Single title

ESG and good corporate governance in relation to the use of pension funds:

Comparison between the United Kingdom and South Africa

Before we can analyse the efficacy of Environmental, Social and Governance (ESG) in relation to pension funds in the City of London UK and South Africa we must assess the progress that has taken place to date, both positive and negative. The City of London is in advance of South Africa in its development of ESG as a tool for good corporate governance and understanding of intangible assets and valuation; while South Africa is in the early stages of doing so especially in relation to their companies integrating ESG into practice. What is clear is that support for good governance when allocating investment in pension funds should ensure that the right choices are made by pension fund managers and trustees to encourage the environmentally sustainable and socially beneficial use of the often, huge sums raised by pension savers. This imperative is as important in the City of London as it is in South Africa. Mitigating climate change is probably the most urgent imperative at present. ra By: Ruth Taplin and Neels Kilian

The importance of such pension fund savings cannot be underestimated. The United Nations has estimated that US$ 90 trillion is needed in global investment to mitigate the effects of climate change by 2030, as outlined in the Paris Accords. To date, ESG branded assets constitute US$30 trillion which is nearly one-third of the US$ 100 trillion global bond market. Unfortunately, it is unclear how much of this ESG investment supports environmentally sustainable infrastructure as recommended by the United Nations (UN).

Rather than supporting sustainable debt which is used to finance concrete environmental goals, such as an environmentally friendly infrastructure; ESG bonds are often used to refinance or repackage bad debt, which is not useful for environmental goals such as those set by the Paris Accords. This means that in real terms sustainable debt related to the UN goals for climate change mitigation only amounts to US$2.2 trillion of which US$ 1 trillion constitutes green bonds. In recent months, there have been a number of climate commitments, especially in the case of transportation activities which account globally for at least 16 per cent of CO2 emissions. Britain has promised to cut emissions by 78 per cent by 2035 from the levels found in the 1990s. Additionally, international shipping (Shipping Innovation Press Release for London International ShippingWeek, 2021)and aviation will be included. The United States Biden Administration, the world’s largest economy and one of the largest contributors to carbon emissions, has committed to reducing emissions by 50 per cent compared with levels of 2005. (Moulds, The Times,28 April 2021). Without good governance, the good intentions of ESG may be undermined in its encouragement of markets to join, through asset placement, the global fight against climate change caused by fossil fuel burning, industrial-scale livestock farming and outdated transportation methods, for example, all of which accelerate global warming.

This report will discuss the problems inherent in setting regulatory guidelines, whether they be governmental like the SEC(Securities Exchange Commission)in the United States (US)for securities, the FCA (Financial Conduct Authority) in the UK or a metric analysis quantitatively assessing how the target of the pension fund investment provides genuine support for sustainable debt. Such debt includes green bonds or qualitative analysis of what the target investment has actually achieved in real terms in support of UN climate goals. Even certification by rating agencies concerning compliance with ESG can have its pitfalls.


Marlize van den Berg

Marlize van den Berg bild

Project Coordinator +27 (11) 214 2900-109