WHY A RESPONSE TO ESG IS NO LONGER OPTIONAL

Wrecking our natural environment poses a direct threat to humans now, and for future generations

In a 2019 analysis of 500 of the world’s biggest companies by market capitalisation (G500) the Climate Disclosure Project found just under a trillion dollars ($970bn) at risk if they do not develop a response to climate change.

Over half of these risks were reported as “likely/very likely/virtually certain” and are likely to materialise in the short to medium term (about five years or earlier).

But why does climate-related information matter, and who cares anyway?

Let’s put it in simple nonboardroom language. When we refer to “the environment”, the first thought that enters the mind is the natural world. But the environment is basically everything that surrounds us — the biophysical alongside society and the economy, with all three interdependent. All these elements — ranging from the air that we breathe, to water, sustenance and security, culture and our sense of belonging — have a direct impact on human welfare.

Any changes to this environment may present direct threats to human welfare, unless the risks are managed, for ourselves and for future generations.

Yet human beings and corporates continue to exploit the natural environment they depend on. How much more pressure can the environment withstand before it finally succumbs?

Since every human being and corporate is dependent on the environment, it is up to us to manage what happens next. By “us” we mean individuals, governing bodies in corporates, regulators, standard-setters and the state, among others. Last year, the King committee on corporate governance issued a guidance paper which highlights the responsibilities of governing bodies specifically in relation to climate change.

To really get traction, however, the state would have to identify this as a top priority. We welcome the new Climate Change Bill introduced in the National

Assembly in October 2021, which recognises that a “nationally driven, co-ordinated and co-operative legal and administrative response is required … as well as the need to develop a legal and institutional framework for the implementation of the republic’s national climate change response”.

This means that regulators would have the wherewithal to enforce compliance and implementation of measures to slow down the demise of our valuable environment.

It is also heartening to know that international accounting standard-setters have made progress in recognising that a universally adopted framework under which climate-related information can be reported in a consistent and comparable manner has to be prioritised.

A universally adopted framework is a step in the right direction, but any reporting under such framework will only be useful once external assurance on the information can be expressed to increase its reliability for decision-making purposes.

Enter the international assurance standard-setters. Kudos to them for already having issued standards which deal with providing assurance on specific engagements such as greenhouse gas statements, but the world continues to wait with bated breath for more standards which focus on providing assurance on environmental, social and governance (ESG) matters.

The advance of integrated reporting has also recognised for some time that users’ needs for information go way beyond financial data. Investors and investor groups, such as Climate Action 100+, signatories to the Principles of Responsible Investment and the UN Environmental Programme Finance

Initiative, which represent trillions of dollars of assets under management, are demanding that entities they invest in demonstrate their commitment to ESG issues. This may require that business enters into the necessary partnerships to make the change.

If the environment is, indeed, “everything around us”, then corporates and governments can no longer pick and choose whether to prioritise economic, societal or environmental issues. To remain relevant, they must recognise their responsibility to respond to each of these elements.

In meditation, the state of consciousness is often compared to the tension between a bow and arrow just before the arrow is released. Let us not wake up when it is too late but let our response be guided by our state of (ethical) consciousness — and conscience.

The advance of integrated reporting has also recognised that users’ needs for information go beyond financial data

Agulhas is chair of the King committee subcommittee on climate change; Judin is a partner at Judin Combrinck Inc Attorneys