Collective Insight ESG April 2023

C O L L E C T I V E

Special report

Collective Insight is a collaborative initiative published quarterly by the Financial Mail

The articles included here were selected by an independent Advisory Commi ee to reflect some of the best insights from investment professionals, practitioners, and academics in relation to selected financial challenges

Collective Insight enjoys the support of the Gordon Institute of Business Science’s Responsible Finance Initiative, the CFA Society of South Africa, the Financial Planning Institute, ABSIP and the Actuarial Society of South Africa

Our vision was to create a journal that SA’s broader investment community and its stakeholders could collectively “own”, carrying content totally independent of commercial interests

For inquiries contact Anne Cabot-Alletzhauser on cabota@gibs co za

Convener:

Anne Cabot-Alletzhauser

Practice director of the Gordon Institute of Business Responsible Finance Initiative

Editorial advisory commi ee:

Simon Dagut

Executive in the office of the chief executive officer, Standard Bank SA

Kelly de Kock

Chief operating officer at Old Mutual Trust Company

Prof Evan Gilbert

Associate professor at Stellenbosch University and strategist at Momentum Investments

Amanda Khoza

Vice-president and board member of the Institute of Retirement Funds SA

Caretha Laubscher

Manager: Consumer Education Framework, Financial Sector Conduct Authority

Lelane Bezuidenhout

CEO Financial Planning Institute of Southern Africa

Nici McDonald

HOD: Certification and Standards, Financial Planning Institute of Southern Africa

Darius van der Walt

Member of the ASSA investment commi ee, head of product development at M&G Investments

Southern Africa

Nerina Visser, CFA

ETF strategist and financial adviser etfSA

Langa Madonko

Principal for investor relations and capital raising at Summit Africa

ARE WE THERE YET?

By and large the corporate and investment world has capitulated

We can no longer assess the viability and sustainability of a business without considering how society, the environment and the regulatory or governance world affect a business or, in turn, are affected by a business’ s products and processes

Over the past few years there has been a flurry of activity from regulators, industry bodies and service providers, all trying to determine exactly how this should be done: what should be measured, how does it get measured and what constitutes good, or at least adequate, in terms of how a company is addressing its ESG obligations.

It’ s been tough going, and certainly not without controversy This edition of Collective Insight focuses on the “S” in ESG Of the three components of ESG, societal impact has received the least attention probably because this aspect is perhaps the most challenging to delineate and the most emotionally charged

To get a feel for what we need to grapple with, let me pose a few questions What exactly does business aim to achieve by getting involved in the “S” in ESG? Surely

Who is the

there are potential conflicts between the needs of society, which cannot be commercially driven, and the needs of businesses, which have to remain financially viable? Is this just a branding exercise, or an attempt by business to obtain “social licence” from the communities they serve? Or is there some tangible financial reward that we need to understand better?

The articles in this edition cover a number of the areas for debate

In our article “ESG in Africa” , about the lessons that can be learnt from nations that placed the “S” above the “E” and “G” , Manka Sebastian shares how other countries have yielded direct and enhanced productivity from prioritising the “S” and how, through doing the right thing, a focus on developing social capital is fundamental to any country’ s productivity and growth rates

What happens when the government does not fulfil that need? This is the conundrum that David Crosoer addresses Importantly, he questions how “fit for purpose ” the corporate and investment world is for filling in the gap when the government fails Noma Nyembo follows on with an article on “social licence” and why this is something businesses need to both earn and renew from the communities they serve Michael Judin and Alexandra Russell provide some solid evidence of how “social licence” can be emphatically

Of the three components of ESG, societal impact has received the least attention

Langa Madonko

achieved in the South African context

Regarding more hard-core financial issues, Michael Rea provides two case studies in which paying attention to the “S” data translated into significant improvements for corporate productivity and efficiency Natalie Anderson, in turn, guides us through the process of how to integrate societal factors into an investment valuation process

Kasief Isaacs provides us with an article (in the digital edition) that highlights how investment options in which the public and private sectors collaborate provide the optimal way of ensuring that public interests are served when the project is managed as a public-private partnership

In many ways, this public-private partnership concept would seem to be an ideal approach

Our final article uses the renewable energy independent producer procurement programme as a case in point, and asks whether this could be the type of approach South Africa can use to secure its just energy transition

What actually needs to be considered to make sure it doesn’t fall short? How and when will we know whether any of these societal interventions by business are going to add value and relieve some of South Africa’ s pressure points?

