Background Regulation 28 requires all funds to have an Investment Policy Statement (hereafter, IPS) and that boards of funds consider Environmental, Social and Governance (ESG) factors before investing in an asset.

On 14 June 2019, the FSCA published Guidance Note 1 of 2019 (hereafter, GN 1 of 2019) to boards of retirement funds on how the Authority would expect a fund to include essential aspects of sustainable investments in an IPS. GN 1 of 2019 also set out the Authority’s expectations regarding the disclosure and reporting requirements relating to sustainability.

Although it is a guidance, the retirement funds industry is encouraged and advised to apply the principles set out in GN 1 of 2019, dealing with sustainability in the interest of transparency, accountability and the fair treatment of its members.

In this note, we outline two specific service channels that we use to work with clients and explain how sustainability considerations are embedded within each channel, in accordance with GN 1 of 2019.

Sustainability in the context of an investment policy statement

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Investment consulting - the Investment Policy Statement (IPS)

The IPS serves to record the decision-making process of a board of trustees inestablishing an appropriate investment strategy for a fund. This includes settingout the fund’s investment beliefs, objectives and risk tolerance. It should set outhow the board seeks to achieve the fund’s desired objectives, how performancewill be monitored, as well as how the board will communicate, review or adaptthe strategy over time.

The IPS also serves to demonstrate adherence to the Pension Funds Act of 1956 and any other relevant regulations, codes or standards that the Fund subscribes to.

How clients can work with usAlexander Forbes Investments has evolved its servicing model by providing clients with options as to how they can work with us. In this way, our clients can choose what services they require and the extent to which the services are required in meeting their fiduciary obligations and overseeing the management of assets. The different servicing channels give our clients the choice and flexibility to optimise their governance budget and resources according to their needs.

The recommendations set out by the FSCA in GN 1 of 2019 are relevant across two specific service channels that we offer, namely:

Delegated solutionsThe full outsourcing of investment decisions

as well as operational implementation.Alexander Forbes Investments acts as the

fiduciary and investment manager, responsible for investment strategy design and asset manager due diligence and selection. The manner in which

asset managers are mandated to manage an investment portfolio underlying Alexander Forbes Investments’ investment linked policies held by

clients is recorded in the Investment Management Agreement (IMA).

Investment consulting Use of traditional investment consultants

to provide advice in developing appropriate investment objectives and policies along with an investment strategy. Investment managers

would then be appointed to generate the returns required to meet those investment objectives. The investment strategy setting, design as well as asset manager due diligence and selection

are recorded in the IPS.

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FSCA GUIDANCE NOTE 1 OF 2019

Clients that partner with us for investment consulting services will utilise a 3-pillar framework to describe the Fund’s Investment Strategy:

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sets out a fund’s investment objectives. This includes a fund’s

governance framework, the investment beliefs recognised by trustees and a fund’s purpose and

investment objectives.

sets out how a fund’s investments are to be structured to achieve the

objectives set out in Pillar 1. This includes the asset allocations

set for a fund’s investment portfolios, the investment

strategies deployed and the asset manager selection criteria.

sets out how a fund’s investments are monitored. This involves determining

how investment performance is analysed, how a fund

communicates to members regarding investments and

lastly, how a fund’s investment strategy is reviewed in order to adapt and improve it over time.

PILLAR

ONE

PILLAR

TWO

PILLAR

THREE

Pillar 1 of the IPS explicitly states that a fund serves as custodian of members’ savings and will carefully steward the fund’s investments to target sustainable investment returns by having regard for the ESG responsibilities that come with the stewardship of these assets. The belief is that material extra-financial factors relating to ESG issues can impact on the

financial performance of companies in which a fund may be invested and hence affect the performance of a fund’s investment portfolios.

The IPS informs these material extra-financial factors into the IPS with the objective of decreasing investment risk and improving risk-adjusted returns.

ESG impact on financial performance

Active ownership requires the fulfilment of ownership duties in order to give effect to the above responsible investment belief.

GN 1 of 2019 defines active ownership as the: “…prudent fulfilment of responsibilities relating to the ownership of, or an interest in, an asset”.

