Sanlam ESG Barometer (March 2023)

MAKE Y OUR INVESTMENT MATTER

Sanlam Investments is committed to making a real, sustainable difference to its investors, society and the environment we live in. Our alternative investments are the future of investing, offering unique growth solutions with competitive returns. We’re devoted to making a sustainable impact, that’s why we’ve invested R2,25 billion of our own capital to help meet the needs of a wide range of our investors and beneficiaries. Our impact investment focuses on job creation, reducing inequality, and looking after the climate.

#TheFUTUREisSustainability

Our private market expertise includes:

ABOUT THIS PUBLICATION

This publication was produced by independent research and media house Intellidex, working in conjunction with Business Day and Andile Khumalo. It is sponsored by Sanlam.

The research was produced independently by Intellidex and the editorial was developed independently by Intellidex working with Business Day. The opinions expressed are therefore not those of the sponsors.

ACKNOWLEDGEMENTS

This report was funded by Sanlam which we gratefully acknowledge. We would also like to thank all companies that responded to the ESG Barometer questionnaire with a special mention to the companies that participated in the case studies.

DISCLAIMER

This report is based on information believed to be reliable and accurate, but Intellidex makes no guarantees as to its accuracy. Intellidex cannot be held responsible for the consequences of relying on any content in this report.

RESEARCH

Project director: Dr Stuart Theobald, CFA

Lead researcher: Dr Zoheb Khan

Project manager: Jana van Deventer

Assistant researchers: Lameez Alexander, Zonke Zwane-Sebonyane, Fezeka Thwala, Timothy Sithole

EDITORIAL

Editorial consultant: Dr Stuart Theobald

Editor: Colin Anthony

Deputy editor: Janice Roberts

Editorial contributors: Aurelia Mbokazi-Kashe, Lynette Dicey, Zanele Sabela, Gillian Klawansky, Herb Payne, Janice Roberts, Jana van Deventer, Stuart Theobald

LAYOUT & DESIGN

SUNSHINE Design Collective

© 2023 This report is copyrighted by Arena Holdings. Copyright of the research data is held by Intellidex

Arena Holdings (Pty) Ltd

Hill on Empire, 16 Empire Road, Parktown, 2193, Tel: +27 (0) 11 280 3000 | www.arena.africa

Intellidex (Pty) Ltd

1st Floor, Building 3, Inanda Greens Office Park, 54 Weirda Road West, Sandton, 2194 Tel: +27 (0) 10 072 0472 | www.intellidex.co.za

This

Respecta

publication uses Respecta60 high-quality, recycled coated fine paper sourced from responsibly managed forests and mills.

60, uses the FSC® Mix* certified high quality recycled coated fine paper for prestigious printing, with a 60% recycled fibre content. A choice that gives a natural brilliance to creativity. The grade is a beautiful combination of 60% recycled fibre content and 40% FSC certified virgin fibres from sustainably managed forests. Respecta60 is a classic, white, matt coated recycled fine paper. The unique fibre combination guarantees excellent opacity even in low substances and the constantly high bulk gives a stiff interesting touch, perfect for publishing and high quality printed media. Respecta60 offers numerous creative options. The very special matt coated surface is ideal for printing large amounts of text, while picture reproduction is perfect in both black and colour.

LET’S PICTURE A WORLD WHERE ESG ADDITIONALITY* BECOMES THE NORM

What would Africa look like if ESG strategies were implemented to create a positive impact instead of focusing solely on external rating positions?

Our resource-rich continent would be a world leader in championing green energy solutions and impact investing. We would be powering our economies through renewable energy sources like wind, water and solar. We would be improving the conditions of our communities, especially the youth. Our people would be safely housed, and our infrastructure built to be disaster-proof. Our population insured so their lives would be less vulnerable to setbacks. Our economies growing, and our education systems giving our children the confidence to live meaningful lives of purpose.

This is the Africa we dream of at Sanlam. This is the Africa that is possible if we prioritise ESG additionality. Suppose we go beyond tick-box compliance and focus on partnerships that create tangible and sustainable outcomes. Now is the time for collective will and action.

