DIRECTIVE PF NO. XXX FINANCIAL SERVICES BOARD PENSION FUNDS ACT, 1956 SUSTAINABILITY REPORTING AND DISCLOSURE REQUIREMENTS

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1 DIRECTIVE PF NO. XXX FINANCIAL SERVICES BOARD PENSION FUNDS ACT, 1956 SUSTAINABILITY REPORTING AND DISCLOSURE REQUIREMENTS I, Dube Phineas Tshidi, Registrar of Pension Funds, hereby, in terms of regulation 28(8)(a) of the Regulations, publish for comment a draft Directive to be issued to prescribe the following requirements to ensure compliance with Regulation 28(2)(c)(ix). Introduction 1. Regulation 28(2)(b) of the regulations to the Pension Funds Act, 1956 ( the PFA ) requires all funds to have an investment policy statement and Regulation 28(2)(c)(ix) requires that boards of funds consider environmental, social and governance factors before investing in an asset. This directive provides guidance in respect of the content of some of the essential aspects of an investment policy statement and the manner in which that content is disclosed by pension funds. 2. Regulation 28 promotes responsible investing of pension fund assets, based on a sustainable, long-term, risk aligned and liability-driven investment philosophy. The preamble to regulation 28 expects pension funds when they are investing their assets to: give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund s assets, including factors of an environmental, social or governance character. This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment. 1

2 3. This requirement to consider the sustainability of a fund s assets is repeated in the principle contained in regulation 28(2)(c)(ix), which states that a fund and its board must: before making an investment in and while invested in an asset consider any factor which may materially affect the sustainable long term performance of the asset including, but not limited to, those of an environmental, social and governance character. 4. In order for the Registrar to monitor compliance with this important principle and to enable stakeholders to ascertain compliance with it, pension funds are required to adhere to the requirements set out in this directive. Definitions 5. In this Directive: 5.1 Terms defined in the PFA and the regulations have the same meaning, unless a term is differently defined below, or the context indicates otherwise. 5.2 The following words and terms have the meanings indicated: active ownership means the prudent fulfilment of responsibilities relating to the ownership of, or an interest in, an asset. These responsibilities include, but are not limited to: (a) guidelines to be applied for the identification of sustainability concerns in that asset; (b) mechanisms of intervention and engagement with the responsible persons in respect of the asset when concerns have been identified and the means of escalation of activities as a holder or owner of that asset if these concerns cannot be resolved; (c) voting at shareholder meetings, or meetings of owners or holders of an asset, including the criteria that are used to reach voting decisions and for public disclosure of full voting records. 2

3 asset class means a category of asset, whether or not it is located in the Republic, and as referred to in Table 1 of Regulation 28; assets means any type of asset that may be held by a pension fund, as referred to in Table 1 of Regulation 28; and asset has a corresponding meaning; effective date means the effective date of this Directive, as published by the Registrar; ESG means environmental, social and governance; FSP has the same meaning as the term authorised financial services provider in section 1 of the Financial Advisory and Intermediary Services Act, 2002; sustainability means the ability of an entity to conduct its operations in a manner that meets existing needs without compromising the ability of future generations to meet their needs. Sustainability includes managing the impact that the business of an entity has on the life of the community, the broader South African economy and the natural environment in which it operates. It also includes the converse, namely considering the effects that the society, economy and environment have on business strategy. Sustainability includes economic and ESG considerations. Sustainable has a meaning consistent with this. Investment Policy Statement Requirements 6. As the sustainability of the assets of a pension fund is a key factor that should inform its investment policy, every pension fund must reflect in its investment policy statement: 6.1 How its investment approach ensures the sustainable long term performance of its assets; 6.2 Its policy in applying ESG factors to the assets it intends to acquire; 6.3 How regularly it measures the compliance of its assets with these ESG factors and its sustainability criteria, in particular, the manner in which broad based black economic empowerment is advanced by the business; 6.4 Its active ownership policy; 3

4 6.5 The requirement that the provisions of , to the extent applicable, be reflected in the mandate given by the pension fund to each FSP engaged by it. 7. Where a pension fund holds assets that limit the application of ESG factors, the sustainability criteria, or the full application of an active ownership policy, the investment policy statement must state the reasons as to why this limitation is to the advantage of both the pension fund and its membership. Alternatively, the investment policy statement must set out the remedial action the fund has taken or intends taking to rectify the position. 8. Every pension fund must make available on request and at no cost, to each member and, if applicable, to each participating employer, its investment policy statement; provided that the investment policy statement may be abridged to reflect those assets relating to a category of members as long as the requirements of paragraphs 6 and 7 in relation to those assets are contained in the abridged investment policy statement. 9. If a pension fund has a website, the provisions of paragraphs 6 and 7 must be set out on the website and be accessible to any person, whether or not a member. 10. The provisions of paragraphs 6 to 9 must be implemented no later than six (6) months after the effective date of this directive. Reporting and provision of information to stakeholders 11. Every pension fund must, in each set of financial statements referred to in section 15(1) as well as in its annual trustee report to members or in any other appropriate communication to its members, include in such a report by the board of the fund the details of: 11.1 how it has applied the provisions of paragraphs 6.1 to 6.5; 11.2 the extent of any non-compliance with these provisions; and 11.3 any changes in its investment policy statement during the reporting period. 12. Every pension fund must state in its annual trustee report : that every member is entitled to a copy of its investment policy statement and the report referred in 11 above; 4

5 12.2 Briefly, any change to the investment policy statement from the previous year, including specifically any changes in respect of paragraphs Every pension fund must, at least on an annual basis, provide a copy of its investment statement and any changes thereto as referred to in to all participating employers in the fund and where there is a representative union or unions in respect of the members of the fund, to the union or unions as the case may be. 14. The provisions of paragraphs 11 to 13 must be implemented by no later than twelve months after the effective date of this directive. General 15. The Registrar may grant exemption from any of the requirements in this directive on application to the Registrar. D P TSHIDI Registrar of Pension Funds Date: 5