This article is the first of a 3‑part series which will consider the broad trends that are taking place in South Africa with regards to the environmental, social and governance indicator ("ESG"). In the articles to follow on this this series, we will focus on factors that have the potential to impact several components of ESG. These are anti‑corruption and bribery practices and the protection of personal information.
Corporate entities operate within a set environment and their actions will inevitably impact on that environment, inclusive of the communities therein. Corporate activity and industrialisation may lead to many costs that are borne by the individuals of the society as opposed to the entity that caused the same, inclusive of environmental degradation, pollution, deforestation, and habitat loss. The need to balance economic growth and development with sustainable practices have become a global issue.
Within this framework, and because of the significant impact of corporate entities on society, investors have become more interested in non-financial disclosures and reporting by corporate entities.
The ESG indicator, which indicator is a standard for sustainable development, is universally regarded as a valuable metric for judging the sustainability of a corporate entities' performance in relation to, inter alia, greenhouse gas emissions, energy and water use, environmental impacts, human rights, product safety, fair trade practices, data security, board independence, and taking steps to combat corruption and bribery.
Reporting ESG Indicators
The Sustainability Accounting Standards Board ("SASB") and the Global Reporting Initiative ("GRI") are both voluntary frameworks which may offer guidance to South African corporate entities when reporting their ESG. The SASB Standards are currently maintained and developed by the International Sustainability Standards Board ("ISSB") of the IFRS.
The ESG Trends
There has been a growing trend, which trend arguably persists, between the ESG performance of corporate entities and improved financial performance, marked by inter alia returns on equity, stock market performance and lower credit rated risks.
It should come as no surprise that asset owners, especially long-term investors and / or institutional investors, are implementing ESG metrics into their investment strategies and decision making. Indeed, an institutional investor may very well be under a fiduciary duty to exercise the voting power of the shares held thereby on behalf of the persons whose money they manage, which necessitates considerations other than merely the financial return on the investment that is held by the institution.
As an example, retirement funds, which are typically large shareholders by virtue of being institutional investors, must consider ESG issues when assessing the sustainable long-term performance of retirement fund assets – a duty that is emphasised in the Second Code for Responsible Investing in South Africa, 2022.
Corporate entities are clearly facing pressures to improve their ESG scores from amongst others, industry regulators, environmental pressure groups and large shareholders.
Corporations need to become more "responsible" in the manner in which they run their operations, or risk falling foul of either investor sentiment and / or regulatory hurdles. Corporate Social Responsibility ("CSR") is a principle that is related to ESG, but it is primary used a paradigm or model by which corporate entities function.
CSR includes all the stakeholders that are impacted by the corporate entity or are otherwise involved in the corporate entities' operations, which typically represents a larger portion of society than the corporate entities' shareholders. ESG, on the other hand, is the benchmark against which the entity's operations can be managed. CSR is suppurative of ESG maturity.
Globally, with reference to the G-20 countries, the trend has been that the measured ESG index has been increasing over the past three decades. South Africa's performance, whilst showing smaller improvements when compared to more affluent countries, has been positive and in line with this global trend.
South Africa, King IV and ESG Indicators
South Africa has been one of the few African states to issue sovereign green bonds for climate related purposes and remains one of the three most frequent domiciles for ESG bond issuers as a consequence of a relatively better developed fixed-income market.
Compliance and reporting in relation to the principles contained in the King IV Report on Corporate Governance has become a listing requirement for companies that wish to list on the Johannesburg Stock Exchange ("JSE").
The King IV code itself is not legislation and cannot be relied on as a source of law but may find further indirect application such as when the court's consider industry standards and / or corporate governance practices.
The King IV code envisions that the governing body of a corporate entity should be a responsible corporate citizen, further underscoring the inter-linked relationship between ESG and CSR.
Additionally, all fifteen factors identified in the JSE sustainability disclosure guidance have been assessed as financially material or significantly financially material, with a higher degree of materiality awarded the factors such as health, safety, and tax transparency.
The level of ESG maturity for corporate entities listed on the JSE remains relatively high, mostly driven by a need to avoid value destruction, optimising exiting value and / or managing risks. This can further be explained, in part, by the fact that the boards of corporate entities have an active role in developing and reviewing ESG strategies which are often implemented by chief sustainability officers.
Furthermore, all listed companies on the JSE are required by regulation 43 of the Companies Regulations promulgated in terms of section 72(4) of the Companies Act, 71 of 2008, to appoint a social and ethics committee. The duties of this committee are clearly supportive of both ESG and CSR.
Other than the benefits aforementioned, developing the ESG indicator will undoubtedly assist in reaching the United Nations 17 Sustainable Development Goals as adopted by all United Nation Members in 2015.
Despite South Africa's remarkable ESG progress, it continues to face notable challenges in respect of inter alia, racial issues, inequality, and public sector corruption.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.