Our hope is that this edition of Collective Insight will ignite curiosity and fuel conversations that may not necessarily bring us answers now, but will cast some light on the next steps x

David Crosoer

CAN ESG REPLACE THE STATE?

The debate about whether asset managers, and corporates more generally, should explicitly take “social issues” into account in terms of their investment decision-making is not without controversy

For what it’ s worth, I am a strong believer in the need to tackle the challenges facing our society today and, like many South Africans, deeply sceptical about the ability of the state in its current guise to do much about it

However, I am also realistic about what the asset management industry and private sector can do to drive change, and why its incentive structure is not necessarily aligned to resolving many of our pressing social challenges These challenges are linked to a failed state rather than a market failure

This view risks upsetting two camps in our industry: those who maintain that the state must simply stay out of our industry, and all will be well, and those who (perhaps naively) believe that we can fundamentally shift the industry’ s incentive structure through sheer force of will

For the purposes of this discussion, I think it is useful to distinguish between market failure and state failure and the fundamental differences between the two

The classic textbook example of market failure is a factory polluting the lake that a town relies on for drinking water

Framing this through an “S” (from ESG) lens: child labour is banned because it is not in society’ s best interest to have uneducated children, though cheap and dextrous labour serves private interests

So far so good, perhaps This is the classic framing of the negative externality problem where a private company is

incentivised to oversupply something with a negative externality unless prevented from doing so

Importantly, this is not because the private company is bad or hasn’t fully integrated ESG into its decision-making, but rather because unless the state regulates it, it remains in its financial interest to persist with the behaviour

Most private companies, to the extent that they frame their investment decisions through an ESG lens, have tended to see the state (or regulator) enforcing rules, and creating hoops that the private sector needs to jump through, albeit with a benign intention of mitigating some of the abovementioned negative externalities As long as companies abide by the legislation, the firms remain open for business and asset management firms can respectably invest in them, no matter what a particular interest group may think

But what happens when there is state failure as opposed to a market failure?

Let’ s go back to the child labour example Assume the child is not allowed to work and the public sector school sys-

The state’s failure to deliver basic services shouldn’t be the reason private companies consider the ‘S’ in ESG commitments

Madonko is the head of investor relations and co-founder of Summit Africa

tem is broken State failure here refers to the inability of the state to provide a public good with a positive externality Will embedding “S” in the decision-making metrics of the private company make any difference to whether the company sponsors the child’ s education (and all the other children who can ’t get a decent education)? And should it?

Most “social issues” , such as a decent education, citizen safety and adequate infrastructure, are public goods where the benefit of providing it is shared more broadly than the individual who directly benefits from it or would be willing to pay for it. Here the incentive for the private sector works in the opposite direction, and the private sector structurally undersupplies the public good, no matter the legislative pressure

Much of the muddle we have with ESG, and especially with “S” , is based on arguments regarding the obligation of the private sector to provide public goods with positive externalities, and in sufficient quantity (though they have limited incentive to do so)

Sure, the private sector and the asset

management industry can play some compensatory role, but this would predominantly be when the “S” issues at hand have a direct bearing on the viability of long-term sustainability in the eyes of their clients or consumers and where it needs to maintain its “social licence” to operate in the communities where they coexist

And certain asset management firms that have better integrated ESG into their purpose are arguably better placed to provide some of these goods than the traditional asset management firm These firms might well play a more enabling role in future

We shouldn’t take this argument too far, however. Just as state legislation dealing with market failure is often poorly framed, subject to unintended consequences, and beholden to vested interests, so the market response to state failure is unlikely to ever be in sufficient quantity to replace the state and could even be negative as the anti-progressive backlash in the US is perhaps demonstrating

It is only because the South African state has failed so spectacularly that we are even contemplating the importance of private companies investing in public goods with positive externalities Given that a private company will only supply a public good up to the point at which the costs outweigh the benefits, it is not realistic for the private sector to fulfil the state’ s role (even if the firm’ s marketing schtick implies it could, and/or the state would allow it)

The failure of the South African state to supply public goods is uncontroversial, at least to all but the most blinkered cadre. It should be equally obvious to all of us that the private sector cannot be expected to bail out a failed state x

