In recent years a growing number of banks and investment firms globally have started to withdraw their support for businesses without plans to transition away from a reliance on non-renewable energy resources.

What is becoming increasingly apparent is that shareholder returns are no longer the only metric under consideration when shaping investment portfolios with ESG (environmental, social and governance) considerations gaining traction as a measure of the collective consciousness of organisations towards environmental and social responsibility.

However, while the influence of ESG in boardrooms is increasingly driving investment-based decisions, the question that needs to be asked is just how much weight ESG principles should carry.

A recent Business Day DialoguesLive, in association with Konrad-Adenauer-Stiftung (KAS) debated the principles shaping investment attitudes that favour businesses with a commitment to environmental sustainability and social well-being, the knock-on effects for pension fund investments and how to balance the financial prosperity of pension funds in SA.

KAS, a German political party foundation which does diverse work globally all underpinned by the principles of freedom, justice and solidarity, operates in more than 100 countries. Christoph Kleiber, KAS project manager pointed out that ESG is becoming an increasingly important topic.

SA was regarded as a global leader as far as corporate governance was concerned in the 1990s. This was primarily as a result of the publication of the King Report on Corporate Governance, published in 1994, which provided guidelines for the governance structures and operations of companies in SA. Subsequent reports were issued in 2002 (King II), 2009 (King III) and 2016 (King IV). The reports are regarded as the most effective summary of the best international practices in corporate governance.

Muvhango Lukhaimane, the Pension Funds Adjudicator, pointed out that pension funds in SA have traditionally been very focused on governance but have been less focused on environmental and social elements. From a governance perspective their challenge is that trust in pension funds has been eroded amidst accusations of mismanagement and corruption with most still to incorporate social elements, she said.

The office of the Pension Funds Adjudicator investigates complaints and issues determinations in terms of the Pension Funds Act. Its determinations are equivalent to civil judgements in courts of law.

The European Investment Bank was involved in ESG almost 20 years ago, noted Professor Ruth Taplin, editor of the Interdisciplinary Journal of Economics and Business Law (IJEBL), an open  independent forum for expanding the boundaries of economics and business law seeking solutions to global problems within the rule of law; while supporting academics, practicing economists, business people and legal practitioners to find ethical solutions for solving economic, environmental and governance issues.

Explaining that green bonds have generated significant interest in Europe and the UK in recent years she said that asset managers now realise that they are not going to generate a return for shareholders if they continue to invest in fossil fuels, for example. “There is growing pressure on asset managers to make green investments,” said Taplin.

Asset managers in SA can’t only invest in profitable companies but need to also ensure they are sustainable businesses which factor ESG into their operations, said Dr Neels Kilian, a member the Law Faculty at North-West University. The sustainability report of a company needs to include all relevant information – and it’s a red flag if they don’t make a full disclosure.