Sanlam and Business Day have partnered to launch the Sanlam environmental, social & governance (ESG) barometer, a project that aims to offer a key measure of SA companies’ ability to improve ESG outcomes through their activities.

The barometer will begin as a research study conducted by Intellidex and will investigate and assess different approaches and attitudes to ESG investing among SA’s biggest companies.

ESG has become fundamental to how organisations conduct their business and make investment decisions. Software company Bloomberg estimates that global investment in ESG will soon reach R957-trillion — half the world’s institutional assets.

SA companies are generally well-governed and conscious of environmental and social impact but the country scores poorly on carbon emissions per unit of economic activity, and on certain corruption and government quality indices. This affects how SA businesses score on ESG, which seriously affects our ability to attract international investment. At the same time, we need huge amounts of investment to finance the decarbonisation of the economy.

This is where the Sanlam ESG Barometer in partnership with Business Day comes in. The barometer will highlight opportunities for investor capital to support ESG additionality — a metric that considers the overall stock of ESG goods in the world, in contrast to those measures that serve solely as screening mechanisms.

“At Sanlam our purpose is to empower generations to be financially confident, secure and prosperous. We are excited to partner with Business Day to launch the country’s first ever Sanlam ESG Barometer,” says Abel Sakhau, Sanlam’s head of sustainability.

“The barometer will be among the first in the world to measure and demonstrate how JSE-listed companies are taking an active approach to ESG and how they are incorporating ESG in their decision-making processes. This focus will come through an assessment of how companies go beyond the expectations and incorporate ‘additionality’ in their ESG execution.”

Identifying the challenge

In principle, ESG integration in the business strategy of organisations should make the world a better place for the most vulnerable. But its delivery needs to move away from being a defensive strategy aimed at reputation management to more of a proactive strategy.

Speaking at an information session, Intellidex chair Stuart Theobald shared some research insight into how investors think about ESG. Investors look at disclosure in a business, using available information to feed into models that can help decide on portfolio choices. This process of “ESG screening” tends to eliminate investments that present “any kind of environmental, social or governance risk,” said Theobald.

“[Investors] don’t want to be found to have invested in companies that are revealed to have undesirable environmental, social or governance practices. So reputational risk management becomes a function of ESG screening,” he said.

While SA still needs to transition to sustainability, “every ESG model that we’ve studied in use around the world has no way to factor that consideration in”.

This means that SA is recognised as a high carbon emitter, which results in a very low score. The country’s development needs are not seen as relevant because it already has a sufficient level of development and the notion of transition is not incorporated into most ESG models.

Bringing ESG additionality into focus

There is a critical need to develop thinking around ESG additionality to secure investment in future. The challenge is to do so in a productive manner, which takes SA’s goals to deal with climate change and social progress into consideration.

“ESG is contested at a conceptual level — people don’t agree on what it means and to resolve that contestation we need to think hard, explain, and engage with different notions of what ESG can be,” said Theobald.

The Sanlam ESG Barometer project will achieve that by bringing together major role players in SA to work together in shifting the focus of ESG beyond its use as a compliance and rating tool.

“We need to elevate those companies having real impact and move the concept of ESG away from mere words to become an active investing strategy. We understand the goal of ESG is not to bias capital away from economies like ours — but a collective challenge for society that can be solved only through partnerships and aligning scarce resources to the most pressing social and environmental issues,” says Sakhau.

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