Crosoer is an investment executive at PPS Investments

THINK ABOUT THE SOCIAL LICENCE

in communities

Businesses rarely act in a vacuum Most must coexist with the communities where they are physically situated, where their employees may live, or where their operations may affect the broader environmental, ecological or social conditions of that community

This coexistence depends on a concept known as the “social licence” : the degree to which a community accepts a business based on the quality of the relationship

While it is well-documented that this phenomenon is hard to measure, multidimensional, emotive and intangible, in South Africa it is perhaps even more so, because community leadership is often challenged, nuanced and dynamic

There are also multiple layers of leadership (traditional leaders, religious leaders, elected leaders); and multiple types of communities (rural, urban, periurban, informal, traditional)

Evaluating the legitimacy of leadership in communities with appreciation of these nuances is critical, as well as adopting a “community legitimacy” lens This basically means not closing the door on any stakeholder.

Rigid and formal requirements for consultation are not sustainable In the almost 30 years since full democracy, poor service delivery, limited access to resources and well-documented socioeconomic challenges that may well be a function of state failure have made communities much more sensitive to private sector intrusions

So how can communities make their voices heard apart from expressing their anger through protests, strikes and violent actions? How can we effect meaningful change?

Meaningful change will come through cross-sector and public-private partnerships Taking the social dynamic seriously by honouring corporate citizenship

Corporate leaders should be aware of the responsibilities or commitments of operating

commitments is non-negotiable for business.

This means social and environmental components of organisational success should be considered as core to business operations, and not peripheral They should be measured in the same way as profitability, with CEOs held to account

The role of the private sector is not to replace the role of the state which fails dismally in some respects but rather to act ethically, fulfilling its social contract for its own benefit It shouldn’t be tickbox exercises or a search for compliance without meaningful investment.

CEOs or leaders who are short-sighted enough to think they can take shortcuts in this area should not only be held accountable, but their role should be understood for what it is: sabotaging the reputation and sustainability of the organisations they purport to lead

Visionaries who are inclusive and participatory in their approach will be set apart as effective These are leaders who understand that weak communities are a threat to the sustainability of businesses

Leaders should panic rather than rejoice when there is poor governance in communities because, as nature has shown us, we are all interdependent and should coexist in healthy ways A weakness in one part of the system can lead to destruction of the whole, and therefore exploiting weakness in one part of the system is short sighted

Business also has a role to play in supporting economies in peri-urban areas, which are largely informal If the private sector does not transact with small businesses in communities, the message they are sending is that sustainability of economies in communities is not important While businesses are competitive enterprises driven by profit, and need not apologise for that, ignoring

the economic plight of small businesses in communities is short-sighted This is not something that can be solved by endless presentations on what has been spent, but by tangible results of successful enterprises in communities

Not everyone who lives in a periurban community wants to move elsewhere and, despite the complex social challenges in communities, some people born in them genuinely want to see them thrive Not every venture will work, but the will from business and effective stakeholder partnerships could go a long way

In addition to this, actual community entrepreneurs need to rigorously interrogate entrepreneurship programmes and boot camps, which are mostly compliance driven Interrogation of participation in those programmes is also necessary, especially in light of high unemployment rates, as well as the sustainability of slotting jobseekers into entrepreneurship programmes Leaders should understand the economic state of the communities they operate in, and the aspirations of small business owners in those communities

Finally, leaders are stewards of organisational resources on behalf of shareholders and should be decisive about investments in communities, especially initiatives aimed at strengthening economies

When businesses go through cycles, real thought needs to go into where to reduce expenditure and where to allocate capital The interdependence of informal and formal economies, corporate communities and civil society should be a key consideration Social good should not be perceived as the responsibility of international NGOs: all leaders should consciously think about a lasting legacy and meaningful contributions

This means thinking beyond narrow interests, thinking about the social licence a community has entrusted to them, and being good ancestors for generations to come

“Social licence” is a “licence to operate” provided by the communities in which businesses operate

It’ s a licence that needs to be earned because it can be “revoked” by those same communities x

is an academic and author on the topic of businesses’s social licence to operate

THE SOCIAL ASPECT: COMPANIES WITH SOUL

Arie de Geus’ s seminal book The Living Company presents a new way of thinking about organisations as living systems that can adapt and evolve

The book draws on De Geus’ s experience as a former executive at Royal Dutch Shell and his research on companies that have existed for a long time, which he calls “living” companies.

