Environmental Social Governance ("ESG") in South Africa may be potentially revolutionised by the JSE's publication of a document titled, "Leading the way for a better tomorrow: JSE Sustainability Disclosure Guidance" ("JSE SDG") on 9 December 2021. The public was invited to comment by 28 February 2022.
The transformative power of the market as both a development partner and shaper of capital allocation was emphasised by JSE's CEO, Leila Fourie: "Sustainable development is rapidly becoming a defining feature of the global economy and financial markets will reflect this". Fourie also notes the growing expectation of business to play a role in investor interest in ESG issues, placing business front and centre in driving the shift towards stakeholder capitalism. Securities exchanges are uniquely placed to facilitate more efficient capital markets by properly pricing social and environmental risks through effective, consistent and comparable sustainability and climate-related disclosure.
To date, sustainability disclosures by most companies, including companies listed on the JSE, have been inconsistent. While the King IV Code discusses the concept of sustainable development, it does not provide detailed recommendations or guidance with respect to the sustainability risks, opportunities and management practices, or specific sustainability disclosures. Additionally, ESG has developed substantially since the publication of King IV.
Many companies fail to grasp the impact of ESG on their businesses. This can negatively affect company value and performance, which has a knock-on effect on investors. Without meaningful, accurate and integrated sustainability disclosures and reporting, it is very difficult for asset managers and investors to successfully monitor and assess ESG performance of their investments and account to their clients. As noted in the JSE SDG, meaningful sustainability disclosure plays an important role in building resilient markets, helping to attract financial capital, and fostering greater accountability and improved business performance.
According to the JSE SDG, sustainability broadly focuses on recognising "the need to drive systemic change in achieving a more equitable society and economy that operates within ecological boundaries. This understanding of sustainability focuses on an organisation's impacts on society, the environment and the economy (on "people, planet and prosperity") enabling an assessment of the organisation's contribution toward global commitments such as the United Nations Sustainable Development Goals.
Although sustainability and ESG issues are often referred to as "non-financial", they clearly contribute to financial value in various ways. Effective sustainability responses can protect value, create value and enable value creation. As sustainability becomes an increasingly more important market concern, an organisation's ability to communicate its sustainability performance more effectively – and an investor's ability to track this better – is increasingly impacting access to capital.
International trends suggest that financial institutions will be increasingly encouraged to invest in the "transition" space, and to do so in a rigorous manner requiring evidence of robust sustainability risk management practices.
So what, according to the JSE, is good sustainability disclosure? The concept of "materiality" is crucial. Material information is "reasonably capable of making a difference to the conclusions that reasonable stakeholders may draw when reviewing the related information... Materiality focuses on the material information needs of the primary stakeholders for the report being issued". From an investor lens, this is any information that could be expected to influence an investor's economic decision-making with respect to the object of investment. Both financial materiality and environmental and social materiality are important.
The JSE SDG recommends the following disclosures:
- Describe the board's oversight of sustainability-related impacts, risks and opportunities, and its process for integrating sustainability issues into the overall governance processes.
- Describe how an assessment of sustainability-related impacts, risks and opportunities has influenced the organisation's strategy, and what impact this has had on the organisation's overall performance, both positive and negative.
- Describe how sustainability-related impacts, risks and opportunities have been integrated into the organisation's management processes.
- Describe the performance metrics and targets used by the organisation to measure, monitor, and manage its sustainability impacts, risks and opportunities, and its performance against these metrics and targets.
Organisations and their boards may require external assistance in grasping their ESG impacts, risks and opportunities, and methods of ESG integration and incorporation will also need to account for industry and/or sector best practices. In addition, sustained and consistent prioritisation and capacity building are required by organisations.
The general rule is that ultimate responsibility for ESG accountability and oversight should sit with the board of directors, but where should sustainability disclosures be housed? The JSE SDG also provides guidance with respect to reporting formats. Many companies use an Annual Integrated Report, in line with the King III and IV Codes. However, global practice appears to be moving towards an Annual Sustainability Report – a standalone report dedicated to ESG impacts. Some companies choose to combine their traditional annual financial report with a more detailed sustainability/ESG performance report into a single combined report. Finally, the use of annual financial statements, which are typically prepared in accordance with generally accepted accounting practice, is another way to capture the financial impacts of sustainability in monetary terms.
The mining industry is well placed to grasp and implement these disclosures because ESG factors are already critical aspects of a successful mining company.
Environmental impacts associated with mining require special management and compliance with the National Environmental Management Act, 1998, a suite of other environmental legislation and the requirement to make financial provision for rehabilitation.
With respect to sustainability, black economic empowerment has been driven in the mining industry primarily through the Mining Charter and local development is driven through social and labour plans. Mining companies are used to reporting on compliance with the aforesaid obligations, but the interplay between the JSE SDG disclosures and existing reporting obligations may require mining companies to reconsider whether their current reporting practices meet the JSE SDG's standards.
While sustainability leadership may be more ingrained in mining companies than in other industries, with designated sustainability officers or directors being common practice in the mining industry, it may be necessary to make changes to ensure that sustainability leadership is holistically integrated into the organisation and that sustainability issues are not siloed to one person within the organisation.
While the JSE SDG only applies to listed companies, it is likely to set a trend for all companies in South Africa, as investors will increasingly expect to see organisations grasp the concepts of sustainability and ESG, as applicable to their organisations and to disclose and report on sustainability and ESG.
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