By Waseem Thokan, Head of Research, Peresec
Environmental, social and governance (ESG) factors have become an imperative across society as activists, governments and the private sector grapple with the challenges of the 21st century and how to navigate them in order to ensure a prosperous and sustainable future. The post-global financial crisis era has thrown up a multitude of short-, medium- and long-term threats and opportunities for society and ultimately for companies and investors, both globally (eg climate change, AI ) and in SA (eg inequality, transformation) with the potential to destabilise society and have a drastic impact on business sustainability.
As such, at a minimum, companies and investors need to demonstrate adherence to regulatory requirements and standards. However, it is becoming increasingly necessary for companies to go beyond compliance and stakeholder relations to engage critically at a strategic level with the implications for their business models or investees, for society and the environment and how these can be governed to achieve sustainable outcomes.
Voluntary standards have historically been relatively fragmented, contributing to a sense of confusion for users and inconsistency in reporting. In response to this, new efforts at co-ordination are emerging under the auspices of the International Financial Reporting Standards (IFRS) and building on the work of the Global Reporting Initiative (GRI), the Integrated Reporting Framework and the Sustainability Accounting Standards Board (SASB), among others. This convergence will likely aid comparability and compliance. However, given the divergent impacts and risk exposures across geographical regions, sectors and companies, disclosure standards convergence can never fully address substantive company-specific reporting needs.
Concurrently, a debate has emerged as to whether responses should be limited to maximisation of risk-adjusted return, or some broader responsibility to promote social or environmental welfare or good governance. The concept of additionality – the idea that in beyond returns, some additional social, environmental or governance benefit can accrue to society as an outcome of investing or operating activities – is particularly alluring. However, this imperative is continuously balanced against the imperatives of profit maximisation, competitiveness and ultimately business model sustainability by asset owners, asset consultants and fund managers.
Nonetheless, whether the aim is additionality or whether ESG is viewed explicitly within the context of risk and return, the first step is to understand the historical context of the impact of companies and the extent to which society has an impact on them. This will create a basis for formulation of views and forward-looking strategies to generate additionality.
An understanding of the interface between companies and stakeholders is necessary, but not sufficient to engage risk- return. Analysis needs to go further, engaging with the proactivity of management of the prospective risks and opportunities which come out of the stakeholder interface.
Disclosure of the company’s (and particularly senior leadership’s) ability to contextualise and recognise the issues, the extent to which there are defined incentives and accountability mechanisms around addressing them, the level of relevance, reliability, understandability and comparability of their performance reporting and the coherence of their strategic response is key.
By responding and reporting within this context, companies can demonstrate themselves to be aligned with a sustained ability to generate return and as such build resilience into their business models, underpinning financial performance.
The Sanlam ESG Barometer Report is the first study of its kind in SA to evaluate the current state of ESG and assess how JSE-listed companies are changing their businesses to deliver improved ESG outcomes. The report, produced by independent research house Intellidex in partnership with Business Day can be download at www.sanlamesgbarometer.co.za/report
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