The Sanlam Group is a purpose-led organisation, and far advanced on our journey as a pre-eminent impact investor. We are driven by our promise: to help all Africans to live with financial confidence.

Our ESG journey is not a new one – perhaps the terminology has changed, but we’ve been committed to investing in communities and the environment for more than 100 years and have always employed the strictest governance procedures. While the term additionality – investing to achieve or build something that would not have happened without our funds – may be new, it is part of our group’s DNA.

We’ve entered into this partnership with Intellidex and Business Day so that we can play a meaningful role in measuring how companies are faring in their environmental, social and governance (ESG) imperatives. We believe the inaugural Sanlam ESG Barometer will be pivotal in pointing people and companies in the right direction. We want to encourage listed companies to make investment decisions based on the impact those choices will have on the environment and society and to motivate businesses to put ESG strategies in place that are designed for impact, not just compliance. We also want to create a dialogue so we can learn from each other and build better strategies in the process.

We are excited about the possibilities that the Sanlam ESG Barometer will create. Listed companies are in a uniquely powerful position to make an impact. We know that by conducting this research year-on-year, we’ll set a benchmark and be able to celebrate tangible progress.

We believe there remains an innate desire among many Africans to lift one another. There’s so much hope and optimism on the continent. Let us each do our part to put ESG first. To do everything in our power to earn the social and environmental returns that’ll create a continent we’re proud to hand to the next generation.

PAUL HANRATTY CEO, SANLAM GROUP

SHIFTING THE NEEDLE: FROM ESG RISK MANAGEMENT TO ADDITIONALITY

Seldom has an acronym in the investing world elicited such passions. “ESG”, which stands for “environment, social, governance”, has sparked acrimonious debates, most obviously in the US where it has been decried as a “woke agenda” (Florida governor Rod DeSantis coined that term, which has since been widely used on the political right). But even in other markets where political temperatures are lower, ESG is contentious, with fund managers, clients and regulators clashing over just how it should be interpreted, regulated and sold to clients.

Underneath all this hot air, on the trading floors where practical decisions must be made on what to buy and sell, fund managers have been actively integrating ESG into their systems and processes. On one interpretation, ESG is just another way of assessing risk; in this case, the risks that arise from ESG issues. A company whose operations are all near the shoreline and vulnerable to rising oceans, for example, may face greater environmental risks than others less exposed to climate change. Similarly, a company with poor social indicators such as internal wage differentials and poor relations with communities around operations may eventually face an internal or external backlash that would damage profits. ESG, on this reading, is just another way to ensure investors don’t see their returns being compromised.

The amounts of investment that is now being managed in adherence to some or other ESG framework has grown exponentially. Flows into ESG investments reached a pinnacle in 2021 when the market saw an estimated $120bn flow to sustainable investments (against a global investment portfolio of about $100tn). The numbers appear to have been far lower in 2022 when a sustained spike in the oil price saw capital flow to fossil fuel producers. But this is likely a temporary blip in a trend that will continue with public and political pressure on investors to consider ESG factors.

What does this mean for emerging markets like South Africa?

To find answers, we need to understand the practicalities of how investors are turning these intentions into actual investment decisions. Many of the guidelines that investors embrace, like the

United Nations Principles for Responsible Investing (UNPRI), set down principles to apply, rather than specific methods to use. As a result, we have seen a wide range of approaches in practice, from investors who simply select companies that profess to report on ESG outcomes to those who actively investigate companies to determine the difference they are making in the world.

In general, though, we see a trend towards application of a certain type of model. Investment decisions are often driven by models, tools that fund managers develop to identify suitable investments. Traditionally, such models will draw out investments that appear to be worth more than their price, analysing financial information about companies, the economies they operate in and market data on their shares. Models have naturally been extended into the ESG realm. In this case, though, the numbers come not from the vast financial databases that investors subscribe to, but from a wide array of other indicators that investors have found to try and convey the factors represented by the acronym. There are several data providers, including global names like Sustainalytics, MSCI and FTSE Russell, which produce standardised indices and ESG scores on companies (see story on indices). That information can be incorporated into models, alongside other indicators drawn from potentially hundreds of sources such as World Bank data, data produced by non profits like Transparency International and Freedom House, satellite imagery of weather patterns, social media analysis using artificial intelligence, and so on. Investors naturally differ on what particular factors they consider important – many, especially in the developed world, focus on environmental factors such as CO 2 emissions, but will also include others.

