African Pension Funds - Environmental, Social & Governance Factors Benchmarking Exercise January 2022 Dr Rory Sullivan and Robert Black (Chronos Sustainability) Matthew Sullivan (Expert Consultant) Fiona Stewart (World Bank) Project Background • African Pension Supervisors Forum, representing pension supervisory authorities from across the African region, invited the team to review the approach to incorporation of ESG factors into decision making by pension funds across the region Page 2 Initial Thoughts from Findings… 1. Pension funds as the main asset owners in the region are at the ‘top of food chain’ and can be catalysts for ‘greening the financial systems’ in the region (e.g. requesting reporting from co./ projects invest in) 2. This can be done: Through regulation Through building regional champions (e.g. large public pension funds) 3. Pension fund + capital market regulators will need to work together to build green financial frameworks 4. Regional approach is recommended – for example: Regional taxonomy Regional green bond guidelines Regional training for regulators and pension funds 5. Stepped approach (learn from + ‘leap frog’ South African journey) – start voluntary + move in steps 6. Focus on transition as well as green instruments 7. Market context means will need guidance for non-listed assets (real estate/ PE etc.) Page 3 Executive Summary Pension Fund Reporting This project assessed a sample of Africa’s pension funds on their sustainable investment related disclosure Strengths in disclosure were: 1. All of the funds provide good disclosure about their organisation, including their history, ownership, mission, governance structure and legal obligations. 2. All of the funds provide information on their financial performance and strategy, although the level of detail varies. 3. All of the funds (except one) disclose their total assets under management, and most with some analytical breakdown. 4. Half of the funds provide information on the importance of sustainability to their investments. There are common information gaps: 1. The funds provide limited information on their sustainable investment strategies. 2. The funds provide limited information on how sustainable investment is implemented, across their portfolios or in specific asset classes. 3. The funds provide limited information on delegated investment. Page 4 Methodology Overview • We assessed a sample of Africa’s pension funds against a sustainable investment disclosure checklist. • Through conversations with industry experts, funds were selected to be assessed that would illustrate best practice whilst also considering geography and significance. Name Country Name Country Botswana Public Officers Pension Fund Botswana Government Employees Pension Fund South Africa Debswana Pension Fund Botswana Old Mutual SuperFund South Africa National Social Security Fund Kenya The Sanlam Umbrella Fund South Africa Government Institutions Pension Fund Namibia Sentinel Retirement Fund South Africa Stanbic IBTC Nigeria Alexander Forbes South Africa National Social Security Fund Uganda Eskom Pension and Provident Fund South Africa National Pension Scheme Authority Zambia Page 5 The Key Elements of the Checklist About the Governance and Sustainable Delegated Climate Change Organisation Strategy Investment by Investment • Information about • Core information • Information about Asset Class • Information about the organisation’s about the the organisation’s how the approach to climate • Information about change in its organisation, investment beliefs, the organisation’s organisation including its size, its strategy, policies, outsources investment approach to process. investments, its objectives and investment investment objectives and its targets, and decision-making management. mandate. governance. and active ownership in its major asset classes. Page 6 Overall Results Summary results of South African funds showing Summary results of African funds (ex South Africa) average, maximum, and minimum scores for each showing average, maximum, and minimum scores for framework section each framework section 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% About the Strategy and Sustainable Sustainable Delegated Climate Change About the Strategy and Sustainable Sustainable Delegated Climate Change organisation Governance Investment: Investment: Investment organisation Governance Investment: Investment: Investment Public Equity Fixed Income Public Equity Fixed Income Average Maximum Minimum Average Maximum Minimum Page 7 Comparison Results Other Regions Summary Results: Global Pension Funds Summary Results: Colombian Pension Funds 100% 90% 80% 70% 60% 50% Average 40% Min Max 30% 20% 10% 0% About the Strategy and Sustainable Delegated Climate Change Organisation Governance Investment: Investment Public Equity (national and/or international) About the Organisation: Results Aim: To determine whether the pension fund provides core information about itself (e.g. size, investments, objectives). Page 9 About the Organisation: Best Practice Examples Botswana Public Officers Pensions Fund Government Employees Pension Fund (GEPF) https://www.g epf.co.za/wp- content/uploa ds/2020/11/G EPF-IR- 2020.pdf https://www.bpopf.co.bw/fund- rules-and-amendments https://www.bpopf.co.bw/sites/def ault/files/publications/2020%20An nual%20Report%20- %20Final%20Digital.pdf Page 10 https://www.gepf.gov.za/board-of-trustees/ Governance and Strategy: Results (1 of 2) Aim: To determine whether the pension fund provides information about its investment beliefs, strategy, policies, objectives and