As the retirement sector regulator works on guidelines to enhance accountability and transparency by pension schemes to protect members’ contributions, it will be critical for trustees to establish an investment strategy that meets the set objectives.
Incorporating environmental, social and governance (ESG) factors into investment decisions, therefore, is key. These include corruption, politics, climate change, working conditions, health and safety.
The meaning of responsible investment and the understanding of how it is best practiced is varied, fast evolving and dynamic. In Kenya, there is little or no responsible investment, translating to poor appreciation of ESG within the pension funds’ decision makers.
The challenge lies in how to expand the market through supportive legal frameworks, availability of responsible investment products or securities to allow trustees to deliberately increase short- and long-term investment performance.
Last year, Kenya’s guaranteed funds and segregated funds on average delivered approximately 10 per cent and 18.7 per cent, respectively.
Despite the strong economic growth prospects for 2018, it is important to factor in variables such as efficiency of the fund manager, risk profile, macroeconomic environment, asset allocation and investment policy or framework. Trustees must not only select investments that produce returns at an appropriate level but equally apply measures that take into account the nature and term of the underlying liabilities.
Adaptation and implementation of responsible investment strategies is the best route to attaining this. Responsible investment aims at incorporating ESG into decisions to better manage risk and generate long-term sustainable returns.
While the aspect of responsible investment is relatively new to Kenya, it is important for trustees, investors or policy makers to understand that incorporating environmental risk factor is part of investors’ fiduciary duty to stakeholders.
We can replicate efforts made by South Africa in terms of guiding principles set out in the 2011 Pension Funds Act Regulation 28 that requires trustees to include ESG in their investment mandates and portfolios.
Kenya has developed a strong savings pool through its pension funds and investment schemes with all registered local retail collective investment schemes as well as pension funds and institutional investment funds, asset holdings totalling Sh18 trillion last year.
A deep understanding of sustainable investment translates to improved understanding of current investment value and insights into future trends and value. A good investment framework also works to find opportunities to achieve superior risk-adjusted returns for beneficiaries, particularly over the long-term.
It is a fundamental principle that trustees always act with utmost good faith and in the best interest of the fund and its beneficiaries.
Time has come for a paradigm shift in the management of retirement schemes through applying risk management models, identifying and pursuing strategic objectives.
Successful implementation of an ESG framework is pegged on the principles of responsible investment. Research- and report-related engagement, training and monitoring and performance indicators are some of the requisite tools. These should be considered and marked against standards and codes of good practice regarding responsible investment.
Institutional investors have a duty to act in the best long-term interest of beneficiaries. Trustees who pay attention to ESG stand a high chance of improving governance of pension funds and more accurately value funds’ assets, liabilities and long-term performance.
Implementing the principles will lead to increased returns and deflated risk.
Mr Wafubwa is the CEO of Enwealth Financial Services. [email protected]