Regulation 28 and ESG: FSCA Expectations for Retirement Funds
How South Africa's Regulation 28 has evolved from a set of prudential limits into a strategic instrument for sustainable development - and what the FSCA's escalating expectations mean for every retirement fund trustee and asset manager.
Trustees are no longer checkers of limits - they are stewards of systemic value
South Africa's retirement fund regulatory framework is undergoing its most significant structural realignment since the introduction of the Twin Peaks model. At the nexus of this transformation is Regulation 28 of the Pension Funds Act, which has transitioned from a purely restrictive set of prudential limits into a strategic instrument for sustainable development and risk management.
The FSCA's escalating ESG expectations are no longer framed as voluntary aspirations. They are now core components of a trustee's fiduciary duties of prudence and loyalty - backed by a 2025 audit that exposed widespread compliance gaps, a draft Guidance Notice on greenwashing, and the looming COFI Bill that will make outcomes-based sustainability reporting mandatory across the financial sector.
"Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund's assets, including factors of an environmental, social and governance character."
Regulation 28 Preamble - 2011 Amendment, Pension Funds Act No. 24 of 1956From asset limits to developmental stewardship
The genesis of the current regulatory environment can be traced back to the 2011 amendments to Regulation 28, which first introduced a preamble explicitly linking the fiduciary duty of fund boards to ESG considerations. For over a decade this requirement existed largely as a high-level principle without granular enforcement mechanisms - leading to heterogeneous adoption across the industry.
However, the post-COVID-19 economic landscape, coupled with the urgent need for infrastructure revitalisation and the global move toward standardised sustainability reporting, prompted a more interventionist approach from the FSCA. The 2022 amendments - effective January 3, 2023 - represent a decisive shift toward leveraging the R4 trillion pool of domestic retirement assets for long-term developmental goals. This shift is characterised by a move away from a potentially coercive "prescribed assets" model toward a voluntary, market-oriented framework that incentivises infrastructure and alternative investments through higher allocation ceilings.
Under South Africa's Twin Peaks model, the FSCA handles market conduct while the Prudential Authority (PA) oversees prudential soundness. The scheduled transfer of pension fund supervision from the FSCA to the PA by Jan 2028 will apply the same prudential rigour to retirement funds as currently applied to banks and insurers - significantly raising the compliance bar for trustees and administrators alike.
The structural shift - limits that incentivise rather than restrict
The 2022 amendments fundamentally restructured Regulation 28's asset allocation framework - moving from a framework designed primarily to prevent concentration risk toward one actively designed to channel capital toward developmental priorities. The introduction of a formal infrastructure category with a 45% aggregate ceiling is the most significant technical change.
| Asset Class | Pre-2022 Limit | Current Limit | Strategic Rationale |
|---|---|---|---|
| Total Equities | 75% | 75% | Balance between growth and volatility - unchanged |
| Infrastructure (Aggregate) | No specific definition | 45% - NEW | Facilitate long-term developmental financing at scale |
| Private Equity | 15% (combined with Hedge Funds) | 15% (separate) | Recognition of private market maturity and infrastructure role |
| Hedge Funds | 15% (combined with PE) | 10% ↓ | Risk mitigation - reduced from combined limit |
| Unlisted Securities | 35% | 45% ↑ | Support for unlisted infrastructure projects |
| Crypto Assets | Not explicitly prohibited | 0% - Prohibited | Prudence due to volatility and lack of regulatory framework |
| Single Entity Exposure | Varies by class | 25% cap | Mitigate concentration risk across all asset classes |
How ESG INSIGHT Tracks Reg 28 Compliance in Real Time
The ESG INSIGHT platform's ESG Risk module provides real-time portfolio monitoring against Regulation 28 allocation limits - flagging concentration breaches, tracking infrastructure classification eligibility and generating audit-ready compliance reports aligned to FSCA expectations.
- Automated portfolio-level Regulation 28 limit monitoring across all asset classes
- Infrastructure "look-through" analysis - verifying assets meet the functional definition
- Single entity exposure tracking with pre-breach alert flags
- Compliance dashboards exportable for trustee board packs and FSCA submissions
Definitions, eligibility and developmental imperatives
The most significant technical change in the 2022 amendments is the introduction of a formal definition for infrastructure. This definition is functional and economic-centric: "any asset that has or operates with a primary objective of developing, constructing and/or maintaining physical assets and technology structures and systems for the provision of utilities, services or facilities for the economy, businesses, or the public."
