IN A NUTSHELL: Signing the Climate Change Act into law is a significant milestone in South Africa’s commitment to addressing climate change. This landmark legislation necessitates a coordinated approach to climate action across all sectors of the economy. Retirement fund trustees ̶ stewards of vast financial assets – are uniquely positioned to drive positive climate action. With the passing of the Act, this role becomes even more critical.
The signing of the Climate Change Act into law in July this year marks a step forward in South Africa’s journey towards sustainability.
Why is the Act so important? The Act makes climate actions legally binding, requiring government and businesses to take specific measures to address climate change. This establishes a legal framework for accountability that was previously absent.
Implementation will take some time, as the President still needs to set a date for the law’s coming into force. Still, the Department of Environmental Affairs will be hard at work within the coming months.
The Act stipulates that, among other things, the Minister of Environment, Forestry and Fisheries must declare which greenhouse gases (GHGs) are synthetic and plan for their phase-down and/or phase-out.
The Minister must also announce which industries are responsible for GHG emissions and will have to set limits on how much they may emit. By law, carbon-intensive sectors like mining and automotive will have to reduce their GHGs.
Another key aspect of the Act is that companies or sectors will be allocated a carbon budget – a legally binding limit on how much GHG they may emit over a specific period. If they exceed the budget, they will be penalised.
This means that in future non-compliant businesses may face fines, legal penalties, or licence revocation for exceeding emission limits or failing to meet carbon budgets.
What can trustees do?
With custody over trillions in assets, retirement fund trustees are in a key position to drive investment towards sustainable investments that are best positioned to deliver sustainable long-term investment returns. In fact, trustees have a responsibility to members to do so.
In April 2019, a legal opinion commissioned by ClientEarth and Just Share NPC found that trustees are required by law to incorporate climate-related risks and opportunities into their decision-making processes when investing on behalf of their funds.
The passing of the Climate Change Act places renewed emphasis on the opinion’s recommendations.
As a trustee, you should:
- Ensure you have sufficient knowledge, i.e. take appropriate advice, analyse and fully understand the climate risks and opportunities of your fund.
- Assess the carbon footprint of your fund’s portfolio, and identify investments that are vulnerable to climate risk and those that can contribute to a just transition to a low-carbon economy.
- Develop a clear climate policy that explains the fund’s understanding of climate risk, and how the board identifies and manages it.
- Communicate this policy to asset managers and consultants who manage the fund’s investments and ensure they are appropriately mandated and incentivised to implement the policy.
- Pursue active stewardship and engagement with companies in high-carbon sectors, including by setting clear voting policies and engagement escalation timelines, and regularly disclosing to members how they manage climate risk. Consider incorporating climate-related performance metrics into incentive structures for asset managers and consultants.
- Develop an investment strategy with clear, measurable targets to remove carbon risk and leverage low-carbon opportunities in the fund’s portfolio.
By keeping up with developments in the Climate Change Act, fund trustees fulfil two key duties: growing members’ retirement savings in a sustainable manner while contributing to building a fairer, climate-resilient future for all South Africans.