Pension funds can influence a major shift in ESG investing

Year after year, parties to the UN Climate Change Conference make pledges to mend their ways in key focus areas such as carbon emissions. The centrality of finance as the catalyst for change in climate matters has been reiterated. As such, pension funds can loop in to make a change and simultaneously derive satisfactory value for their members.

Possibly the largest mobiliser of private finance globally, pension funds are a potential superpower in the climate change battle. With Kenya’s assets under management approaching the Sh1.5 trillion mark, pension funds make the largest institutional investors with substantial long-term interests — enough to influence significant shifts in Environmental, Social and Governance (ESG) investing. As legislation regarding ESG factors becomes increasingly ambitious, pension fund trustees still have a fiduciary duty to protect the financial interests of their members who rely on them to preserve their retirement savings.

As a result, the trustees and fund managers are often confronted with the ‘values versus value’ dilemma in nearly each investment decision they are making and are expected to act with utmost financial prudence.

In the new wake of sustainability debate, the trustee might also be tasked with enlightening the members on the need to adopt ESG values — in cases where members have not bought into the need to shift from traditional investment avenues whose returns may sometimes be deemed better.

Remember that E, S and G pillars have been around for decades. They have been evolving separately over the years with the concept having taken hold in the 1970s when investors began aligning around crucial social concerns like apartheid in South Africa.

However, it was not until the 2020s when there was an increased sense of urgency globally on climate matters. This has made it possible to integrate ESG issues well into pension fund strategies.

Accordingly, broadly weighing up any risks from ESG factors as they examine how sustainable their investments are in line with their values and outlook is important. Climate change not only threatens investment portfolios but also employers’ contribution capabilities and the retirement life of savers. This is why pension funds should prioritise ESG now more than ever.

The writer is the CEO KenGen Staff Retirement Benefits Scheme and a governance trainer.