“Why South African Companies Should Reevaluate ESG”
The importance of Environmental, Social, and Governance (ESG) principles in the context of South African business operations has been on my mind lately. Discussions surrounding the ESG Africa conference sparked this reflection, which led me to wonder about the origins and true purpose of ESG. Given that many of our clients now request ESG reporting in their annual reports, it becomes imperative to discern its genuine value.
As I delved into the history of ESG, I discovered that it became more pronounced as a response to concerns regarding Shell’s carbon emissions and environmental impact in Europe, which led to legislative mandates for carbon footprint reduction. Notably, Apple also addressed this issue through an advertisement, emphasizing its commitment to ESG principles and carbon neutrality goals.
At its core though, ESG stands for Environmental, Social, and Governance, encompassing the disclosure of data related to these aspects. This disclosure aims to enhance stakeholder transparency, mitigating risks and identifying opportunities. ESG covers various facets of business that conventional financial analyses often overlook, yet these aspects frequently hold financial relevance for companies. Neglecting to assess ESG exposures could potentially lead to substantial financial losses.
Ivo Knoepfel, an expert in impact investing, first used the term “ESG” in his report “Who Cares Wins” in the middle of the 2000s. In this report, Knoepfel argued for the inclusion of ESG factors in financial analysis within capital markets, emphasizing their role in risk identification, business evaluation, and driving positive social change.
This report followed an initiative led by former UN Secretary-General Kofi Annan, which invited over 50 CEOs to collaborate under the UN Global Compact, with support from the International Finance Corporation (IFC) and the Swiss Government. The objective was to find ways for the financial industry to incorporate environmental, social, and governance considerations into capital markets, ultimately quantifying social impact and promoting responsible investing.
ESG may seem like a set of rules and regulations that are somewhat disconnected from the South African market. Some argue that businesses should prioritize profit maximization without additional constraints. In South Africa, Broad-Based Black Economic Empowerment (BEE) holds great significance. While ESG implies that adhering to its three pillars (environmental, social, and governance) can attract more investors and increase profits, concrete data supporting this assertion is currently scarce.
This situation draws parallels with the “tick-box mentality” in the implementation of corporate social investment (CSI) programmes. We may not yet fully grasp the significance of ESG for our organisations.
ESG may appear more relevant to multinational corporations, aligning with international agreements such as the Paris Climate Agreement and focusing on human rights, labor rights, environmental sustainability, equity, and fairness etc. Nevertheless, the applicability of ESG to all South African businesses and its necessity in our annual reports remain subjects of debate.
Regardless of whether South African companies choose to embrace ESG principles or not, it is crucial to consider insights from research and industry discourse. ESG initiatives may not be an absolute imperative for South African companies, and noteworthy figures in the tech industry have criticized ESG as potentially being a form of “greenwashing” rather than a genuine commitment to sustainability.
The ESG conversation extends globally, with prominent figures like Vivek Ramaswamy challenging its nature. Even Elon Musk has labelled ESG as questionable. Therefore, businesses must engage in a thoughtful evaluation process to determine whether incorporating an ESG framework into their operations is the right course of action.
In conclusion, the relevance of ESG in the South African context raises significant questions. It is incumbent upon us to ascertain whether we genuinely embody an ESG-driven ethos or if ESG has become little more than a checkbox on our annual reports.