By Emma Montocchio, Head of Impact Investment Solutions at Decusatio
As a business, we are very fortunate to play at the intersection between the Sustainability goals of corporate South Africa and on-the-ground project implementation of impact investment solutions. Whether it involves clean energy, water, tackling “period poverty” or SME development – we are grateful for the opportunity to be involved in these discussions with leading corporates.
To that end, we are incredibly interested in the debate around where “ESG” and “Sustainable” or “Impact” Investing are headed.
“Investor support for ESG is waning” and “Asset Managers, banks want tougher ESG reporting rules for firms” are just 2 of the headlines that we have seen in South African business media recently and if we simplify the debate it goes something like this:
“ESG” is effectively a product for banks and asset managers to charge fees – business owners are pushing back saying it is an expense and a distraction from our core use of capital.”
This is unfortunate in the South African context because we need all 3 elements of ESG to work. We have environmental, social and governance issues and we need to unlock funding to tackle them.
Reporting on ESG is not yet a requirement in South Africa but has become relevant to show how companies are committing themselves to implementing ESG frameworks – something that’s become imperative to build thriving businesses. Not just because it’s a good idea to do good business, but because doing good sustainable businesses attracts the investors and clients you need to sustain business growth.
International investors are increasingly looking to invest in companies that are committed to sustainability and responsible practices. According to a 2022 report by the Global Sustainable Investment Alliance, global sustainable investment assets reached $35.3 trillion in 2021, up from $30.7 trillion in 2020. The report also found that sustainable investment assets in Africa grew by 20% in 2021, reaching $1.5 trillion.
On top of that, consumers are becoming more aware of ESG factors and are making purchasing decisions based on them. A 2021 survey by the World Economic Forum found that 87% of CEOs believe that ESG factors will have a significant impact on their business in the next five years.
As the world continues to grapple with pressing global challenges such as climate change, social inequality, and corporate governance failures, incorporating ESG has not only become essential for businesses looking to thrive in the long run, it has become expected by stakeholders.
Stakeholders’ interest in ESG is encouraging more and more companies to voluntarily report on all three categories that comprise the ESG framework to communicate impact and attract investment. If you might still wonder what the ESG framework comprises: The Environmental category focuses on a company’s impact on the environment, including resource usage, emissions, waste management, and climate change mitigation efforts. The
Social aspect of ESG evaluates a company’s relationships with its employees, customers, suppliers, and communities. It encompasses factors such as diversity and inclusion, human rights, labour practices, and community development. Governance covers a company’s internal structure, leadership, policies, and procedures. Good governance ensures transparency, accountability, and ethical decision-making.
How can South African companies benefit from ESG?
South African companies can benefit from ESG in many ways.
First, by adopting ESG practices, companies can attract socially responsible investors who are looking to invest in companies that are committed to sustainability and responsible practices. This can lead to increased access to capital and lower borrowing costs.
Second, ESG practices can help companies improve their reputation and brand image, which can lead to increased sales and market share. For example, a study by the University of Oxford found that companies with high ESG ratings outperformed those with low ESG ratings by an average of 15% over five years.
Third, ESG practices can help companies reduce their costs and risks, such as the cost of complying with environmental regulations or the risk of negative publicity from social and governance issues.
Some of the easy wins that South African companies can leverage regarding ESG to attract socially responsible investors include:
- Renewable energy and green infrastructure: South Africa has abundant renewable energy resources, such as solar and wind power. Transitioning to cleaner energy sources not only addresses environmental concerns but also creates opportunities for investment, job creation, and economic growth. Investing in green infrastructure projects can enhance the country’s energy security and reduce its carbon footprint.
- Responsible mining and resource management: South Africa is rich in mineral resources, and mining plays a crucial role in its economy. By adopting responsible mining practices that minimise environmental impact, promote worker safety, and support local communities, the mining sector can attract responsible investors and contribute to sustainable development.
- Socially responsible investment: Investors are increasingly considering ESG factors when making investment decisions. South African companies that prioritise social initiatives, such as education, healthcare, and poverty alleviation, can attract capital from socially conscious investors. By aligning business objectives with societal needs, companies can contribute to inclusive growth and foster long-term stakeholder relationships.
- Ethical supply chains: The global demand for ethically sourced products and services continues to rise. South Africa, with its diverse agricultural and manufacturing sectors, can position itself as a hub for sustainable supply chains. By ensuring fair trade practices, minimising environmental impact, and respecting human rights, South African businesses can tap into international markets that prioritise responsible sourcing.
- Corporate governance and transparency: South Africa has experienced its fair share of corporate governance scandals in the past. Implementing robust governance frameworks, promoting transparency, and enhancing board diversity can restore investor confidence and attract foreign direct investment. A strong governance culture is a foundation for sustainable business practices.
ESG considerations are no longer an option but a necessity for businesses seeking long-term success and resilience. South Africa, with its unique challenges and abundant resources, has an immense opportunity to embrace the principles of ESG and drive sustainable development.
By taking steps to improve their ESG performance, South African companies can position themselves as leaders in sustainable business and reap the rewards that come with it.