April, 2019 - South Africa has witnessed its fair share of corporate governance failures, necessitating the integration of responsible investment into the mainstream of the country's business landscape. This imperative not only safeguards the well-being of its 57.7 million inhabitants but also solidifies its position as a competitive and viable investment destination. Companies that wholeheartedly adopt environmental, social, and governance (ESG) principles in their investments stand to reap disproportionate benefits compared to those who neglect them. Presently, ESG integration remains a voluntary consideration, guided by the Code for Responsible Investing in South Africa (CRISA), the King IV Report, and the United Nations Principles for Responsible Investment (UN PRI).

However, the Financial Sector Conduct Authority's (FSCA) draft directive on sustainability reporting and disclosure requirements, combined with the considerable size of South Africa's pension fund industry, may provide the necessary impetus for active ESG integration across businesses. The pension fund industry's collective assets under management amount to over R4 trillion, constituting approximately 40% of the assets listed on the Johannesburg Stock Exchange. According to Mr Pravin Gordhan, their sheer size confers unprecedented power upon them to secure sustainable long-term returns by advocating for high standards of environmental care, social concern, and better governance in their invested assets.

Distinguishing Responsible Investing

Responsible investing (RI), ESG, socially responsible investing (SRI), sustainable investing (SI), impact investing, and green investing are often misconstrued as synonymous terms, yet they possess subtle distinctions. RI refers to an investment approach that incorporates ESG factors into decision-making processes to effectively manage risks and generate sustainable long-term returns. In essence, all investors can embrace RI, even those driven solely by financial objectives, as disregarding ESG factors equates to disregarding pertinent risks and opportunities that profoundly impact returns. SRI, SI, green investing, sustainable investing, and impact investing represent specific forms of responsible investment wherein investors employ value and ethics-based screening of investments to achieve financial returns while integrating ESG considerations.

The Foundation of ESG: Corporate Governance

Corporate governance serves as the cornerstone of ESG principles, underscoring the crucial role of management in improving outcomes for stakeholders. Successful implementation of environmental and social factors relies on a strong governance framework. Within the South African context, governance entails compliance with regulatory bodies such as the South African Revenue Service (SARS), the King Code, FSCA Rules and Regulations, and transparent reporting on relevant metrics. The environmental (E) and social (S) dimensions encompass a company's business practices and operating procedures, evaluating their impact on the environment, employees, stakeholders, and the broader public throughout the value chain. This evaluation also incorporates compliance with Broad-Based Black Economic Empowerment (BBBEE) and transformation initiatives. How companies address and report on their ESG metrics across their operations and value chains, as well as in the development of beneficial products, services, or investments, directly affects their long-term sustainable value in the eyes of investors.

Globally, the number of asset owners investing in companies with positive ESG integration is soaring, with estimates suggesting that the responsible investment market reached $30 trillion in assets under management in 2018. Furthermore, asset owners are increasingly aligning their investment portfolios with the United Nations' 17 Sustainable Development Goals (SDGs), which aim to eradicate poverty, protect the planet, and foster prosperity for all. South Africa, as a signatory to the SDGs, must actively contribute to achieving a more sustainable world to maintain its competitive stance in the investment landscape. As Bain & Company's survey of 297 companies reveals, 81% of respondents deem sustainability more important to their business today than five years ago, with 85% believing that it will be even more important in five years.

Sustainability as a Part of ESG Integration

For Asset Owners

Incorporating non-financial performance metrics and effectively measuring and comparing them can be challenging, especially for smaller companies. While an international standard validating an investment's Environmental, Social, and Governance (ESG) credentials has yet to be established, several frameworks, industry-level definitions, and principles have been put in place. South African asset owners and managers should expect to align with and annually report on their application of the principles outlined by the Code for Responsible Investing in South Africa (CRISA). CRISA is in alignment with both the United Nations Principles for Responsible Investment (UN PRI) and The Association for Savings and Investments South Africa (ASISA), assisting the investor community in meeting the ESG requirements of the UN PRI, Regulation 28 of the Pension Funds Act (Reg 28), and the King Code IV.

Together, CRISA, Reg 28, the UN PRI, and other related initiatives provide a framework for asset owners, such as pension and provident funds, to engage with and hold asset/investment managers accountable. These managers, in turn, hold investee companies accountable for sustainable returns. This framework applies to all asset classes, requiring institutional investors to develop policies on how they incorporate and report on sustainability considerations, including ESG, in their investment analysis and post-investment activities.

For Corporates

As investors increasingly focus on meeting ESG and Sustainable Development Goals (SDG) targets, and with big data providing insights into the correlation between ESG scoring models and positive financial performance, corporations are facing pressure to operationalize ESG and sustainability practices. The global goals campaign presents a significant opportunity for companies that view emerging and frontier markets as their sources of long-term growth. According to estimates by McKinsey, consumers in these markets could be worth $30 trillion to investors by 2025. South Africa, with its slower growth, infrastructure problems, and governance failures, may feel distant from securing its share of this $30 trillion prize. However, by implementing a robust ESG and SDG policy into their business operations, companies can address these obstacles and unlock the "trapped value" for both local and international investors. By actively contributing to sustainability through innovation and positioning themselves as leaders in sustainable development, using the SDGs as a guiding framework, companies can gain a competitive advantage and become known for their ethical practices. It's worth noting that corporate ESG reporting is not yet consistent or fully mapped to the UN SDGs, which consist of 169 targets and 230 indicators.

Navigating this landscape can be challenging, and a company cannot be everything to everyone. At Summit Africa, we assist our investee companies in identifying the ESG and sustainability criteria that are relevant to their business and corporate strategy, qualifying them for inclusion based on fund investors' ESG criteria. The Global Reporting Initiative (GRI) offers a sustainability reporting framework that helps companies measure, understand, and communicate their economic, environmental, social, and governance performance. It also enables them to set goals and manage change more effectively. Integrated reporting, which combines the analysis of financial and non-financial performance, is an intrinsic part of this framework. As a proud signatory to the UN PRI, Summit Africa is continuously seeking ways to better embrace and implement ESG and SDG principles.

Other influential providers of sustainability reporting guidance include:

• The United Nations Global Compact, specifically its Communication on Progress

• The International Organization for Standardization (ISO 26000), which sets the International Standard for social responsibility

• The Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises

• MSCI Sustainable Impact Index

ESG is becoming a standard consideration across asset owners’ investment strategies and product ranges. Estimates predict ESG assets will make up two-thirds of assets managed by global funds by 2020 and sustainability-focused millennials who will make up one-third of the workforce by 2020 are poised to inherit the approximately US$30 trillion of wealth. With the political and market forces behind sustainable investment strengthening, we will see a lasting change in the investment landscape. To quote Bill Gates, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction”. Now is the time to plan your company’s sustainable future.