As the global climate crisis deepens and socioeconomic inequalities in South Africa widen, it’s easy to be discouraged about the future of our planet and our country. After all, how can you or I make any difference? 

If you are a stakeholder in a retirement fund, the truth is that you can help to move your world in a more sustainable direction. 

Imagine a long row of dominoes set up to topple one after the other when the first one is pushed. Well, retirement funds can be that push that sets off a chain reaction. 

Here’s what retirement funds and therefore fund trustees can do to encourage sustainability in businesses: retirement funds place pressure on investment consultants, who in turn place pressure on multi-managers and single-asset managers; they then put pressure on companies to implement the change that the retirement funds would like to see on an environmental or social level while investing in them. This is done through active engagement and proxy voting. 

That push starts with the retirement fund trustees and participating employers, but it can also come from retirement fund members. After all, while trustees are placed in a custodial relationship with our investment, feedback to those trustees is not prohibited. As a member, once you have an idea of what you’d like to see in your retirement fund, or the information you’d like to receive about your investments, you can make a request to your trustees – and tell them what you’d like to see if it’s not there.

How can retirement funds change the world?

It all comes down to retirement funds’ influence as investors. After all, it is estimated that retirement funds have $500 billion (roughly R8.6 trillion) under management and the South African pension industry owns about 40% of our share market. So we should have some clout, but the process needs to begin with us. To kick-start it, we believe in taking a values-first approach.

This step-by-step process will help you, as trustees, to define your values-based approach to investing.

• Define what is important to you (or your retirement fund collectively) as an investor. What are the changes you’d like to see? 
• Obtain an understanding and get the necessary information and training you need to bring about these changes.
• Understand the impact such changes would have on your investments.
• Engage with industry specialists to help translate and embed your values in your strategy.
• Ask your asset manager questions to gain clarity where needed and put pressure on them to put your retirement-fund investment to work. 

• Agree on yardsticks and actions – with a roadmap – to achieve these goals.
• Then tip that first domino. 

At Old Mutual Corporate and Old Mutual Corporate Consultants we have seen the power of this domino effect. Companies do change when there is pressure from investors to do so. 

Learn more about the value of investment beliefs and Old Mutual Corporate Consultants’ recommendation on how many one should have.

The difference between doing no harm and actively seeking to do good

Investment beliefs are implemented in different ways that range from limiting harm to doing no harm to actively doing good. These approaches are not either/or and two or three can be used together in the same strategy. 

You could seek to limit harm through Environmental, Social, and Governance (ESG) integration. While this often takes more work, it could lead to the best real-world outcomes. It requires you to identify the most critical ESG matters in a company, and then tackling them with that company. 

The thinking behind ESG integration is not to disinvest from the company (although that certainly remains an option), but rather to engage with them and fix what’s wrong. By doing this, the company may change their operations to be friendlier to the environment and the society they operate in, thus improving long-term sustainability across the board.

When seeking to limit harm, you could also apply what’s known as negative screening. Here, in effect, you’re saying, ‘We will not invest in X.’ According to Old Mutual Investment Group (OMIG), negative screening means applying filters based on an investor’s priorities. (The Old Mutual Responsible Investing Policy explains how Old Mutual, as an institutional investor, ensures that we remain a responsible investor.)

There is a risk associated with negative screening, though, as you could end up excluding large sectors of the economy. If this happens, your returns won’t be the same as those of someone who hasn’t excluded certain sectors from their portfolio. In addition, if you want to use responsible investment to encourage sustainable business practices, negative screening won’t achieve anything. If you don’t have ownership rights, you will have limited scope for engagement and no right to vote. Companies won’t change or close down because one investor chooses to sell their shares. They will simply be allowed to continue doing what they are doing with less responsible owners.

Instead, you could use positive screening. This involves deliberately investing in companies which meet the highest ESG standards. This entails looking for a best-of-breed selection per sector, index, region or country. Positive screening therefore prevents eliminating entire sectors, but again, does not stop the other companies from continuing their potentially worse operations.  

Impact investing lies at the other end of the spectrum, where you seek todo good. This is about putting your money behind change by, for example, investing in a solar farm or a school or a hospital. Here, your investment is directly related to the solution. It is important to note that while impact investments do good, they still need to form part of your overall investment strategy with expected returns alongside progress in that specific area.

Philanthropy also lies at the very far end of the spectrum, although there is no expectation of getting a return on your investment when donating money.

Advice for retirement-fund stakeholders who want to implement a responsible investing strategy

While developing these responsible investment strategies as a retirement fund or as an asset owner, you must keep your initial investment objectives in mind. Remember, responsible investing works alongside the initial objectives of an asset portfolio.

At the same time, we encourage employers (and employees) who are participating in a retirement fund to fully understand their current investment portfolio before making irrational decisions. The Old Mutual Absolute Growth Portfolios, for example, have always had an element of impact investing–to the tune of 7-10%, where many other market-linked funds are still finding their feet in this space.

So there’s a chance that your retirement savings are already invested in the types of companies that you want to support. If you’re not sure, it’s key is to engage with the fund’s trustees, find out where your money is going, and push for a change towards more responsible and sustainable investing. 

That, in turn, will prompt the trustees to speak to their asset managers and that’s when you’ll start seeing the benefits of the domino effect.

Find out more about Old Mutual’s Responsible Business Strategy.