One of De Geus’ s conclusions is that a company should be seen as a living organism rather than as just a machine designed to maximise profits The writer argues that a company that is able to survive and thrive over the long term adapts to changing circumstances and evolves over time He identifies four key characteristics of such a company:

● Sensing: the ability to be aware of and responsive to the environment in which the company operates;

● Nurturing: the ability to care for employees, customers and other stakeholders;

● Flexibility: the ability to adapt to changing circumstances; and

● Identity: a clear sense of purpose and

There are some SA businesses that are sensible, nurturing and flexible, and have a strong sense of identity as they conduct their operations

Michael Judin & Alexandra Russell

values that guide the company ’ s actions

De Geus emphasises the importance of learning and continuous improvement in a living company. He argues that to stay competitive in a constantly changing business environment, companies need to be willing to experiment, take risks and learn from their mistakes

The Living Company provides a thought-provoking perspective on organisational behaviour and encourages companies to think about themselves in a new way

It’ s worth spending a bit of time examining an example of a company that, today, is getting this right South African firm Nando’ s operates in the sphere of local and inclusive sourcing (as do many other local businesses)

Nando’ s is known worldwide for its peri-peri chicken The company has a programme called Nando’ s Peri-Peri Farm, which works with small-scale farmers in South Africa to grow the periperi chili peppers that are used in the firm’ s sauces and marinades The programme provides farmers with training and support to help them increase their yields and improve the quality of their crops, while ensuring that they are paid a fair price for their products

It works like this: Nando’ s is supporting the South African economy by sourcing its ingredients locally In turn, this creates jobs in the community Sourcing locally can reduce the distance that food needs to travel, which can help lower carbon emissions and reduce a company ’ s overall environmental impact (De Geus’ s first key characteristic, sensing) while improving quality and freshness

By working with local suppliers and farmers, Nando’ s has built strong relationships based on trust and mutual benefit (the second key characteristic, nurturing) to ensure a reliable supply chain and consistent quality of ingredients

By supporting underrepresented com-

munities, Nando’ s helps create a more equitable and just food system (the third key characteristic, flexibility), while promoting social responsibility and ethical business practices

By demonstrating a commitment to these values through its sourcing practices, Nando’ s can continue to build customer loyalty while differentiating itself from its competitors (the fourth key characteristic, identity) This gives it a unique selling proposition that can attract customers who likewise value these practices At the same time, Nando’ s can engage its employees and create a sense of purpose and pride among them, with the added benefit of improving workforce retention, boosting morale and enhancing its reputation as an employer of choice

Nando’ s has shifted into carpe diem mode, and its value chain agility and product, or market innovation, are solutions which can simultaneously address stagnating economic growth and social challenges

There is the added opportunity factor, which can radically reduce material or energy throughput across value chains Sourcing ingredients locally reduces Nando’ s carbon footprint by minimising the distance food travels from farm to table

Overall, its shared value creation is providing a range of benefits to Nando’ s, including increased innovation, improved reputation, cost savings, access to new markets, improved stakeholder relations and more employee engagement

With a little imagination to see the opportunities, leadership has the ability in the context of current uncertainties to interrogate the context, recognise systemic issues and overcome the dominant industry logic to innovate and expand the total pool of economic and social value

Martin Luther King jnr wrote: “Life’ s most persistent and urgent question is: ‘What are you doing for others?’”

Our suggestion is that at the conclusion of every meeting of management, committees and boards, the question should be asked: “In reaching the decisions we have arrived at today, have we managed to do something positive, constructive and effective for people and for planet and not only for profit?” x

Judin is an attorney and partner at law firm Judin Combrinck, and Russell is the chief risk officer of Sasol

WHY IT PAYS TO PAY ATTENTION TO DATA

With ESG reporting, companies can identify serious risks in their operations and even boost profits

Whereas sustainability reporting has tended to result in many companies producing glossy documents filled with fabulous stories of what the company got right, ESG reporting is forcing businesses to focus less on the wordsmithing of storytellers and to simply give the facts that is, the data

But therein lies the opportunity

Learning how to interpret that data properly can translate into more productive, efficient, and cost-effective ways to operate. There are tangible bottom-line benefits that go beyond simply presenting an image of a good corporate citizen

