South African policymakers must articulate a clear vision for the role of the South African capital markets in the sustainability transition, make reporting in terms of the Recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) compulsory for pension funds and asset managers, and create an enabling environment for investors to prioritise sustainability impact.
The PRI monitors sustainable finance policy. There are five global trends.
The first trend is that sustainable finance policy matters. There have now been over 730 hard and soft-law policy revisions, across some 500 policy instruments, that support, encourage or require investors to consider long-term value drivers, including environmental, social and governance (ESG) factors.
The second trend is that we’re moving from sporadic adoption of sustainability requirements to comprehensive national sustainable finance strategies. Overseas, we see this in Europe’s Sustainable Finance Action Plan, the UK’s Green Finance Strategy and Canada’s Expert Panel on Sustainable Finance. The PRI recommends that South Africa form its own policy-backed expert panel on sustainable finance.
The third trend is that investors are increasingly involved in public policy development and implementation on sustainable finance. This is critical for investors in South Africa given the country’s coal dependence and the importance of a just transition. Local investors have the most to lose, but also, the most to gain. This is one of the key drivers of the recent increase in local shareholder activism, led by organisations such as Just Share, focused on catalysing the structural and systemic change needed for an economy in today’s rapidly evolving investment market.
In relation to energy generation, the questions for policymakers and investors are “What do I build new? What do I finance?” The PRI’s view is that solar and wind energy in South Africa are inevitable – costs are falling, jobs are healthier, and energy distribution is decentralised and flexible.
This is the way the world is moving, and local investors don’t want South Africa to be the last country to adjust to the new technologies. Indeed, if South Africa is early to the game (and that means starting now), renewable energy can become an export – rolling out across other African economies.
The fourth trend is that we’re getting more technical and implementation focussed – at least in part because regulators are getting involved. This month, UK regulators put in place steps to mandate TCFD reporting for UK pension funds. South African regulators could demonstrate global leadership if they did the same.
Finally – and most importantly for South Africa – the fifth trend is that sustainability impact is the new focus for investors and policymakers.
The PRI has commissioned legal analysis in South Africa, to be prepared by Freshfields Bruckhaus Deringer and Bowmans, to better understand how the country’s legal frameworks influence the sustainability impact of investment activities. This is key to understanding the likely role and contribution of investors to the achievement of sustainability outcomes, like those articulated by the UN’s Sustainable Development Goals (SDGs). Policy recommendations to enable sustainability impact will be published later this year.
A decade ago, South Africa set the pace on responsible investment. But on implementation and policy, South Africa is now playing catch-up. It doesn’t have to be that way – but that means acting now. It means engaging with organisations like the PRI, which are at the forefront of global market trends and international best practice with respect to developing and implementing policies and regulations required to ensure a conducive environment for responsible investment. It means leadership, taking a decisive stance on these issues, and leaving the idealistic ‘nudge’ approach behind.
Will Martindale is the PRI Director of Policy and Research, and Nicole Martens is the PRI Head of Africa and Middle East.