targets, and sustainability governance. Page 11 Governance and Strategy: Results (2 of 2) Aim: To determine whether the pension fund provides information about its investment beliefs, strategy, policies, objectives and targets, and sustainability governance. Page 12 Governance and Strategy: Best Practice Examples (2 of 2) National Social Security Fund Uganda Sentinel Retirement Fund NSSF_Annual_Report_2020.pdf (nssfug.org) sentinel-integrated-annual-report-2020.pdf (sentinel-reports.co.za) Page 13 Reporting by Asset Class: Results Aim: To determine whether the pension fund provides information about its approach to investment decision-making and active ownership in its major asset classes. Note: Public Equity results are presented here as it is the asset class on which funds provided the best disclosure. Disclosure on other asset classes was of a similar or worse level. Page 14 Reporting by Asset Class: Best Practice Examples Old Mutual SuperFund https://www.oldmutual.co.za/v3/assets/blt0554f48052bb4620/blt84ef5afec87d20c6/60703e2ab75906 764b1a4415/sf_member_investment_update_q1_2021.pdf Page 15 Delegated Investment: Results Aim: To determine if the organisation provides information about how the organisation outsources investment management. Page 16 Delegated Investment: Best Practice Examples Alexander Forbes Eskom Pension and Provident Fund https://stpublic.blob.core. windows.net/pri- ra/2020/Investor/Public- TR/(Merged)_Public_Transp arency_Report_Eskom%20Pe nsion%20and%20Provident% 20Fund_2020.pdf Annexures to IPS - Feb 2020.pdf (alexanderforbes.co.za) Page 17 Climate Change: Results Aim: To determine if the organisation provides information about its approach to climate change in its investment process. Page 18 Climate Change: Key Findings & Best Practice Examples Aim: To determine if the organisation provides information about its approach to climate change in its investment process. 1. Overall, the funds provide almost no disclosure on their approach to climate change in investment processes. 2. Three funds provide information on board oversight of climate-related risks and opportunities. 3. Climate change does not appear to be covered in other sustainability or corporate social responsibility reports published by the pension funds. Sanlam Limited Our Response to Climate Change | Sanlam Investor Relations Page 19 Next Steps? • Extend survey broader range funds/ regional or country deep dives • Further guidance by pension fund regulators on ESG reporting to support industry adaption of good practice • Training for regional leaders • Work with regional and national industry associations Page 20 Need to work with Securities Regulators – improved disclosure listed companies in region Disclosure made: no comment on quality of Documents listed companies ESG reporting reviewed include compliance only disclosure. Alternative metrics Annual Reports, Integrated Reports, ESG/Sustainability Reports, Green accepted where appropriate Bond Reports, Verification Reports, GRI Mapping Documents, Board Charters, Codes of Ethics, Codes for Suppliers, Human Rights/MSA Disclosure conspicuously incomplete Policy Statements, CDP Climate Change and Water questionnaire responses. Also Website generally. Holding Company documents not included unless specifically referenced by company Disclosure not found in documents or website Overview of ESG GHG Air Recycling Specific ESGand Water Workforce / indicators TCFD related Human Anti- integration and waste CG indicators and Rights corruption reporting explanations CSR Verification Specific ESG indicators Page 21 Percentage of Information Found in Main Markets and in Regions Overall, only 38% of information sought was found (SA 46%, WA 45%, EA 23%). Across countries: South Africa 74% Namibia 30% Botswana 16% Nigeria 48% Ghana 51% BRVM 36% Kenya 32% Uganda 16% Tanzania 14% Across subjects: ESG Integration 65% Data points 31% TCFD 20% HR/Bribery 54% Verification 38% Page 22 World Bank Toolkits for Policymakers to Green the Financial System Strategy and Green Finance National Climate coordination Roadmap Finance Strategy Build skills & International Paris Alignment by National Taskforce capacity Networks Fis* Regulation & central Supervisory Greening Central Bank Risk Analysis Supervisory Practice banks Guidance Activities Disclosure & Disclosure & Transparency Taxonomy Reporting: issuers Reporting: investors • Menu of options Greening NDBs*/ Green(ing) FIs* National Green Bank • High-level guidance public FIs • Based on good practice and country experience Green finance Corporate Green Sovereign Green Blended Finance Green Loans instruments Bonds & Equities Bonds Products * NDB = National Development Banks; FI = Financial Institutions Page 23 Section 5: Annexes Checklist Design Principles The checklist builds on and aligns with the indicators and structure of the most commonly used disclosure frameworks in the sustainable/responsible investment area. The checklist is essentially a completeness check, and is framed as yes/no, objectively assessable questions. The checklist does not offer a view on the ‘right’ approach to sustainable investment but on the disclosures that should be provided about the asset owner’s approach to sustainable investment. The checklist covers climate change as a specific topic. The information provided by asset owners should enable stakeholders to understand: • What the organisation is and what its core purpose and objectives are. • What the organisation’s beliefs and commitments on sustainable investment are. • How these beliefs and commitments are translated into