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DealMakers - Q3 2022 (released November 2022)


ESG reporting begins with honest and verifiable statements

by Paula-Ann Novotny, Jaqui Pinto and Chandni Gopal

An increased focus on ESG reporting has heightened the risk that stakeholders may take a number of decisive actions against a company for making false or misleading claims, including litigation and shareholder derivative actions.


Today, in assessing the likely resilience and sustainability of their investments, investors employ an integrated framework based on environmental, social and governance (ESG) principles. Companies are now expected to consider and reflect ESG risks, impacts and opportunities in their strategies, product portfolios, operational value chains, decision making structures, and stakeholder engagement platforms.


As stakeholders and shareholders pay more interest to these non-financial parameters of a company's performance, there is an increased demand for companies to disclose data that is transparent, verifiable, credible, and accurate.


Reporting requirements are evolving


Various organisations, regulatory and industry bodies, and even States have developed frameworks to guide ESG disclosure and reporting which, although all seeking to achieve similar goals, have nuanced approaches, recommendations and focus areas. One of the biggest challenges faced by corporates is understanding which frameworks (global, regional, or sector-specific) to report against and how to meet those requirements in alignment with other stakeholder expectations and requirements.

A global effort towards convergence and harmonisation of these guidelines is under way. The latest effort is the ISSB’s Exposure Drafts of two new disclosure standards aimed at establishing a global baseline guideline for sustainability and climate-related disclosures. Reporting in line with these frameworks is currently voluntary for South African organisations, but we anticipate a mandatory disclosure regime(s) in the near future (as is already happening in the UK and EU).

Paula-Ann Novotny WWWW-100145-01.jpg
Paula-Ann Novotny
Jaqui Pinto WWWW-01.jpg
Jaqui Pinto
Chandni Gopal WWWW-01.jpg
Chandni Gopal

For South Africa, the JSE has issued voluntary sustainability and climate change disclosure guidance documents, which align with global standards but are framed by a domestic context.


In deciding what information to disclose (as guided by the principle of “materiality”), corporates must identify the purpose and users of their reports. For example, integrated reporting targets stakeholders seeking to assess enterprise value (e.g. investors, lenders and creditors), so disclosure includes a sub-set of sustainability issues that enable users to understand the financial implications of sustainability-related risks and opportunities on enterprise value over time. The various disclosure frameworks which have been published recommend different approaches to materiality (single materiality vs double materiality), depending on the report's purpose and users.


Stakeholders can deploy various weapons


Companies have various stakeholders, such as employees, the communities in which they operate, funders, trade unions, non-governmental organisations, and shareholders. This piece focuses on shareholders, although other agendas and concerns must also be considered and balanced.


Shareholder activism involves shareholders deploying certain mechanisms to effect change within a company. This has been effectively used to pursue ESG agendas.


South Africa has an enabling framework for shareholder activism, including the Companies Act, the Takeover Regulations, and the Financial Markets Act. Guidelines and requirements issued by regulators such as the JSE and the Takeover Regulation Panel also provide shareholders with certain protections, as well as the King Code.


  • Shareholder activism can take the form of attending, taking part in, calling (in certain circumstances) and voting at meetings. Companies can prepare themselves by considering who the shareholders are, what information they are using, and what their main concerns are. It is always best to be proactive and to engage with shareholders at the appropriate levels and through appropriate channels to pre-empt any issues, and to cater for them.

  • Shareholders have the right to access certain company information. The Protection of Access to Information Act allows shareholders (and other parties, including broader stakeholders) to request and access additional information. For example, they may ask to see verifiable evidence that lies behind a company’s claims of its ESG achievements.

  • Appraisal rights, which are governed by Section 164 of the Companies Act. This provides the shareholder, in certain circumstances (predominantly involving corporate actions) the right to demand that the company buy back all shares held by that shareholder for a fair market value.

  • Dissenting shareholders have various protections in legislation. For example, in terms of the Companies Act, an affected transaction is subject to court review if more than 15 percent of the shareholders vote against it and, within five business days after the vote, any person who voted against it requires the company to seek court approval.


Apart from legislative tools, shareholders can also effectively use social media to obtain support and change ideas, as well as influence a company’s strategy.


South Africa’s legislative provisions uphold disclosure


While South Africa has no specific legislation targeting ESG-related claims, there are “hard” and “soft” law requirements that potential litigants may utilise to hold companies accountable for inaccurate or misleading disclosures and statements.


"Hard" laws primarily include statutes such as the Consumer Protection Act, Companies Act and Financial Markets Act, all of which contain provisions relating to disclosures and statements. Various environmental, health and safety regulations similarly impose reporting requirements.

"Soft" laws comprise common law requirements such as those in delict where, for example, a financial statement could lead to an investor suffering financial loss, giving rise to an actionable claim.


Claims relating to ESG disclosures may be ventilated in numerous forums. Apart from the court system, there are also statutory ombudsmen and regulators, and various forms of alternative dispute resolution. Dispute resolution proceedings, particularly litigation and arbitration, are generally considered to be an expensive endeavour, which tends to deter potential claimants. In recent years, however, the advent of third-party litigation funding, especially for matters of public interest and climate change (in)action, has ameliorated the "expense" barrier to entry, making litigation much more accessible to ordinary consumers and affected communities.


In an effort to safely navigate the minefield of litigation risk presented by ESG-related disclosures, companies should remember that "the best defence is the truth". If a company can support concrete statements with evidence of sustainability efforts and firm data, it is more likely to be able to neutralise and defend potential ESG claims.


Novotny and Pinto are Senior Associates, and Gopal a Partner | Webber Wentzel

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