The “S” in ESG includes matters of occupational health and safety, which, in an era of zero tolerance for the abuse of workers, has become a key contractual element in most global supply chains

For example, in the automotive sector, the global original equipment manufacturers measure and report on the lost-time injury frequency rate (LTIFR) of not only their own manufacturing sites but also those of their supply chains

Toyota, for example, has a supply chain LTIFR target of 0 15, or fewer than 15 losttime injuries per 2-million person hours worked

Let’ s consider two cases in which the use of “S” data, one regarding absenteeism and the other relating to lost-time injuries, benefited the businesses

Case 1: Impahla Clothing

In 2006, three small garment manufacturing companies in South Africa were invited by one of their key customers, Puma, to produce their inaugural sustainability report as part of a global reporting initiative project focusing on reporting in the supply chain

Michael Rea

Of the three, only Impahla, based in Cape Town, took note of the value of the data its reporting consultant accumulated to structure what was ultimately a performance-based report

Among the key items discussed was greenhouse gas emissions an already hot topic for reporting and employee absenteeism, which at the time was calculated to be over 7% of total productive time

Through an analysis of the data, it was determined that more than half of the 7% was related not to a failure to come to work, but to late arrivals, which until that point hadn’t been considered

The problem was connected to a variety of factors, not least of which were the unreliability of government-managed rail networks and publicly operated taxis However, it was noted that younger employees, particularly relatively new joiners between the ages of 18 and 25, were almost exclusively responsible for the bulk of all late arrivals

In discussing this with employees, it was determined that a key issue was that of people not feeling sufficiently remunerated to care about whether they arrived on time

To address the problem, Impahla created a revenue-sharing bonus scheme that ultimately rewarded every employee based on a collective ability to reduce total absenteeism, inclusive of late arrivals, to below an industry benchmark of 3%, noting that this meant a productive capacity increase of over 4% On a total turnover of roughly R20m this meant a revenue surge of more than R800,000 a year for the company, and an even greater profit surge due to improved efficiencies resulting from increased “time on task” measures.

Case 2: Metair

JSE-listed Metair produces everything from automotive batteries to wiring harnesses, springs, brake pads, lights and dashboards and other panels for most of the major auto manufacturers, including Ford, Isuzu, Mercedes-Benz, Toyota and Volkswagen

As part of the assurance process, an average of three operations a year are selected for five-day site visits to test the accuracy, consistency, completeness and reliability of the data being reported to the group by the operations for annual reporting purposes

This testing of data at source also helps to determine potential root causes

of anomalies

In 2018, one of Metair’ s businesses was measured as having an LTIFR of 3 8, or over 25 times more than Toyota’ s global supply chain benchmark

The problem (at the risk of oversimplification) was that an ageing workforce with increasing rates of obesity, diabetes and hypertension, among other ailments, was working in an ageing workplace in need of important repairs and redesign

Simple slips, trips and falls, due to potholed flooring inside and outside the buildings, coupled with stairways that were slippery thanks to more than 50 years of use-related deterioration, and vehicle pathways that were restricted after years of increased demand for a finite amount of space, were leading to minor injuries (typical first-aid cases), escalating to more severe lost time due to injuries, such as broken hips

Having identified that the business could potentially lose contracts to supply goods to Toyota (or others) should the rate of serious injury not decline sharply, an investment of roughly R50m was made to overhaul the facility to reduce risks, while there was increasing medical observation and treatment in support of workers. By December 2022 the company ’ s LTIFR was zero

Conclusion

The problem we face in the disconnect between the ESG reporters (or the companies) and the ESG users (the analysts) is that of limited understanding of how to unpack the data for modelling and assessment purposes

Analysts need to understand that a fatality at a South African mine almost always results in a government shutdown of three days to investigate the death Those three days equal an average of more than R60m in lost production

Analysts also need to understand that inadequate training and development procedures seriously affect flight risk (the risk of key talent leaving for minor increases in salary)

This is costly to the company, not only because the efficiency of processes during transitions to new recruits suffers but also because it is difficult to quantify the effect of lost institutional memory

If the devil is in the detail, he’ s definitely in the data x

QUANTIFYING THE ‘S’ IN ESG

The social pillar of ESG encompasses the way companies interact with their employees and the communities they operate in and, admittedly, these factors may be more difficult to assess than environmental or governance issues That is perhaps why it is often overlooked

However, we believe they are measurable To assess potential social risk factors for the companies in which we invest we have developed a systematic, data-driven ESG scoring tool We consider ESG on a holistic level and, importantly, cover all three components equally We can, however, take a deeper dive into any of the underlying metrics to better understand the driving forces behind them

Our starting point involved consulting ESG industry experts and leading industry bodies such as the UN Principles for Responsible Investing to determine local and international industry best practices for the measurement of ESG factors These engagements, supplemented with a thorough research process, produced the factors which we consider to be measurable and material in determining ESG risks and opportunities.

