Is South Africa uniquely set up for socially responsible investing?

As South Africa commemorates 30 years of democracy – a milestone celebrated on world stages, including a billboard on the NASDAQ Tower in Times Square, New York – it's a time of reflection and forward thinking. Despite significant progress, our nation faces pressing challenges. Our economy is under strain, exacerbated by rising unemployment, increasing inequality, and the devastating impacts of climate-related disasters, which all pose substantial social consequences.

Amid these complexities, maintaining a strong social fabric is crucial for rebuilding and advancing our country. Socially responsible investing (SRI) emerges as a key strategy – not as a silver bullet – but as a vital part of the solution. By embracing proactive socially responsible investing (SRI) strategies, guided by South Africa’s National Development Goals and the ESG-focused considerations in Regulation 28, we are well-positioned to tackle these socio-economic challenges through informed investment decisions.

This approach not only promises to enhance sustainability and profitability but also positions us to capitalise on innovative investment products that can drive real change. As we stand at these crossroads, it is imperative that we convince investors of the immense opportunities that responsible investing offers in reshaping our local context for the better.

Where sustainable investment comes from

The concept of responsible or ethical sustainable investment practices has deep historical roots. One early example can be traced back to the annual meetings of the Quakers, a religious society, in Philadelphia, USA. As early as 1758, the Quakers were advocating against unethical practices like the slave trade, embodying principles that underscore today's sustainable investment strategies. At the meeting members expressed their disdain for the buying and selling of slaves and prohibited the act. Within a South African context, the divestment of international corporations from the country during the apartheid era sparked the first moves towards sustainable investment strategies. 

Although not a novel concept, sustainable investment practices have gained significant momentum in recent years. Responsible investing became a more formalised strategy back in the 1960s, as investors began to question the ethical implications of their investments. It was significantly shaped by 2015’s Sustainable Development Goals, which highlighted the private sector’s part in overcoming the enormity of humanity’s shared challenges. This transition was underscored by recognition of the interplay between global events – like climate change, the Covid-19 pandemic and the Black Lives Matter movement – and global economic growth, and the gravitas of the financial sector’s role in shaping how money moves to address these issues.

We need to pay attention, and take action, today

Fast forward to today, and the emphasis is not just on avoiding harm; we’re now equally focused on proactively doing good. South Africa poses a particularly prime ‘candidate’ for proactive responsible investing strategies to reap robust social and financial returns. There are several reasons, which Bowman’s explored in depth, summarised below.

Regulation 28: The US’s focus on absolute returns means pensions are invested just to earn financial return. Conversely, South Africa’s Pension Funds Act’s Regulation 28 – which limits investments in particular asset classes – requires all South African pension funds to appraise assets for their ESG integration before they’re considered for investment. The bottom-line? South Africa recognises responsible investing as key to common law fiduciary duty. Regulation 28 of South Africa's Pension Funds Act, as revised, does encourage local investment by pension funds, particularly in infrastructure, which aligns with fostering economic development within the country.

Notably, the amendments have increased the limits for investments in infrastructure and private equity, allowing pension funds to allocate a larger portion of their portfolio to these asset classes.

The changes are intended to facilitate greater participation of pension funds in sectors critical for national development, such as infrastructure, by providing clear guidelines and increased investment ceilings. This aims to boost local development by channelling private retirement savings into projects that can drive economic growth and sustainability.

The NDC’s: The updated Nationally Determined Contributions (NDCs) of South Africa under the Paris Agreement, released in 2021, aim to reduce greenhouse gas emissions more aggressively than previous targets and emphasise South Africa's commitment to transitioning to a low-carbon economy.

South Africa was a signatory to the agreement from the start and can be analysed in terms of their alignment to the government’s NDP and just transition goals.

Socio-economic opportunity: South Africa’s socio-economic situation presents ample opportunities for robust financial – and social – returns, with endless pipelines of infrastructure and enterprise development, for example. The proliferation of impact- and sustainability-oriented products presents major possibilities for investors to garner strong returns, backed by institutional investors and the government.

Looking ahead

Conditions are ripe for responsible investment to grow and find new headwinds in South Africa as the landscape of sustainable finance evolves. Asset managers have a pivotal role to play in reassuring investors of the opportunity and effectiveness of responsible investing RI within the South African context. As renewable energy and SMME investments become more commonplace, there’s the need for consistent innovation to address broader sustainability issues through creative fund structures. Blended finance stands out as a critical strategic consideration, facilitating the collaborative approach that is required to tackle complex shared challenges in a meaningful way. This approach not only helps in mitigating risks but also leverages collective expertise and resources, thereby enhancing the potential for impactful outcomes.

*Teboho Makhabane is Head of ESG and Impact at Sanlam Investments.