‘Africa needs bespoke rating tool’
• Ability to demonstrate strong ESG credentials key to unlocking additional capital flows, writes Lynette Dicey
Environmental, social and governance (ESG) imperatives are moving into the mainstream, both globally and in SA, and have rapidly become fundamental to how businesses make investment decisions.
ESG investments globally are expected to reach $53-trillion. In 2022, the global sustainable finance market was valued at $1.412bn, compared to R61bn in SA, indicating that there is room for growth locally given the appetite for ESG investments.
However, as the recently released Sanlam ESG Barometer points out, the risk is that this global investment bypasses SA unless organisations can demonstrate progress in their commitment to ESG. The report says although South African companies are ahead of the curve in terms of delivering on the social aspects of ESG, their ability to manage ESG risks and capacity to make ESG disclosures, the country as a whole performs poorly on a number of other ESG measures such as governance, which will make it harder to attract investment. The barometer is the first study of its kind to evaluate the current state of ESG and assess what JSE-listed companies are doing to improve their ESG outcomes.
“The ability to demonstrate strong ESG credentials is a key factor in unlocking additional capital flows to sustainable enterprises and away from those enterprises or geographies that are not embracing and demonstrating strong ESG credentials,” says Nigel Beck, head of Sustainable Financing and ESG at RMB.
“Given the significant green and social opportunities across the African continent and the significant amount of local and international funding sources looking for credible opportunities, the ability of businesses to integrate sustainability with their core business functions, while still maintaining their competitiveness, is key to ensuring they are able to consistently attract pools of investor capital.”
ESG performance is typically measured by external rating systems and frameworks which can have unintended consequences for local companies. One solution to this, according to the Sanlam ESG Barometer Report, is a bigger focus on additionality. Additionality is about enabling a positive environmental or social outcome that would not have been possible – or would have been unlikely – without the investment.
Beck agrees, explaining that most external rating tools focus on using company ratings to demonstrate sustainability performance to investors. “What’s missed in these ratings is the positive societal impacts of investments made by companies, especially in local communities. One of the unintended consequences of these external rating tools is that some investors decide to divest from companies with low ratings without fully understanding the importance of these companies within their local context.”
He says the issue of context is also missed in international ESG frameworks from developed economies which are used to assess companies in developing economies.
“While these international standards are good from an ambition and comparative perspective, the cut-and-paste application of these frameworks exerts undue pressure on companies in developing economies.”
Zak Wood, co-founder of DBK Advisory, a tech-enabled ESG consultancy, agrees that the multiplicity of frameworks measuring ESG is a challenge. “Companies are working to improve ESG data and reporting, but need to look beyond box-checking compliance — the majority of significant threats and opportunities lie in the sustainability realm. Frameworks have relevance in their context, but the problem for investors is to compare across contexts. A consistent method of comparison is needed, and raters’ opaque scoring doesn’t allow for contextual nuance.”
Beck says Africa needs to develop a bespoke and homegrown ESG rating tool. While rankings and ratings are a good way for companies to better understand their ESG performance and level of sustainability relative to their peers, he says these solutions are not without their own challenges, including, for example, applying inconsistent methodologies, not providing sufficient guidance on how to improve ratings and not focusing on positive externalities.
ELEVATE AGENDA
“Companies need to be able to look beyond ratings and rankings to consider their most material sustainability issues. This allows them to elevate their sustainability agenda beyond a mere compliance exercise to be able to identify opportunities for growth or improvement beyond what might otherwise have been possible.”
Wood believes that ESG is at a crossroads unless business leaders are able to integrate their commercial and operational objectives with the ESG expectations placed on the business. “ESG as a business strategy will struggle unless it is tied to economics,” he says.