South African pension funds remain at relatively low levels of sustainable development investment, with only 16% of the about 1 000 pension funds investing in green, social or sustainability bonds and only 3% of their policy investment statements being aligned to the United Nations Sustainable Development Goals.

However, 52% of funds have indicated a willingness to increase their investments in green and climate-focused investments and 57% are interested in investing to generate a positive social impact, highlighted regulator Financial Sector Conduct Authority (FSCA) retirement funds supervision divisional executive Olano Makhubela.

Independent sustainability consultant Corli le Roux concurred, noting that ten years after the launch of the Code for Responsible Investing in South Africa (Crisa) by local bourse the JSE, responsible investment in the industry had grown significantly, but had not yet reached a tipping point.

"There remains a gap in terms of a core of passionate people who want to see a change in the investment industry and a lack of understanding in the industry on how to do it and what the benefits are.

"We are still learning, even after ten years, and there remain questions about the value of environmental, social and governance (ESG). However, we are starting to see deeper engagement with these issues and, while the conversations with industry stakeholders remain broadly similar, each time it is discussed, the cohort of participants is larger," she said.

The movements are small, but there is momentum and the industry is almost beyond the tipping point. ESG considerations are increasingly part of the core conversations held by pension funds and their stakeholders.

Local regulatory changes demonstrate this, while tools such as the Responsible Investing and Active Ownership (RIO) guide and Crisa are there to help the pension funds and investment industry, she added.

This sentiment is echoed by retirement fund independent trustee and principal officer Jolly Mokorosi, who also serves on the board of the sectoral responsible investing nonprofit organisation Batseta and as the Asset Owners' Forum deputy chairperson.

"The broad-based response to ESG issues is not where it needs to be yet. The need for education [on ESG] remains and some misconceptions endure, but there is growing awareness of the potential returns and long-term positive social impacts that can be created through impact investments," she said.

She cited the investments made by pension funds in developing truck stops in South Africa. Trucks move the majority of South Africa's and Southern Africa's goods, but trucks and truck drivers are vulnerable owing to long travel times and inadequate or unsafe places for rest stops.

"Truck drivers must travel long distances before they are able to find a safe place to stop. Driver fatigue places the drivers and cargo at risk. Many fuel stations cannot accommodate trucks, and vehicles, cargoes and the drivers are exposed and at risk when drivers, by necessity, stop on the side of the roads.

"Developing truck stops that provide adequate and safe places for truck drivers to rest reduced the risks for all parties and provided 9% ungeared returns in the first six months following the investments. This is a serious return in anyone's book, and is not a sacrifice in terms of the pension fund's mandate to generate returns for its members," she highlighted.

These truck stops provide on-site hotel rooms for drivers, improving the quality of rest they get, fuel from accredited providers and good food for truck drivers, thereby increasing their life expectancy, which was as low as 42 years and one of the lowest in any profession in South Africa, Mokorosi noted.

"For the fund member, this was a profitable endeavour, while also creating a positive impact. Investments by pension funds have similarly enabled other profitable, impactful investments, such as investments in rural telecommunications infrastructure, that are making an incredible impact not just in South Africa but across the world," she emphasised.

Defined benefit pension fund Eskom Pension and Provident Fund CEO Shafeeq Abrahams highlighted that, while there may be questions about the financial returns and risks of ESG-focused investments over the short term, the fund's younger members are recognising sustainability, particularly in terms of climate change, as more important than only financial returns on investment.

"The benefits pension funds pay out can be viewed as a function of the society in which they operate. We are dealing with the short-term issues of risks and rates of return around ESG investments, but, for our younger members, their emphasis is more on longer-term planning," he noted.

Thailand Government Pension Fund secretary-general Dr Srikanya Yathip highlighted that investment managers should understand that integrated ESG investments do not sacrifice returns for ESG impacts, but enhance returns over the long term.

She emphasised that setting the tone of investment mandates from the top is important, as investors and fund managers will then invest accordingly.

"Our fund has $40-billion of investments globally, with assets across the world. If we are investing in a company anywhere in the world that is doing a bad job or having a negative impact, it is something we cannot ignore.

"Pension funds are global asset owners and, in the ESG ecosystem, the most important agent is the one who has the money," she said.

She highlighted renewable and alternative energy investments as examples of long-term sustainable investment opportunities, especially given the current global energy crisis precipitated by Russia's invasion of Ukraine.

Yathip advised South African pension funds on how to implement ESG-integrated investing by detailing the processes of the fund she serves, stating that the Thailand Government Pension Fund had integrated a range of considerations into its strategic asset allocation processes to become a responsible investor.

"The first step is to add the criteria for fund managers. They have not had ESG criteria for investments before. We shared our ESG evaluation methodologies with them so that they understand evaluation of ESG in equity or fixed income assets.

"Owing to the impact of investments made by pension funds, we cannot invest like we did before, which was only for profit and the bottom line. As a long-term investor, we must invest for the good of people and the planet. This is the tone from the top that is necessary," she explained.

Purpose-driven global investment firm Riscura MD Malcolm Fair added that there were difficult structural challenges to overcome to promote responsible investment by pension funds in South Africa and that it required champions to place it onto the agenda of boards that have limited time to complete their work.

"However, ESG is a huge opportunity for the industry to ensure the investments they make mitigate and reduce negative impacts and ensure positive impacts on the world that their members will retire in.

"Why would you want to retire to a wasteland? ESG connects the typically intellectual, fact-based processes of investing to environmental and social considerations and makes them real and important considerations for pension funds," he said, reiterating a statement by Makhubela.

"Integrated ESG connects the dots between investments, their returns and their long-term impacts," he emphasised.

Abrahams highlighted investments in student accommodation, in schools and education, in the building of hospitals and providing small and medium-sized enterprise debt funds as examples of impactful investments that also generate great returns.

"Equity, whether listed or not, is equity. Once you understand the dynamics, the risk factor decreases and pension funds can find some good opportunities to invest," he said.