The inclusion of "technology structures" enables funds to invest in telecommunications, broadband and data infrastructure alongside traditional sectors like energy and water. Critically, the 45% aggregate infrastructure limit excludes debt issued or guaranteed by the South African government - designed specifically to "crowd in" private capital for new infrastructure development rather than facilitating refinancing of existing government debt.
Prudence, loyalty and the legal case for ESG
The legal grounding for ESG integration rests on sections 7C and 7D of the Pension Funds Act, which mandate that fund boards act in the best interests of their members. Historically, some interpreted this as a focus solely on immediate pecuniary returns - viewing ESG factors as "collateral" or "non-financial" concerns that might detract from a fund's primary objective.
The modern interpretation, as articulated by the FSCA and reinforced by the UN Principles for Responsible Investment, posits that failing to consider material ESG drivers is itself a failure of the duty of prudence. Given that climate change and social instability are recognised as systemic financial risks, a trustee who ignores these factors is arguably failing to identify risks that could lead to stranded assets or catastrophic long-term loss.
The Investment Policy Statement - the primary compliance document
The FSCA's Guidance Notice 1 of 2019 - "Sustainability of Investments and Assets" - provides the technical roadmap for demonstrating compliance with Regulation 28's ESG requirements. It focuses on the Investment Policy Statement (IPS) as the primary document for articulating a fund's sustainability philosophy.
The FSCA's IPS expectations are specific: it must reflect how the fund intends to monitor and evaluate the ongoing sustainability of its assets, including the extent to which ESG factors have been considered and the potential effect on the fund's overall risk-adjusted performance. A "comply or explain" mechanism is embedded: where a fund holds assets that limit the application of ESG factors, the IPS must explicitly state why this limitation is advantageous to the fund and its membership.
ESG Monitoring and Evaluation
The IPS must describe how the fund monitors and evaluates the ongoing sustainability of its assets - including the extent to which ESG factors have been considered and their potential effect on risk-adjusted performance.
Public Accessibility
The FSCA expects funds to make their full IPS - or an abridged version - available on their website at no cost, ensuring stakeholders can hold the board accountable for sustainability commitments. The 2025 audit found 4 of 25 largest funds had no searchable website.
Comply or Explain
Where a fund holds assets that limit the full implementation of an active ownership policy, the IPS must explicitly state the reasons why this limitation is advantageous to the fund - not simply omit the information.
Active Ownership Policy
The IPS must include the fund's approach to exercising ownership responsibilities - how it votes at AGMs, how it engages with investee companies on material ESG risks, and its escalation procedure when engagement fails.
ESG INSIGHT Automates Your IPS Data Requirements
The ESG INSIGHT platform's Reporting module directly addresses the FSCA's IPS population requirements - pulling live ESG data, portfolio-level sustainability metrics and active ownership records into structured, board-ready and FSCA-compliant report formats.
- Auto-populated IPS sections from live portfolio ESG data across all four platform modules
- CRISA principle mapping - all six principles tracked and evidenced with audit trails
- Active ownership activity log - proxy voting records, engagement outcomes, escalation history
- One-click PDF export for website publication and FSCA submission
Five pillars - from voluntary guidance to mandatory disclosure
As of the 2025 reporting period, the FSCA has signalled a transition from voluntary guidance to a more rigid, disclosure-based regulatory regime. The FSCA Sustainable Finance Update Report 2025 and the Regulatory Strategy 2025–2028 outline a "climate-first" approach to mandatory reporting built around five strategic pillars intended to create a fair, resilient and inclusive financial system.
Defining what counts as green - the triple-hurdle test
The Green Finance Taxonomy is the most technical component of the new framework - a classification system defining a minimum set of assets and projects eligible to be described as "green." The FSCA is conducting a GFT pilot with eleven financial institutions, including major pension funds, to test practical application before considering mandatory taxonomy-aligned reporting.
The GFT pilot involves eleven financial institutions testing the taxonomy's application in real-world investment decisions. Results expected mid-2025 will inform the FSCA's decisions on potential mandatory disclosure requirements. The work is collaborative - involving National Treasury and the Prudential Authority - to ensure international interoperability with the EU Taxonomy and ASEAN Green Taxonomy while maintaining local relevance.
Beyond passive holding - proactive engagement as fiduciary duty
A critical evolution in FSCA expectations involves "active ownership" - defined as the prudent fulfilment of ownership responsibilities. Funds must move beyond passive holding of securities to proactive engagement with investee companies. The 2025 landscape highlights proxy voting and management engagement as the two primary levers for addressing governance issues and driving long-term value.
