share and Client Earth have published a legal opinion urging retirement funds to take climate change into account when they invest.
The lobbyists said this week they had written to more than 50 major SA pension fund boards asking them to analyse their exposure to investments that pose climate risks and to stop new investments into coal operations, among other things.
Investment returns on retirement savings can be an emotional topic. Pensions are lifetime savings that most people put aside only because they made hard decisions like borrowing from a bank to fund their children’s education instead of ceasing contributions to their retirement funds.
It is not surprising that some funds may be chasing higher returns for their members by
investing in sectors that are not environmentally friendly. After all, the JSE resources index returned 13% in 2018 while the JSE all share index closed the year down 11.37%.
Unfortunately, there is no data on the JSE responsible investment index to see how it fared in comparison. Using the MSCI world select 5-factor ESG low carbon target index as a benchmark to gauge how profitable sustainable investing is, it shows that these sustainable stocks also disappointed in 2018, losing 9.6%, although fiveyear annualised returns were higher than the MSCI at 8.6%.
Profitable as it may be in the short term, it is known that investing in fossil fuels poses risks to the planet. This is why, according to the legal opinion commissioned by Just Share and Client Earth, legal action can be taken against pension and provident funds board members who disregard climate change risks when investing.
The opinion was compiled by top pension lawyer Rosemary Hunter, who is a partner at Fasken. It does not say that the funds must disinvest from fossil fuels. However, it says that board members must consider whether those investments are, over the long term, consistent with the best interests of the fund. If they believe that they are not, they must think about how best to disinvest from them.
Hunter was clear that what she compiled was an opinion, and not a binding ruling. However, it was based on detailed legal research into applicable law, including the Pension Funds Act and common law.
Regulation 28 of the Pension Funds Act, in particular, is clear that boards of retirement funds must consider things that can affect long-term performance of asset classes they invest in such as environmental, social and governance issues.
Furthermore, in 2018 the Financial Sector Conduct Authority (FSCA) published a draft directive in which it proposed a new way for funds to report how they take sustainability into account in their investments. This directive has, however, not been finalised.
Hunter’s opinion said that investment managers who are contracted by retirement funds have the same duty to put the funds’ long-term best interests before their own. Instead of recommending investments with the highest returns to boost their management fees in the short term, they have to think about external costs of investing or remaining invested in fossil fuels.
When Just Share and Client Earth wrote to pension funds, they told trustees that failure to take into account climate risks would amount to a breach of their duties. According to Hunter, this means that even if fund members are happy to stay invested in carbon-intensive companies for higher returns, the regulator and third parties such as taxpayers and public interest advocates may take the funds to court.
“They would have the legal standing to apply to court for orders compelling boards of funds to fulfil their duties by taking proper account of the risks that climate change poses to the long-term sustainability of the funds when making investment-related decisions,” said Hunter.
She said the FSCA, which is the custodian of the Pension Funds Act, can also take various actions against funds, including removal of board members, if the regulator is persuaded that they have been grossly negligent in the fulfilling of their duties towards climate change.