ESG: What are the challenges for retirement funds?

Investing only in companies that prioritise environmental, social, and governance (ESG) issues seems like the obvious choice. Retirement funds should direct capital towards ethical businesses that respect the environment, support their workers, and strengthen communities — building the kind of world members will one day retire into.

But the reality of achieving this vision is far more complex.

Challenges for companies

ESG is a global movement that drives businesses and investors to consider environmental, social, and governance factors in their decisions, shaping how companies operate and how capital is allocated. Yet this short acronym covers an enormous range of objectives — from board diversity to waste management — and meeting them can be time-consuming and costly. Often, companies prioritise and report on issues most material to their operations. For example, a manufacturer with high water usage, or one whose production relies heavily on a steady water supply, might focus on improving water efficiency and reducing wastage.

The reporting landscape is also fragmented. International frameworks include the Global Reporting Initiative (GRI) and the International Financial Reporting Standards (IFRS) Sustainability Standards, while local ones include King IV™, the JSE Sustainability and Climate Disclosure Guidance, and the National Green Finance Taxonomy.

And new standards keep emerging, causing the “goalposts” to shift, which makes compliance even more onerous. Globally, there are more than 600 sustainability reporting frameworks — a “spaghetti bowl” of guidelines, according to the Institute of Sustainable Finance at the University of Economics Ho Chi Minh City.

Difficulty in quantifying non-financial data

Financial performance can be measured using established numerical rules. ESG factors, however, often involve qualitative or context-specific data — for example, how inclusive a company’s workforce is or how it impacts local communities. These measures will differ widely between a small rural business in KwaZulu-Natal and a large urban corporation with factories in every city.

The lack of consistent, verifiable metrics opens the door to greenwashing — where companies exaggerate or misrepresent their ESG credentials.

Balancing competing priorities

Transitioning to ESG-aligned practices isn’t always straightforward. Take climate change: while moving away from coal benefits the environment, shutting mines can cause mass job losses and social unrest. A coal company shifting to a greener sector may face reduced short-term returns and significant restructuring costs before real benefits emerge.

Challenges for trustees

Although Regulation 28 only requires trustees to consider sustainability factors when investing, the pressure is slowly mounting. Frameworks such as the Code for Responsible Investing in South Africa (CRISA) and the FSCA’s Sustainable Finance Guidance, while still a work in progress, aim to guide them in integrating ESG into investment decisions.

However, lack of standardisation makes comparing ESG scores and disclosures challenging — especially in private equity or alternative assets, where data is even scarcer. Aggregating ESG metrics across multiple asset classes in a diverse portfolio can be complex and resource-intensive.

Trustees also face a steep learning curve. They need knowledge not only in finance, but also in environmental science, social development, and governance best practice — expertise that may be unrealistic to expect from every board. Smaller funds, in particular, may lack the budget or staff to fully integrate ESG considerations.

Why it’s still worth the effort

Despite the difficulties, ignoring ESG is not an option. Evidence increasingly shows that companies with strong environmental policies, active social engagement, and effective governance tend to outperform peers over the long term.

Trustees’ fiduciary duty goes beyond simply growing members’ savings. Responsible investing requires them to consider any factor — including ESG issues — that could materially affect long-term performance. While integration is complex, it aligns with both protecting returns and building a sustainable future for members.

Further reading

Why sustainability matters to your fund