South Africa’s revolutionary journey in ESG investing

By: James George, Compliance Manager, Compli-Serve SA

South Africa’s journey towards ESG integration in investment management can be traced back to the late 20th century, leading up to today where ‘ESG’ is a concept commonly known across financial services. The end of apartheid in 1994 marked a new era, with an increased focus on corporate governance and social responsibility. The King Report on Corporate Governance, first published in 1994 and subsequently updated as the The King IV Report, released in 2016, includes explicit guidance on how companies should approach ESG issues.

According to ESG expert Emma Leigh, the Johannesburg Stock Exchange (JSE) has played a pivotal role in fostering ESG transparency and accountability. The publication of the Sustainability Disclosure Guidance and the Climate Change Disclosure Guidance documents, while voluntary in nature, assists listed companies to integrate climate-related information into their reporting practices.

“These guidelines are significant in establishing a foundation for standardised and transparent ESG reporting standards in South Africa,” Leigh said at a recent Compli-Serve webinar on navigating the ESG landscape.

The three pillars of ESG are well known but are always worth reviewing:

  • Environmental scrutinises a company’s impact on the planet, evaluating its energy consumption, waste management practices, efforts to combat climate change, and overall ecological footprint.
  • Social assesses how a company manages its relationships with employees, suppliers, customers, and the communities in which it operates. It addresses crucial issues such as labour standards, diversity, human rights, and community engagement.
  • Governance examines a company’s internal practices, governance structure, executive compensation, and compliance with laws and regulations.

Since the early 2000s, investors have recognised the importance of considering environmental and social factors alongside financial returns. The launch of the JSE’s Socially Responsible Investment (SRI) Index in 2004 was a landmark moment, providing a platform for companies to showcase their commitment to sustainable practices.

ESG has been a buzzword for quite a while, creating fatigue for some, but the reality is it’s not going away.

A plethora of ESG standards and frameworks exist globally, acting as invaluable resources for adopting ESG. The United Nations Principles for Responsible Investment (UNPRI) is one example, adopted locally, that states that investors should incorporate ESG issues into their investment analysis, ownership policies and practices, seek transparency from invested entities, promote UNPRI acceptance, collaborate for enhanced effectiveness, and report on their progress in implementing these Principles.

ESG integration in South Africa really matured from the 2010s, with a growing number of asset managers and institutional investors incorporating ESG criteria into their investment processes.

The establishment of the Code for Responsible Investing in South Africa (CRISA) in 2011 guides institutional investors in fulfilling their responsibilities to benefit fund beneficiaries by encouraging the development and disclosure of responsible investment policies, promoting collaboration for sustainability, considering ESG factors in investment decisions, advocating transparency and disclosure, and actively engaging with investee companies for sound governance and sustainable value creation.

ESG considerations balance with mandatory industry standards. For example, Regulation 28 of the Pension Funds Act requires pension funds to consider ESG factors in their investment decisions, reflecting a broader trend of integrating sustainability into financial regulation. Adopting sustainable and responsible practices is becoming the way forward generally, which is increasingly influenced by peer pressure and the Fear of Missing Out (FOMO).

Companies and financial service providers are pressured by industry benchmarks, investor expectations, and the potential for a competitive advantage, as falling behind can harm reputation and hinder investment attraction. Furthermore, FOMO on market opportunities and the innovation driven by sustainability underscore the urgency for businesses to actively engage in responsible practices to stay competitive and seize new opportunities in the evolving economy.

The importance of ESG considerations in investment decisions is growing as demand from investors for transparency and accountability in corporate ESG practices increases. This trend is anticipated to continue impacting the investment landscape in the years to come and has become crucial in today’s world due to increasing awareness of climate change, social responsibility, and the need for ethical governance.

Investors recognise that companies with strong ESG practices tend to be more resilient, better prepared for future challenges, and are therefore more likely to deliver sustainable long-term returns. This shift is not just a passing trend but rather a fundamental change in how value and risk are assessed in the investment landscape.

South Africa may continue to align its regulatory framework with international standards and best practices related to ESG, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Principles for Responsible Investment (PRI). There could be enhanced disclosure requirements for companies ahead regarding their ESG practices and impacts, ensuring greater transparency and accountability.

As 2023 comes to an end, and we look towards a new year, it is crucial for businesses, investors and stakeholders to deepen their engagement with ESG. Here are some steps to take to stay ahead.

  • Be proactive: Keep abreast of evolving regulations and be proactive in compliance to mitigate risks and ensure operational efficiency.
  • Embrace adaptation: Continuously learn and adapt to new ESG trends and innovations to stay competitive and resilient.
  • Enhance transparency: Commit to transparent ESG reporting and stakeholder engagement to build trust and accountability.
  • Think long term: Align business and investment strategies with long-term sustainability goals for enduring success.

The global business environment increasingly shifts towards sustainable and ethical practices, and so gaining a thorough understanding of the ESG landscape has become crucial for all. By following the practical steps above, it becomes easier to contribute to a sustainable future while securing long-term business viability and success.

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