These responsibilities include, but are not limited to:

a Guidelines to be applied for the identification of sustainability concerns in that asset;

b Mechanisms of intervention and engagement with the responsible persons in respect of the asset when concerns have been identified and the means of escalation of activities as a holder or owner of that asset if these concerns cannot be resolved; and

c Voting at meetings of shareholders, owners or holders of an asset, including the criteria that are used to reach voting decisions and the methodology for recording voting;

The responsibility for the management of a fund’s assets is delegated to asset managers appointed by the fund. Asset managers are interrogated in respect of their active ownership approach, including engagements and proxy voting records, and their ESG policies. Asset managers are required to exercise active ownership responsibilities on behalf of the fund to positively influence the underlying companies in areas such as sustainability through proxy voting and other engagement.

A fund’s approach to responsible investing and active ownership and any changes to this are encouraged to be reported in a note to the fund’s financial statements, together with additional reporting guidelines contained in GN 1 of 2019.

Active Ownership and Governance

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conflicts of interest

the incorporation of sustainability considerations

into their investment decision-making processes (including the identification of sustainability concerns)

a commitment to the principles of sustainable

development

ownership responsibilities (including shareholder activism

guides and/or proxy voting recommendations)

how they incorporate or apply the Code for Responsible Investing in South Africa

(CRISA) principles

The due diligence process followed in selecting and appointing asset managers takes responsible investing and active ownership criteria into account. A fund’s expectations in respect of responsible investment and active ownership activities will, to the extent applicable, be reflected

in the relevant investment mandates with each appointed asset manager. The framework for the underlying investment mandates stems from legislation and other codes of good governance and requires that appointed asset managers have various policies in force regarding:

Asset manager selection

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FSCA GUIDANCE NOTE 1 OF 2019

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Delegated solutions - the Investment Management Agreement (IMA)

The IMA serves to set out how an asset manager will manage an investment portfolio underlying Alexander Forbes Investments’ investment linked policies held by clients. The IMA records the investment objectives and the investment parameters within which the investment portfolio will be managed.

At Alexander Forbes Investments, we aim to protect our clients so that they can achieve their financial goals in the most responsible way possible. Our approach to responsible investing is founded on the belief that responsible investing practices are the way to a sustainable and long-term future for all and is consistent

with our mission, which includes the achievement of consistent and responsible investment outcomes for the benefit of our clients.

The IMA between Alexander Forbes Investments and appointed asset managers to an investment portfolio underlying Alexander Forbes Investments’ investment linked policies is divided into three sections, namely Proxy Voting Guidelines, ESG/CRISA and Corporate Governance recommendations. We believe that the principles contained in these sections are important considerations for all financial services providers to be cognisant of in order to further Corporate Governance and Responsible Investing principles.

Proxy Voting Guidelines

Alexander Forbes Investments does not invest in companies directly but rather invests in asset managers which are selected and combined into portfolios. The fiduciary responsibility of voting is delegated to the appointed asset managers who are expected to vote on all material and important issues on a case by case basis. We believe that the appointed asset managers are best equipped to assess both ESG risks and opportunities and make meaningful decisions on proxy voting and engagement because they are required to have a deep understanding of the companies they invest in and any potential issues that may materially affect its share price.

While we are not prescriptive as to how asset managers should vote, we do provide them with guidelines. We have developed

“Proxy Voting Guidelines” that are included in our investment management agreements. The guidelines provide a philosophical framework within which Alexander Forbes Investments stipulates how an asset manager should vote proxies on our behalf.

The overriding principle that we expect our appointed asset managers to apply when voting is that they must act in the best long-term interests on behalf of our clients. They should do this to deliver responsible alpha (benchmark-beating returns whilst being cognisant of ESG factors).

Proxy voting results are monitored quarterly. Summary reporting on the voting actions of incumbent asset managers in our flagship portfolios is disclosed on our website.

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ESG/CRISA

Alexander Forbes Investments supports the principles and intentions as laid down in the King IV Report on Corporate Governance. Where issues arise that are not addressed or are insufficiently covered, we require our appointed asset managers to be cognisant of the principles and intentions of the King IV Report on Corporate Governance and apply these as appropriate to the specific circumstance at hand.

We have developed “Corporate Governance Recommendations” that are included in our investment management agreements. The recommendations provide a framework within which Alexander Forbes Investments stipulates how an asset manager should apply sound governance principles and practices.

We believe a key feature of a quality asset manager is its ability to consider any factors that may affect the sustainability of an investment such as those of an ESG nature. We believe we can better achieve our goal of achieving sustainable and responsible investment outcomes when ESG factors are considered in an asset manager’s investment process. This provides a more holistic view of the risks associated with the investment.

