Worldwide, retirement funds are warming up to the idea of environmental, social and governance (ESG) investing. However, most funds have yet to move from appreciating the rationale for ESG investing to actually making such investments.

The reason is regulation that, with a few exceptions — notably SA — is not particularly ESG friendly. SA retirement fund regulation goes much further in encouraging ESG investing than jurisdictions such as the US, making the country worth watching — as we saw at the recent Impact Investing Legal Working Group annual conference at New York University’s Grunin Centre for Law and Social Entrepreneurship.

The regulatory position of SA retirement funds on ESG investing attracted great interest at this conference, which highlighted the contrast in how ESG “fits” into the regulatory framework for retirement funds in SA compared to the US.

The US regulatory regime governing private retirement plans makes no direct mention of ESG investment. Theoretically, the US federal pension regulator does allow funds to consider ESG investments, provided they produce financial returns comparable to non-ESG investments. In other words, US funds must approach investments from a purely financial perspective that emphasises maximum returns.

As one US commentator noted, that means they can take ESG factors into account if they believe it will maximise returns, but they cannot select investments based on social considerations — meaning ESG investing has to be done as a financial metric.

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