This blog was co-authored by: Bongubuhle Sibanda, candidate attorney
There has been a global trend encouraging the integration of environmental, social and governance issues to be part of the business strategy and reporting practices of companies. While the concept of ESG is broad, the component parts of ESG can be broken down as follows –
- Environmental considerations relate to the impact that a company has on the environment where it operates or does business and its mitigation initiatives to reduce or eliminate the environmental harm that its activities may cause.
- Social considerations refer to the relationships that the company has with stakeholders, and may include how it addresses issues of consumer satisfaction and data protection, employee diversity, inclusion, workplace health and safety and broader social issues.
- Governance considerations relate to the internal policies and processes developed, and could include policies and systems to prevent bribery and corruption and to promote good corporate governance.
To facilitate ESG data disclosures, an overwhelming number of sustainability frameworks and guidelines have been published by various advisers, regulators and bodies. However, there is a lack of global coordination between these frameworks. While companies have rushed to comply with various guidelines, in certain instances this has led to companies preparing a number of shallow corporate sustainability reports that fail to appropriately assess ESG performances in detail.
Despite the absence of a definitive best practice guideline in South Africa, it is important for companies to be pro-active and start to integrate ESG into their business strategies. Not only will this align the company with the investment community’s evolving ESG-focus, but it will also enhance the company’s long-term resilience in the face of risks that may not previously have been considered.
As a point of departure, companies must identify ESG risks and opportunities that may be material to their business. By engaging stakeholders such as consumers, suppliers and regulators, companies can determine their data needs in terms of which their sustainability strategy can be designed and implemented. These engagements may also assist in the identification of value-creating opportunities.
Companies must also establish governance structures and must set objective, achievable governance goals. South Africa has a well-developed corporate governance framework in the form of the King Report on Corporate Governance for South Africa, known as “King IV”. Even the exercise of benchmarking a company’s practices against King IV’s recommendations would lead to increased awareness of best practice, and would result in an increasing tendency towards sound governance principles.
The 17 principles of King IV are couched in broad terms so that boards apply their collective minds, as opposed to following a tick-box approach. This style of guideline promotes discussion and debate as to the applicability and appropriateness of each principle, which in turn promotes an enterprise–wide culture of compliance. King IV regards sustainability as an element of value creation and as a primary ethical and economic imperative.
Once data points are understood and appropriate structures are in place, a board can consider a holistic sustainability strategy. The real value of this strategy is not in its formulation, but in its implementation. It is certainly important to develop policies and action plans covering a range of ESG topics such as climate change, corporate social responsibility and anti-corruption, but these policies must include performance objectives and indicators that are monitored regularly.
Ultimately, the integration of ESG considerations into existing business strategies and reporting practices ensures that companies are proactively managing risks that are becoming increasingly relevant in today’s business environment. The concept of implementing ESG guidelines might be daunting and even costly, but in the long run it is intended to unlock responsible and sustainable value for all stakeholders.