The FSCA's latest guidance encourages funds to adopt "systemic engagement" policies, prioritising sectors where ESG risks are most material - energy, mining and telecommunications. Furthermore, funds are increasingly expected to disclose their proxy voting records, providing transparency on how they vote on executive remuneration, board diversity and climate risk disclosure.
| Mechanism | Description | 2025 FSCA Expectation |
|---|---|---|
| Proxy Voting | Exercising voting rights at company AGMs on remuneration, governance and ESG resolutions | Mandatory voting based on fund-specific policies - records to be disclosed |
| Engagement | Direct dialogue with company management and boards on material ESG risks | Evidence-based engagement tracking and outcome reporting |
| Resolutions | Filing or co-filing shareholder proposals on climate, governance and social issues | Collaborative action on cross-market systemic risks - particularly climate |
| Escalation | Increasing pressure when engagement fails to produce adequate response | Clear "step-up" procedures defined in the fund's Stewardship Policy |
Large Asset Owners Joining Forces on Just Transition AGM Resolutions
The 2024/25 period has seen a rise in collaborative stewardship, with large asset owners joining forces to table climate-related and "Just Transition" resolutions at major AGMs - particularly at carbon-intensive energy companies. The FSCA views this collaboration as a key mechanism for overcoming the resource constraints of smaller individual funds while achieving market-wide impacts. For resource-constrained funds, joining coalitions - such as the Sustainable Investing Group - provides access to research and engagement infrastructure that would otherwise be unaffordable.
ESG INSIGHT Provides a Complete Active Ownership Infrastructure
The ESG INSIGHT platform was built by practitioners who have exercised active ownership at JSE AGMs for over a decade. Every tool in the platform reflects that lived institutional knowledge - from the intelligence that informs engagement to the audit trail that evidences it.
- AI-powered governance scoring - identifies material ESG risks for targeted company engagement
- Proxy voting workflow - policy-aligned vote recommendations with full rationale and audit trail
- Engagement tracking module - records meeting outcomes, commitments made and milestone progress
- Escalation flagging - automated alerts when portfolio companies fail to respond to engagement
- CRISA Active Ownership reporting - pre-formatted for Principle 4 and Principle 5 compliance
The 2025 FSCA audit - widespread non-compliance exposed
Despite the robust regulatory framework, the FSCA's Sustainable Finance Update Report 2025 reveals a significant gap between policy and implementation. The FSCA conducted an audit of the 25 largest registered pension funds to assess current climate-related reporting practices. The findings are sobering - and provide a clear picture of the compliance journey ahead.
The audit findings suggest that while many funds have high-level ESG policies, the "look-through" into their actual asset management practices remains opaque. The FSCA has indicated this data will inform the phasing of future mandatory reporting requirements - likely utilising "proportionality mechanisms" and "transition standard reliefs" to help smaller funds catch up with their larger peers.
ESG INSIGHT Directly Addresses Every Audit Deficiency
Each of the FSCA's four audit deficiency areas maps directly to a capability in the ESG INSIGHT platform. The platform was designed with the specific intent of enabling South African retirement funds to meet regulatory disclosure expectations without adding material operational overhead.
- Public Accessibility: One-click IPS export with branded, board-ready PDF for website publication
- IFRS S2 / TCFD Alignment: ESG Reporting module maps portfolio data to TCFD pillars and IFRS S2 indicators
- Fund-Level Specificity: All reporting is generated at fund asset level - not group level - with full look-through
- Metric Depth: Beyond WACI - full E, S, G factor scoring, climate risk, governance flags and impact metrics
South Africa's unique fiduciary balancing act
South Africa's ESG journey is uniquely shaped by its constitutional commitment to an environment "not harmful to health or well-being" and protected for "present and future generations." Within the financial sector, this translates into the "Just Transition" framework - emphasising that the move toward a low-carbon economy must address historical inequalities and support the social wage.
The National Planning Commission has suggested the FSCA require pension funds to draft "annual infrastructure investment plans" as part of their reporting cycle. While not yet implemented as a hard requirement, the 2022 Regulation 28 amendments - allowing for a 45% infrastructure allocation - are a direct response to this policy pressure.
Climate Change Mitigation
Trustees must fund projects that actively reduce emissions - renewable energy, energy efficiency and low-carbon transition infrastructure. The REIPPP remains the primary vehicle for private retirement capital participation in South Africa's energy transition.
Societal Resilience to Climate Shocks
Funds must also invest in infrastructure that builds South Africa's ability to withstand climate impacts - water supply resilience, food security infrastructure and climate-adapted urban development. Adaptation is not optional under a "prudent person" standard.