The World Bank maintains a sovereign ESG data portal that is assesses governments, which is used by investors into sovereign debt. This looks at 72 different factors. Here are some of them:

• ENVIRONMENT:

- CO 2 emissions (metric tonnes per capita)

- Level of water stress

- Threatened mammal species

• SOCIAL:

- Access to clean fuels and technologies for cooking

- Unemployment, total

- Hospital beds (per 1,000 people)

- Gini index

• GOVERNANCE:

- GDP growth (annual %)

- Patent applications by residents

- Control of corruption

- Rule of law

To get back to how South Africa is affected, it helps to think how such models might score the country relative to others. South Africa is a global outlier in the carbon intensity of the economy. It has among the highest levels of inequality in the world. Its unemployment rate is catastrophic. Corruption perceptions have been deteriorating dramatically. On these it will be judged harshly by most ESG models. But there are also some measures on which it performs relatively well: government expenditure on education and proportion of seats held by women in national parliaments are two examples. Overall, though, if an investor is modelling at the sovereign level and deciding which countries should be upweighted or downweighted on ESG criteria, South Africa may well find itself shifted down compared with other G20 economies.

But while this may be true of sovereigns, what does it mean at company level? It is not easy to answer that, because it depends on the asset management house and portfolio manager. Some will look at companies through a sovereign lens, with the logic being that a company operating in a country with negative ESG features is not going to itself be able to escape these when it comes to ESG risks. Others will ignore the sovereign and focus only on the company.

In practice, fund managers will factor in company scores from various third-party providers like Sustainalytics, MSCI and S&P Global. The Sustainable Development Goals are increasingly used as a way of assessing companies. For example, a primary objective in the South African market given our policy goals of eliminating poverty is SDG 8: Decent work and economic growth. But the narrative dominating the ESG debate globally is firmly linked to SDG 13: Climate action.

There is, we believe, a climate bias in how ESG is interpreted, particularly in developed markets where most of the capital is held. Climate change is clearly a prominent international concern that affects people everywhere, but many social measures are focused within domestic environments and don’t easily translate into the decision frameworks of developed world investors. South Africa has an unemployment crisis, particularly among the youth, but Japan has a crisis of a rapidly aging population – how would investors’ models analyse these very different sources of social distress?

There is also a data problem – environmental measures are typically more straightforward to measure, in tonnes of CO 2 emitted or amount of fresh water consumed. It much harder to measure social factors like how a company affects sanitation or early childhood development. As a result, models tend to factor in data that is readily available, that can result in an environmental bias even if the investor wants to balance social factors in too.

Some of the decisions over models depend on what the investor is aiming to achieve with the ESG strategy. Some fund managers see ESG as a returns-enhancing mechanism. ESG analysis should bring out risks to earnings that can be factored into the investment decision. You may assume that high CO2 emissions, for example, would be perceived as a risk, but we have encountered investors whose ESG analysis identifies the risk of reducing CO2 emissions on the back of public and political pressure, resulting in higher costs for the company. That signal – a reduction in CO2 emissions – counts as a sell signal. So ESG analysis in practice can have the opposite effect to what you may expect: companies which are reducing CO2 emissions are picked out as higher risk because such reductions will increase the cost of production. So, an ESG strategy may result in investments that are high CO2, but harder to regulate.

In contrast, some investors are more focused on risks to their own reputations. They do not want the kind of negative headlines that would follow from being invested in the next Exxon Valdez oil spill or Nike sweatshop labour scandal. As a result they screen out companies where such risks may be present. The concern can be about the reputation of investors, but can also be interpreted as a responsible investment strategy that aims to screen out exposure to any activity deemed to be harmful, or at risk of being harmful. The same strategy applies when “sin stocks” like alcohol, tobacco and gambling companies are excluded as well as climate negative stocks like oil and coal companies.