action. • The organisation’s performance against its beliefs, its commitments and its objectives and targets. Page 25 Some Specific Notes on Methodology • The assessments focus on the public disclosures provided by the pension funds. • The assessments did consider disclosures made by parent company entities though there needed to be a clear link to the pension fund in order for points to be awarded. • Disclosures should be made in a sustainable investment (or equivalent) report, or through a sustainable investment section on the website. • Stakeholders may not have the time or technical knowledge to effectively search for relevant information, therefore, it is the responsibility of the asset owner to provide clear and accessible disclosures. • Asset owners that do not delegate investment management to investment managers or other providers are not assessed on that element of the framework. • Voting questions in Sustainable Investment by Asset Class are only applicable to listed equity. • This assessment assesses the three largest asset classes (by AUM) managed by each asset owner. Page 26 About the Organisation (1/2) History and context: • Has the organisation provided an overview of its history including the reasons for its creation? • Has the organisation explained the origins of its wealth (i.e. how it is funded)? • Has the organisation described its ownership structure? Mission and mandate: • Has the organisation described its overarching mission and objectives? • Has the organisation described the legal and other obligations that apply to it? Note: These include sustainability-related obligations, and other obligations that affect its approach to sustainability. Finance and governance: • Has the organisation published an annual report describing its overall performance and strategy? • Has the organisation reported on its investment performance over at least three years? • Has the organisation published details of its overall governance structure? • Has the organisation published the names of its board directors? • Has the organisation published the names of its senior management team? Page 27 About the Organisation (2/2) Assets under management: • Has the organisation stated its total assets under management? • Has the organisation provided an analysis of these assets: • By asset class? • By geography (domestic versus international)? • By whether the assets are internally or externally managed? • By whether the assets are actively or passively managed? • Has the organisation provided an analysis of these assets by sustainable investment strategy: • In terms of the proportion that are covered by ethical screens? • In terms of the proportion that are covered by active ownership strategies? • In terms of the proportion where sustainability-related issues are explicitly integrated into the investment research and decision-making process? • In terms of the proportion that are invested in sustainability-related areas? Reporting • Has the organisation had its sustainable investment-related reporting assured or otherwise reviewed by an external party? Page 28 About the Organisation (2/2) Assets under management: • Has the organisation stated its total assets under management? • Has the organisation provided an analysis of these assets: • By asset class? • By geography (domestic versus international)? • By whether the assets are internally or externally managed? • By whether the assets are actively or passively managed? • Has the organisation provided an analysis of these assets by sustainable investment strategy: • In terms of the proportion that are covered by ethical screens? • In terms of the proportion that are covered by active ownership strategies? • In terms of the proportion where sustainability-related issues are explicitly integrated into the investment research and decision-making process? • In terms of the proportion that are invested in sustainability-related areas? Reporting • Has the organisation had its sustainable investment-related reporting assured or otherwise reviewed by an external party? Page 29 Sustainable Investment Strategy and Governance (1/4) Investment Beliefs: • Has the organisation published its investment beliefs? • Do the investment beliefs set out the organisation’s views on the relevance of sustainability to its investment practices, processes and performance? • Does the organisation explain how sustainability-related issues create long-term investment value? • Does the organisation define what it means by ‘long term’? Investment strategy: • Has the organisation described its investment strategy, explaining how it will deliver on its investment beliefs? • Has the organisation explained how sustainability is integrated into its risk management processes? • Has the organisation identified its material sustainability-related issues? Investment objectives: • Does the organisation specify its investment objectives, e.g. by highlighting the benchmarks it uses to track and assess performance? • Does the organisation specify the timeframes over which it assesses performance? Page 30 Sustainable Investment Strategy and Governance (2/4) Policy: • Has the organisation published an overarching sustainable investment policy or similar document? • If yes, does the policy: • Specify the coverage of the policy (in terms of the asset classes and AUM covered by the policy)? • Identify any exceptions to the policy? • Describe the integration of sustainability-related issues into its investment decision-making? • Describe the organisation’s approach to active ownership/engagement? • Describe the