Job Creation and Community Investment
The Just Transition requires that infrastructure investment creates and preserves jobs for workers in transitioning industries. Trustees must assess the social employment impact of their infrastructure choices - not just their financial returns.
Section 24 - Environmental Rights
South Africa's Bill of Rights includes an explicit constitutional right to a healthy environment. The FSCA interprets this as a legal foundation for the ESG obligations of retirement fund trustees - embedding environmental stewardship in fiduciary law itself.
The regulatory deterrent is strengthening
One of the most pressing risks identified by the FSCA in 2025 is greenwashing - the practice of providing misleading information about a product's environmental or social benefits, often driven by a lack of common definitions and a desire to capture "sustainable" capital flows without underlying rigour.
To address this, the FSCA plans to issue a draft Guidance Notice in late 2025 focused on the "accuracy and appropriateness of information." Every claim made in an IPS, a member newsletter or a marketing brochure must be factually substantiated and aligned with the Green Finance Taxonomy. For retirement funds, this extends to how asset managers present ESG credentials when reporting to trustees.
The COFI Bill - Outcomes-Focused Regulation: The entire FSCA 2025–2028 strategy is framed as preparation for the COFI Bill, which replaces fragmented financial sector laws with a single holistic conduct framework. Under COFI, funds are judged not just on whether they stayed within asset limits - but on whether investment decisions actively contributed to a fair and sustainable financial sector.
Conduct Standard 2 of 2025 - Administrator Fit and Proper: Administrators are now held to Fit and Proper requirements including ongoing ESG competence. They must have the technical capability to manage the complex data sets required for taxonomy-aligned reporting and TCFD disclosures - and must handle member complaints about greenwashing claims in sustainability communications.
Intensified FSCA Supervision: The FSCA has signalled its intent to be "intensive and intrusive" in its supervision of conduct risks. For retirement funds, the most effective defence is a robust, evidence-based and transparent commitment to sustainable investing - not compliance theatre.
The platform built for exactly this regulatory moment
ESG INSIGHT SA designed its AI-powered platform with one primary institutional mandate in mind: enabling South African retirement funds, asset managers and pension fund trustees to meet every Regulation 28 and FSCA ESG obligation - without building a separate compliance function from scratch.
The platform's four modules map precisely to the four obligations the FSCA audit identified as the industry's primary weaknesses. This is not coincidence - it reflects 17 years of institutional knowledge built through direct active ownership experience and deep familiarity with the South African regulatory landscape.
Four priorities for every retirement fund board
The evolving expectations surrounding Regulation 28 and ESG represent a paradigm shift in South African retirement fund governance. Trustees are no longer merely "checkers of limits" but are "stewards of systemic value." The regulatory environment is moving toward mandatory disclosures, and the FSCA has signalled its intent to be "intensive and intrusive" in supervision.
Priority 1 - Asset-Class Specific ESG Integration: Move beyond generic ESG statements to asset-class-specific integration methodologies, particularly for the new infrastructure and private equity allocation buckets. The functional definition of infrastructure requires proactive "look-through" to underlying assets to verify Regulation 28(2)(c)(ix) sustainability criteria are met.
Priority 2 - Transparency as Fiduciary Core: The 2025 FSCA audit indicates accessibility and standardisation are the industry's primary weaknesses. Funds should begin aligning reporting with IFRS S2 and TCFD immediately - viewing this as a tool for better risk management rather than a compliance burden.
Priority 3 - Formalise Active Ownership: Develop a robust proxy voting policy specific to the fund's objectives. Ensure delegated asset managers are held accountable for engagement activities. Use the Green Finance Taxonomy as a filter for selecting and classifying "green" investments.
Priority 4 - Prepare for the COFI Transition: The COFI Bill's outcomes-based framework will judge funds on whether their investment decisions actively contributed to a fair and sustainable financial sector - not just on limit compliance. Start building the evidence base now.
"For retirement funds, the most effective defence against regulatory intensity is a robust, evidence-based, and transparent commitment to sustainable investing that fulfils the promise of the preamble to Regulation 28."
FSCA Regulatory Strategy 2025–2028ESG INSIGHT SA's AI platform provides retirement fund trustees and their asset managers with a single institutional-grade environment to meet every Regulation 28 and FSCA ESG obligation - from real-time climate risk monitoring to CRISA-compliant stewardship reports and IPS auto-population. Request a personalised demonstration for your fund.