Our IMA agreement with appointed asset managers requires the asset managers to incorporate sustainability considerations, including those of an ESG nature, into its investment analysis and investment activities as part of the delivery of superior risk-adjusted returns. Asset managers should include examples and demonstrate such

considerations during scheduled portfolio report-backs and due diligences to Alexander Forbes Investments.

Asset managers should also be cognisant of the principles as set out in Code for Responsible Investing in South Africa (CRISA) or as amended from time to time when managing assets. This includes demonstrating its acceptance of ownership responsibilities in its investment arrangements and investment activities, collaborating to promote acceptance and implementation of the principles of CRISA as well as being transparent with their policies and the implementation thereof to make informed assessments.

Corporate Governance

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FSCA GUIDANCE NOTE 1 OF 2019

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DisclaimerAlexander Forbes Investments Limited is a licensed financial services provider, in terms of section 8 of the Financial Advisory and Intermediary Services Act 37 of 2002, as amended, FAIS licence number 711. This information is not advice, as defined and contemplated in the Financial Advisory and Intermediary Services Act 37 of 2002, as amended. The value of a portfolio can go down, as well as up, as a result of changes in the value of the underlying investments, or of currency movement. An investor may not recoup the full amount invested. All policies issued or underwritten by Alexander Forbes Investments are linked policies, under which no guarantees are issued. The policy benefits are determined solely on the value of the assets, or categories of assets, to which the policies are linked. Past performance is not necessarily an indication of future performance. Forecasts and examples are for illustrative purposes only and are not guaranteed to occur. Any projections contained in the information are estimates only and are not guaranteed to occur. Such projections are subject to market influences and contingent upon matters outside the control of Alexander Forbes Investments, so may not be realised in the future.

Please be advised that there may be supervised representatives.

Company registration number: 1997/000595/06. Pension Fund Administrator number: 24/217. Insurer number: 10/10/1/155. Postal address: PO Box 786055, Sandton 2146. Physical address: 115 West Street, Sandown 2196. Telephone number: +27 (0) 11 505 6000.

The complaints policy and conflict of interest management policy can be found on the Alexander Forbes Investmentswebsite: www.alexanderforbesinvestments.co.za.

An annual review of the IPS is encouraged, or more frequently should the retirement fund decide to review its investment strategy or hire/terminate an asset manager. When conducting its annual review of the underlying asset managers, boards of retirement funds should simultaneously assess the voting and reporting aspects of the asset manager. Transparency is key.

One of the core beliefs that underpins our investment advisory and delegated investment approach for investment success is sustainability. Seeking superior long-term returns entails investing in sustainable and attractive investments, avoiding any negative shocks resulting from ESG risks. We firmly believe that underlying asset managers who consider and evaluate the risks and opportunities arising from incorporating ESG factors into their investment process are better positioned to make better-quality long-term investment decisions.

Alexander Forbes Investments fully endorses the CRISA codes and is a signatory to the Principles for Responsible Investment (PRI). Over the years, our sustainability beliefs have been recorded in our RI policy, outlining our philosophy and approach to Responsible Investing (RI). This policy ultimately dictates how sustainability is practiced by Alexander Forbes Investments on behalf of our clients. We strive to be transparent about how we integrate sustainability considerations into our investment process. Documentation around our RI philosophy, policy and initiatives are stored on our website and readily available here.

GN 1 of 2019 looks to promote and foster good RI principles in the interest of transparency, accountability and the fair treatment of investors. The principles are consistent with our mission and current practices in pursuit of responsible investment outcomes for the benefit of our clients, regardless of how they choose to work with us.

Alexander Forbes Investments’ commitment

Evaluating active ownership practices

Evaluating disclosure and reporting practices

Consider if the IPS has included not just the requirement for the asset manager to vote on behalf of the board, but the substance of the votes. The IPS or IMA should stipulate the active ownership practice of engagement, voting and reporting disclosure by the asset manager. This ensures asset managers can be held to account for the investment decisions they make on behalf of the retirement fund.

GN 1 of 2019 makes reference to disclosure and reporting practices more specifically within the context of the IPS. We believe that these matters should extend beyond the IPS and present themselves in the IMA between the retirement fund and its appointed asset managers (where applicable). Retirement funds are encouraged to make their IPS available to the members, stipulate any changes to the IPS or its assets annually via its website or any suitable form of communication that is easily and readily accessible to members.

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Designed by Alexander Forbes Communications. Photos: Gallo Images. 18214-BRO-2019-07

Monitoring active ownership3

Considerations for boards of retirement funds

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