organisation’s approach to voting its listed equities holdings (if relevant)? • Describe the organisation’s approach to climate change? • Has the organisation published a policy on managing conflicts of interest in its investment process? Stakeholder Engagement: • Has the organisation identified its key stakeholders? • Has it indicated which of these it has engaged with? • Has it identified the key issues raised by these stakeholders and the actions taken as a result? Page 31 Sustainable Investment Strategy and Governance (3/4) Objectives and Targets: • Has the organisation published objectives and targets for its sustainable investment activities? • Are the objectives and targets SMART (specific, measurable, achievable, realistic, time bound)? • Has the organisation explained how the targets are to be achieved? • Has the organisation set key performance indicators (KPIs) to assess progress towards the targets? • Has the organisation reported on progress against the targets? • Has the organisation described the factors that have affected its performance against the targets? Responsibilities and Accountabilities: • Has the organisation specified who is responsible for oversight of the sustainable investment policy? • Has the organisation specified who is responsible for implementation of the sustainable investment policy? • Has the organisation stated who is responsible for the delivery of the targets? • Has the organisation described how sustainable investment is incorporated in performance management and reward processes? • Has the organisation described how sustainable investment is incorporated in personal development processes (e.g. training)? Page 32 Sustainable Investment Strategy and Governance (4/4) Promoting Sustainable Investment: • Has the organisation listed the sustainable investment initiatives it is a member of/signatory to? • Has the organisation listed the sustainability-related codes and other commitments it has made? Public Policy Engagement: • Has the organisation reported on its dialogue with policymakers or regulators in support of sustainable investment? • Has the organisation published copies of the sustainable investment-related submissions it has made to governments, regulators or policymakers? Asset Allocation: • Has the organisation undertaken sustainability-related scenario analysis and/or modelling? • If yes, has it provided a description of the scenario analysis? • Has the organisation described whether and how it considers ESG issues in asset allocation decisions? • Has the organisation indicated the percentage of its total AUM invested in sustainability-themed areas? • Has the organisation reported on the overall sustainability performance and impact of its investment portfolio? Page 33 Sustainable Investment by Asset Class (1/3) Investment: • Does the organisation describe its approach to assessing and managing sustainability-related issues in the asset class? Note: This may be screening, best in class, enhanced analysis. • Does the organisation describe any variations in its approach across the asset class. • Does the organisation describe how its approach affects its investment decisions (e.g. narrowed the investment universe, influenced buy-sell decisions)? • Does the organisation describe how its approach affects the composition of its portfolio? • Does the organisation describe how its approach has affected its financial performance or the financial characteristics (e.g. tracking error) of its portfolio? • Does the organisation describe how its approach has affected the sustainability performance of its portfolio? • Does the organisation disclose: • All of its holdings in the asset class? • The percentage of the asset class in sustainability-related investments? • The sustainability-related characteristics of the asset class? Page 34 Sustainable Investment by Asset Class (2/3) Active Ownership: • Does the organisation describe how it engages with the companies/entities/assets in which it is invested? • Does the organisation describe how this engagement has influenced the sustainability-related performance of these companies/entities/assets? • Does the organisation provide data on: • The number of engagements carried out in the reporting period? • The engagement strategies/approaches used? • The proportion of the portfolio covered by engagement in the reporting period? • The subjects (topics) of engagement? • The objectives of its engagement? • The outcomes (i.e. changes in company practice) achieved from engagement? Voting (listed equity): • Does the organisation specify the shareholder meetings at which it voted its shares? • Does the organisation report on the number of votes for and against management, and the number abstained? • Does the organisation comment on the reasons for abstentions and votes against management? • Does the organisation comment on the outcomes (i.e. changes in company practice) achieved through voting? Page 35 Sustainable Investment by Asset Class (3/3) Other asset classes: • Does the organisation describe its approach to sustainable investment in other asset classes? • Does it describe how it assesses and manages sustainability-related issues in these asset classes? • Does it describe how it engages with the companies/entities/assets in these asset classes? • Does it describe the sustainability-related characteristics of these asset classes? • Does it list its holdings in these asset classes? Note: For the purposes of testing the checklist, the three largest asset classes for each asset owner will be assessed in detail, and these questions will be asked