Regulation 28 to propel both investment returns and positive impact in SA

Amendments to Regulation 28 will challenge the perception that investment returns and positive social impact are mutually exclusive.

The amendment of Regulation 28 of the Pension Funds Act could open the way for more significant national infrastructure and social investments, giving investors greater access to diversified growth assets with low or no correlation to listed markets, creating a win-win for the South African economy.

This is according to Ettienne de Kock, Head of Product Development for Impact Investing at Old Mutual Alternative Investments and Sean Friend, Investment Director: CIO SADC and Co-Portfolio Manager of the AIIM IDEAS Managed Fund. Both spoke at a BASETA conference and webinar attended by the trustees and members of South Africa’s most prominent retirement funds.

At the heart of opening the way for massive investment in energy, education, housing, and other infrastructure projects currently underfunded, the changes introduced by Treasury will allow institutional investors more scope to address shared socio-economic risks facing their organisations while improving investment performance.

According to De Kock, recent changes to Regulation 28, which will take effect in January 2023, will make it easier for institutional investors to invest in social infrastructure – such as housing, education, and energy assets – alongside traditional infrastructure.

“The original definition of ‘infrastructure’ which guides permissible investments leans heavily on infrastructure being outlined in terms of projects specified in the National Infrastructure Plan. This omitted private sector infrastructure projects and those beyond South Africa’s borders,” he said.

Similar to the traditional infrastructure assets that investors know well, social infrastructure often has a low correlation with equity and bond markets, making them ideal for diversification. They also generate stable and predictable cash yields that typically escalate well above inflation while enabling investors to contribute to a positive social impact, said De Kock.

He pointed to their investment in the Royal Schools group, as an example. “Our investment helped a high potential education operator grow from 750 learners in 4 schools to 4,300 learners in 8 schools, all of which are in the underserviced affordable market segment.This provided our investors with an annualised return of 14%.”

Housing and education investments, a focus area for Old Mutual Alternative Investments, benefit from being a high priority spend for consumers, making them good defensive assets.

“However,” De Kock added, “not all housing and education investments are created equal. This only holds true for well-considered and properly managed investments, backed by management teams with considerable industry experience and expertise.”

With the energy crisis facing South Africa top of mind, Friend outlined the obvious benefits of more significant investment into renewable energy thanks to proposed amendments in Regulation 28.

“The change will enable retirement funds to consider more energy infrastructure projects for investment where at least 3 000 Mw of renewables a year is needed to sustain energy outputs. This would also include more significant investment in rural areas, including meaningful job creation,” said Friend.

He said that capital managed by the IDEAS Fund, the largest domestic equity investor in infrastructure projects in the SADC region, for example, grew to ZAR21.1 B as of 30 June 2022.

“Of this, 59% of asset allocation has been earmarked for renewable energy projects. Actual returns have varied between 10% and 11% since 1999, reflecting the nature of the tangible assets that offer high dividend yields and predictable results, making them ideal investments for retirement funds,” said Friend.

“As the number and impact of renewable energy plants increases, the result will be the national legacy of cheap electricity for future generations and a reduction in the impact of coal-powered power stations on the environment.”

De Kock believes that the changes to Regulation 28 will create a win-win for institutional investors, increasing their ability to invest in the ecosystem in which they operate and in which their members live, work, raise their children and retire while providing them with compelling returns.

“Institutional investors can only invest where they can generate a competitive risk adjusted return for their members. Therefore, we work hard to create investments that meet our dual mandate – providing investors with compelling returns alongside an embedded positive social impact.

“Old Mutual believes that with the recent changes to Regulation 28, National Treasury recognises this reality, sending an extremely encouraging signal to investors. It is important that we invest in the ecosystem in which we all operate,” said De Kock.

According to Friend, one of the key economic activities that could benefit significantly is the energy sector in which investment in renewable energy is poised to make a substantial contribution.

“Retrospective research has indicated that adding five gigawatts of power to the grid in 2021 would have reduced load shedding by 96.5%.

“The benefits for a struggling economy of alternative energy are incalculable. More important, however, is that an investment today will mean long-term benefits. These will include a fully-amortised system that will provide cheap electricity for generations to come,” concluded Friend.