By: John Anderson
While global warming is accelerating at a record-breaking speed, resulting in extreme weather events like floods and drought, few South African retirement funds have climate policies in place. The World Meteorological Organisation declared 2024 the hottest year on record, following 10 consecutive years of exceptional land and sea surface temperatures driven by human-generated greenhouse gas emissions.
A Financial Sector Conduct Authority (FSCA) survey found that in 2020, only 7% of South African retirement funds had climate change policies, and only 2% were committed to green, climate, social, or sustainability-focused investments. A recent actuarial study also found that South African retirement funds only score 11% in terms of climate-related disclosure and reporting versus an ideal score of 80%.
Concerned that South African retirement fund trustees are not factoring the risks and opportunities presented by climate change into their investment strategies, the Actuarial Society of South Africa (ASSA) has released a Climate Change Toolkit for actuaries and trustees. The toolkit was compiled by a joint working group consisting of actuaries from the ASSA Climate Change Committee, the ASSA Retirement Matters Committee, and the ASSA Investment Committee.
The toolkit provides actuaries and trustees with guidance on integrating climate risk management into their strategies to ensure the provision of sustainable retirement incomes while contributing positively to society and the environment.
Actuarial projections and reserving assumptions often do not explicitly include allowances or considerations to account for the long-term implications of climate change.
Current research indicates a significant gap in the integration of climate-related risks in the strategy and management of retirement funds. This toolkit aims to bridge this gap and encourage the integration of climate change into the actuarial work related to retirement funds.
The toolkit identifies key climate change-related risks and the range of impacts on economic growth, mortality, employment patterns, and investment returns. These factors ultimately influence the long-term expected outcomes that defined contribution funds can achieve and the funding levels of defined benefit funds.
Retirement funds exist to provide lasting retirement income for their members. Given the long-term nature of retirement savings and later the drawing of an income, it is important to consider to what extent external factors such as those created by climate change are priced into the investment portfolios underlying the pension promise.
There are also opportunities that retirement funds should be consciously pursuing, such as investments in clean energy, innovation in energy storage, green and climate-change resilient infrastructure, and sustainable agriculture, amongst others.
There are regions, asset classes, sectors, and companies that will benefit from the transition to a low-carbon economy, and there are those that will be negatively affected. Also, there are regions, asset classes, sectors, and companies that will benefit from the adaptation that will be necessary to be resilient on a warmer planet. The key to investment strategies is to identify how best to mitigate the risk and benefit from the opportunities.
Retirement fund actuaries can play a much more significant role in helping retirement fund trustees identify the risks and opportunities that come with climate change.
Retirement funds are important and influential asset owners. By prioritising responsible investment opportunities, retirement funds are well placed to drive meaningful adoption of environmentally and socially conscious practices, enabling sustainable returns for beneficiaries.
* Anderson is a retirement fund and investments actuary at ASSA Investment Committee.
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