We subsequently developed an ESG risk-analysis tool that evaluates and scores listed companies based on their ESG risks and opportunities and we rely on these scores as a key input into our day-to-day decision-making process. We employ more than 60 metrics to gain insights into how proficiently the underlying counterparties are in incorporating ESG practices into their business

This ESG scorecard consists of the three pillars, which are weighted on a sectorspecific basis to account for industry materiality and company size biases For example, companies in the consumer goods sector are potentially more exposed to social issues, such as child labour

When determining the methodology for

There is a way to score the social impact of companies in order to determine their sustainability commitments

Natalie Anderson

the overall ESG score for this sector, we would give the social pillar a higher weighting than the environmental or governance pillar, to account for its significance The derived scores for the various counters have been back-tested

The scorecard uses data from integrated financial reports, collected by a third-party service provider, and is supplemented by the experience and insights of our investment team

This data goes back to 2008, which allows us to do a cross-sectional assessment of each company ’ s ESG performance as well its historical performance against its sector peers We are thus able to track the improvement, or deterioration, in a company ’ s social factors over time, see

industry-wide trends, and identify the leaders and laggards in relation to their peers at a sector level

One of the most prevalent challenges to our process is data constraints especially the disclosure of social metrics, which drastically lags developed market peers

The social component of our ESG score considers three main subfactors employee diversity and investment, safety and policies and these, in turn, comprise more than 20 underlying metrics The underlying metrics look at information such as percentage of women employees, percentage of minority employees, work accidents and fatalities, and company policies on the gender pay gap, ethics and child labour, to name a few

PRESCIENT ESG SCORECARD

Nomination committee Compensation committee

Audit committee

Many of these metrics are binary, as in, we view having a policy in place addressing equal opportunities, for example, as positive. Conversely, having no policy addressing these issues would negatively affect the company ’ s social score

We also track nonbinary metrics over time, such as the percentage of women in the workforce or percentage of minorities in management The data for the underlying metrics is cleaned and pre-processed accordingly and feeds through into the scorecard where the social factor score is calculated

The social and environmental and governance risks picked up in our scoring tool are then integrated into our investment process through our credit process Our credit scoring models determine the overall probability of default of the company, and we then make use of an ESG notching process Using the scores from our ESG scorecard, credit ratings are downgraded, left unchanged or uplifted

If the company has a poor ESG score, this then translates into a higher probability of default, which ultimately means higher risk We may still invest in a company that has a relatively poor score, but to do so we would require a higher return to compensate us for that embedded ESG risk we ’ ve identified

We make use of various pricing curves, which helps us determine the minimum required rate of return for any given investment opportunity If the company is sufficiently addressing social issues, they should score highly on their “S” factor, which, depending on their environmental and governance scores, means we would be more willing to invest in that counterparty

We believe ESG factors provide insight into the probability distribution of company returns value-creating ESGrelated practices contribute to company outperformance For instance, a wellmanaged company that adheres to social regulations is less likely to face costs associated with litigation and labour unrest, which may directly affect its short- or long-term performance ESG factors display strong explanatory power over a wide range of securities, offer a positive payoff over reasonably long horizons, have a significantly low correlation with other factors and, above all, make intuitive and economic sense x

ESG IN AFRICA

The investment in, and development of, human capital increases the productive capacities of all the other factors that contribute to a country’ s sustainability This is according to the UN Conference on Trade & Development productive capacities index (PCI)

Simply put, social success is at the centre of a nation’ s overall success and sustainability

In Africa, several countries have seen the benefits of taking a “people first” policy approach, most notably Rwanda, Mauritius and Botswana

The PCI measures a country’ s ability to produce and export a diversified range of goods and services that can sustainably increase its economic growth and development It reflects the effort invested by countries to improve their ability to derive value from their economic structures, human capital and natural capital.