for other asset classes managed by the asset owner. Page 36 Delegated Investment (External or Outsourced Management) (1/2) General: • Does the organisation describe how sustainability-related issues are managed by its external investment managers? • Does the organisation specify the sustainability-related strategies (e.g. screening, integration) that are to be applied by its external managers? • Does it explain how these differ between investment managers or between asset classes? • Does the organisation describe how its external managers are rewarded for their sustainability-related performance? • Does the organisation explain how external investment manager rewards and incentives align with its own investment beliefs, policies and objectives? Manager Selection: • Does the organisation describe the sustainability-related information it reviews when selecting external managers? • Does the organisation explain how sustainability-related information is incorporated into manager selection processes? • Does the organisation specify what weight is given to sustainability-related information in manager selection processes? • Does the organisation explain how sustainability-related information has influenced decisions on manager selection • Does the organisation explain how these decisions differ from those that would otherwise have been made? Page 37 Delegated Investment (External or Outsourced Management) (1/2) General: • Does the organisation describe how sustainability-related issues are managed by its external investment managers? • Does the organisation specify the sustainability-related strategies (e.g. screening, integration) that are to be applied by its external managers? • Does it explain how these differ between investment managers or between asset classes? • Does the organisation describe how its external managers are rewarded for their sustainability-related performance? • Does the organisation explain how external investment manager rewards and incentives align with its own investment beliefs, policies and objectives? Manager Selection: • Does the organisation describe the sustainability-related information it reviews when selecting external managers? • Does the organisation explain how sustainability-related information is incorporated into manager selection processes? • Does the organisation specify what weight is given to sustainability-related information in manager selection processes? • Does the organisation explain how sustainability-related information has influenced decisions on manager selection • Does the organisation explain how these decisions differ from those that would otherwise have been made? Page 38 Delegated Investment (External or Outsourced Management) (2/2) Manager Appointment: • Does the organisation describe how sustainability-related issues are incorporated into manager requirements (e.g. mandates)? • Does the organisation describe: • The investment performance benchmarks (or other expectations) it sets for its external managers? • The sustainability-related performance objectives (or other expectations) it sets for its external managers? • The sustainability-related incentives it provides to its external managers? • The sustainability-related reporting it requires from its external managers? • The actions it takes if investment managers do not meet their contractual obligations or do not perform in line with the organisation’s policies and other commitments? Manager Monitoring: • Does the organisation describe how it monitors and reviews the sustainability-related performance of its external investment managers? • Does the organisation report on the sustainability-related performance of its external managers? Page 39 Climate Change (1/2) Governance: • Has the organisation described its board oversight of climate-related risks and opportunities? • Has the organisation described management’s role in assessing and managing climate-related risks and opportunities? Strategy: • Has the organisation described the climate-related risks and opportunities it has identified? • Has the organisation described the impact of climate-related risks and opportunities on its investments and on its businesses, strategy and financial planning? • Has the organisation described the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario? • Has the organisation described the scenarios it has used in its modelling? • Has it described the results of its modelling? • Has it explained how the results of the modelling have influenced its investment decisions? Page 40 Climate Change 2 Risk Management: • Has the organisation described its processes for identifying and assessing climate-related risks? • Has the organisation described its processes for managing climate-related risks. • Has the organisation described how processes for identifying, assessing and managing climate-related risks are integrated into its overall risk management processes? Metrics and Targets: • Has the organisation described the metrics it uses to assess climate-related risks and opportunities in line with its strategy and risk management process? • Has the organisation disclosed its portfolio-related Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks? • Has the organisation indicated the percentage of its total AUM in investments that support the low carbon transition? • Has the organisation indicated the percentage of its total AUM in investments that support effective adaptation? • Has the organisation described the targets it uses to manage climate-related risks and opportunities, and its performance against the targets? Page 41