ESG - no longer for show
Margo-Ann Werner and Alecia Pienaar
A vital custom to be maintained by corporate society to achieve sustainable economic development
Environmental impacts, together with the risks and opportunities associated therewith, have become fundamental to economic development, both internationally and in South Africa. This is especially in the light of the climate change crisis, and an appreciation for the need to urgently respond to the challenges arising from its impacts, which are far-reaching across environmental, social, economic and political spheres. This spotlight on environmental considerations is evidenced by the increasing prominence of Environmental, Social and Governance ("ESG") criteria in investment decisions, corporate conduct and general appreciation around the role of ESG in aiding the global transition to more sustainable economic practices.
Whilst ESG, in its infancy, may have seemed somewhat abstract, it is becoming an increasingly tangible and vital custom in corporate society, capable of swaying investor appetite and developer innovations towards the "greener" and socially more responsible projects. The more investment capital is reserved for "greener" developments, the more developers will focus on developing projects that align accordingly.
Today, ESG criteria, and what should be the progressive development thereof, is underpinned and supported by several ESG-related frameworks, including international environmental principles (such as the principle of sustainable development); the blueprint provided by the Sustainable Development Goals; the standards prescribed by the IFC's Environmental and Social Performance Standards; and Equator Principles IV. In South Africa, which boasts an entrenched constitutional right to an environment that is not harmful to health or wellbeing, and a well-developed suite of environmental legislation, corporate ESG criteria and policies are encouraged to incorporate or align with the provisions and sentiments of this regulatory framework.
Although the application of ESG criteria appears to primarily feature at the investment decision level, it also plays a vital role in any company’s day-to-day operations. Robust corporate ESG policies are a necessary foundation to influence a company’s way of doing business, and to guarantee more sustainable outcomes. Offering a competitive advantage, ESG observance at business level will naturally also be more attractive to ESG-committed investors and lenders.
At the risk of simplifying ESG to the mere practice of "policy-adoption", the true value of ESG will only be realised off the back of actual commitment by all stakeholders to make a concerted effort to achieve defined environmental and social benefits. This is important to note as, although ESG may have reputational benefits, it also bears the risk of reputational harm if the ESG goals or outcomes are overstated or otherwise misrepresented. Thus, the commitment to incorporating and realising ESG should not be undervalued. Stakeholders, including environmental and community interest groups, are already holding investors and corporates accountable, scrutinising environmental and social monitoring reports, publicly critisising failures to provide transparent disclosures, and instituting ESG-related litigation. In South Africa, in particular, with its development needs and just-transition approach, these challenges are likely to arise irrespective of the robustness of an ESG-led investment decision.
The above realities, although daunting, should inform and be proactively incorporated into ESG policies, with investors and the broader corporate community in South Africa encouraged to supplement, revise or implement (if they have not already done so), an ESG policy or framework that takes these South African elements into consideration. It is also recommended that ESG-related covenants in transaction documents be amplified to hold parties more accountable to meeting specific KPIs in respect of ESG performance.
The observance of ESG in practice will not only achieve long-term returns for investors and contribute to actual sustainable development at a business level, but will likely also encourage innovation in environmental management, planning, project design and technology. With such potential for true sustainable growth, ESG can no longer be underplayed, but should be recognised and implemented as a vital custom to be maintained across corporate society.
Werner is a Director and Pienaar a Senior Associate in the
Environmental Law Practice | Cliffe Dekker Hofmeyr.