Once the components of the PCI are modelled against the real GDP per capita of each country, over 95% of each country’ s GDP movement can be explained by the changes in the PCI’ s components According to the World Bank, the world’ s 20-year cumulative annual growth rate (CAGR) stands at 1 2% Rwanda, Mauritius and Botswana have delivered comparable CAGRs of 4 1%, 2 5%, and 1 2%, respectively, while South Africa’ s CAGR has been 0 9%

In analysing the decisions made by each of these countries after 2000, it is evident that the investment in human capital is what has allowed Rwanda, Mauritius and Botswana to achieve above-average GDP per capita growth rates This means that the strong relationship between human capital and the above factors is the key to a country’ s ability to achieve a strong productive trajectory The correlation of other sectors such as transport and natural capital (resources such as mining) all have a weaker relationship compared with human capital

Rwanda

Rwanda has a similar history to South Africa Both countries experienced discriminatory policies and laws that caused deep social and economic inequalities, re-

quiring significant political and social transitions to correct historical injustices

A significant investment in Rwanda was made to increase the quality of its health care, education and basic public services

According to the World Bank, in 2000, Rwanda’ s combined spending on health care and education was 4 3% of GDP and by 2018 this rose to 7 4% What is notable about the structure of the spending is the focus on its quality Rwanda introduced a competence-based curriculum and teacher training, and prioritised early childhood education This was in recognition that early quality interventions in education improve outcomes. Rwanda’ s PCI increase reflects the knock-on effect of social intervention

Mauritius

Mauritius is the highest-ranked African country in the PCI, at 48th out of 195 countries As a small island country, Mauritius has limited natural resources, in contrast to South Africa’ s resource richness After independence, Mauritius realised that its comparative advantage would lie in creating a diversified skills-based economy. According to the latest national accounts, 69% of Mauritius’ s gross value add comes from the services sector and only 4 3% from agricultural and mining activities The country’ s strong focus on services is underpinned by a skilled workforce

The ability to achieve a high PCI rating with a skills-based economy is unsurprising given the nation’ s historical investment in socially focused infrastructure Mauritius made primary education free and compulsory in 1976 and made significant investments in educational infrastructure and the recruitment of teachers. The strong foundational focus on the social capabilities of its workforce has earned Mauritius a Gini coefficient of 36 8, making the country attractive to the private sector

Botswana

Botswana and South Africa are similar in that they are both considered to be resource-based economies However, according to the PCI, Botswana has made a cumulative gain of 8% more on its human capital measure compared with South Africa Early in the 1970s Botswana invested in health care and education It implemented free and universal education, increasing its literacy rate from 44% to 87% Through its human resource development council and partnerships with internation-

Manka Sebastian

al organisations, the government provides full support to students who want to pursue skills that are imperative to the development of Botswana Its commitment to human capital efforts has allowed it to outpace South Africa marginally on factors such as ICT and an enabling private sector

South Africa

South Africa is ranked 74th in the PCI Its cumulative increase in human capital ranking has been 12% The consequence is that it ranks the lowest in every area, except ICT, when compared with Rwanda, Botswana and Mauritius This is concerning because South Africa’ s allocation to social services is R1.35-trillion according to the 2023 national budget

The difference seems to be in the quality of execution While having the highest literacy rate among the mentioned countries, it has the lowest primary school enrolment and the second-lowest level of completion, according to the World Bank The South African education system faces several challenges, including inadequate funding, teacher shortages, a lack of resources in schools and the challenge of having 11 languages spoken across the population Investing in education should include providing adequate funding for schools, training and retaining quality teachers, and ensuring that all children have access to quality education, regardless of their socioeconomic background

South Africa has the lowest life expectancy at birth among the four countries It is therefore important for South Africa to reduce the significant disparities in access to health care, particularly in rural areas

Investing in health care should include building and improving health-care facilities, ensuring that there are enough health-care professionals to meet the needs of the population, and implementing policies that ensure equitable access to health care for all

The examples of these countries provide a spectrum of lessons and a path for accelerated progress for South Africa through investment in the “S” in ESG South Africa is a hybrid of Rwanda and Botswana in that it is a country with a discriminatory past and a resource-based economy It is also the opposite of Mauritius, which is an island skills-based economy. The focus as illustrated goes beyond increasing access and spend it must be about quality x

Sebastian is a portfolio manager at Sanlam Investments

There are some lessons from other African nations who put the ‘S’ above the ‘E’ and ‘G’

JET: A BIG TEST FOR THE ‘S’ IN ESG

The government is pulling out the stops though maybe not all of them yet to transition the country from its reliance on coal to the use of renewable energy for the generation of electricity It’ s a mammoth task, worth about $98 7bn, according to the presidency The question now is whether the “S” in ESG will feature strongly enough in the implementation of the just energy transition (JET) plan over the coming years

Several lessons can be learnt from the government’ s lauded renewable energy independent power producer procurement programme (REIPPPP), which has been running for more than a decade

When awarding projects under this plan to the private sector, the REIPPPP considered, in addition to tariffs, the project bidders’ spending on socioeconomic and economic development initiatives, as well as the shareholding that was allocated to local communities So ESG is baked into the business model of renewable energy independent power producers (IPPs)

Through their provision of additional electricity for the national grid and their financial and socioeconomic investments they bring to predominantly rural and impoverished communities, these projects are very powerful in their ability to both generate power and potentially spur on community empowerment in our load-shedding-throttled nation The key question is to what extent this potential can be realised

A major advantage is that REIPPPP projects are concessioned over 20 years, which guarantees funding for social impact spanning almost a generation Theoretically, these projects can create stable and thriving communities through capacitated, competent and reliable suppliers and labour

This would require well-conceptu-

alised strategic programmes Rather than just a bursary programme, for example, support is required over the entire education pipeline from the first 1,000 days starting from conception to tertiary education or technical vocational education and training opportunities, acknowledging that the scourge of foetal alcohol spectrum disorder critically affects South Africa’ s rural educational outcomes much more than anywhere else in the world

However, the conceptualisation and implementation of such systemic programmes take time and resources These resources are too often rendered inadequate by the compliance burden on IPPs Reporting to a plethora of stakeholders on a quarterly basis consumes valuable planning, management and implementation time

The resultant lack of strategic programmes cannot keep up with communities’ increasing and valid demands that they share in the benefits of the profits understood to be enjoyed by IPPs They demand jobs, business contracts and improved living standards key expected outcomes of the “S” in ESG not only beautiful sustainability reports and cheaper green capital

However, even for IPPs where host community prosperity is a strategic business objective, it is very difficult to achieve this outcome Are we ready as an industry to admit that we cannot do it all ourselves? With our current small social performance teams, can each IPP be an expert on every type of project and aspect of social performance? An honest assessment of what is reasonably feasible to achieve as an industry seems essential to plan for a more impressive second decade of REIPPPP

Within the REIPPPP organised social performance sector, collaboration has been identified as critical to strengthen the “S” through, for example, collective planning, co-ordinated implementation, appreciating synergies, drawing on the diversity of respective IPPs’ skills and

expertise, measuring impact and learning from ongoing implementation

This vision could be realised through an industry-wide “gold standard” lowrisk, low-complexity socioeconomic development programme, with some level of customisation from one region to another A uniform set of key performance indicators, yielding a wealth of data, could be transformational, not only to this chosen programme, but to partnerships in the REIPPPP in general and the strength of the industry’ s “S” in ESG

The data could inform more strategic decisions: practitioners can compare outcomes in different geographies and have better insights into factors of success and failure Programmes could be built that solve for favourable outcomes and eventually also optimal impact. Steadily, the same can be done for more complex programmes towards a full education pipeline from maternal health to adult education, enterprise support, and the development of more women-owned suppliers to our industry

In other sectors, companies have come together to set standards, guidelines, performance expectations and best practice guides for social performance However, there is none yet for the national or international renewable energy industry despite the existence of associations and working groups, possibly because their constraints are no different to that of the members they are constituted by

This critically important industry needs to urgently gear up If we don’t lean into the lessons of the past decade of the REIPPPP, gather the courage to be honest about what isn’t working, and find our way to the collaboration table, we run the risk of flatlining our “S” in ESG efforts the current trajectory of individual efforts is simply too weak to sustain change x

Wlokas and Firfirey are both contributors to INSPIRE, Initiative for Social Performance in Renewable Energy

Partnerships are crucial for societal impact, as the current trajectory of individual efforts is simply too weak to sustain change

Yumnaa Firfirey & Holle Wlokas