This objective can be at odds with those investors who intend ESG to maximise returns, though some argue that excluding higher-risk stocks is potentially also positive for returns because such portfolios are more sustainable over the longer run. Such approaches to ESG are common among foundations and endowments and increasingly among pension funds, especially those related to public sector employers.

Both these strategies, returns maximisation and harm minimisation, assess companies on current performance. What is missing is an analysis of how companies are changing. And this leads us to the big gap in ESG investment as it is now practised: any consideration of how an investment can drive change.

ESG investment does often consider the role investors can play in influencing companies to change. This is known as an “engagement” strategy and can become a type of ESG investment strategy on its own. Such investors engage with companies actively, demanding better disclosure, plans to improve environmental performance and adherence to various ESG frameworks. For example, such investors can vote directors onto company boards who have a clear mandate to drive change, or vote against remuneration policies that don’t include ESG indicators as part of the performance assessments of management.

But there is to our minds a further step that is needed: the active steering of capital to support the transition of companies to more sustainable futures. And this is where South Africa has a clear interest: it requires masses of investment to finance the transition of its economy. If investors are trying to simply screen out risks or downweighting regions and companies that perform poorly on standard ESG metrics, then the transition is not going to find the necessary investment. This would be a perverse outcome because many of the wider goals of the ESG movement, such as preventing climate change, would be achieved faster if companies were funded to make the necessary investments to reduce emissions. Many of the same arguments apply in the case of social goals.

We call such an approach “ESG additionality” to focus on adding to the stock of ESG good in the world, rather than merely improving a portfolio’s relative ESG compliance by screening out exposures. A fund that is focused on ESG additionality may well have exposures to issuers that are currently poor ESG performers, but that is actively directing capital to finance transition. Such a fund can only be judged over time, by assessing the shifting ESG features of the investments it holds. Such a fund should be able to report outcomes, like “CO 2 emissions reduced”, rather than only in comparing its performance to a market aggregate and stating it has lower CO 2 exposure.

The Sanlam ESG Barometer aims to examine how such an approach can work in practice. Intellidex (as the research partner) set out to assess approaches and practices relating to ESG additionality among SA’s biggest companies, through a survey of listed companies. The concept of ESG additionality alludes to pushing the boundaries of ESG to generate positive outcomes in society through ESG activities as well as shifting the ESG outcomes of the operations of a company.

A fundamental consideration for ESG integration is financial materiality, a concept which refers to the identification of ESG issues that can have a meaningful impact on an organisation’s financial performance. Because certain ESG issues can have a material effect on a company’s financial performance, these issues must be taken into consideration when the investment decision is made. This notion of materiality is functionally the same as standard financial notions of material risks – any material risk to the earnings of a business, with ESG serving only to pick out those from an environment, social or governance perspective.

But ESG additionality focuses on identifying and pursuing investment opportunities that will achieve positive externalities. This different focus is related to the concept of “double materiality” – an extension of the key accounting concept of materiality of financial information. Simply put, double materiality extends the need for companies to disclose information on issues that could have a material impact on a company’s financial performance but also the organisation’s material impact on particular sustainability issues, for example, climate change. This notion draws apart standard financial risk analysis, that investors should rationally be concerned with, and ESG as a measure of impact on society outside of the firm, of direct concern to the public at large.

The Sanlam ESG Barometer aims to demonstrate how companies in the South African market are already pursuing ESG additionality opportunities through investing in projects that will achieve positive social or environmental outcomes. These initiatives span beyond traditional corporate social investment (CSI) or corporate social responsibility (CSR) activities, both of which are considered interventions that give companies a social licence to operate, to focus on the impact of the company’s core operations. CSR is often measured by the value of money spent on specific initiatives (say, as a percentage of profits) rather than the positive social or environmental outcomes as a result of these interventions. Measuring impact is more complex than simply considering the value spent. Over time, companies will have to become more intentional about this to demonstrate to investors how they are going beyond risk management to achieve positive outcomes.

The ESG Barometer intends to challenge conventional thinking on investor ESG integration. The case studies and analyses it presents aim to show how companies are doing in delivering ESG outcomes. We want to shift investor ideas about what should matter in their decision-making models. Ultimately, we believe it can support the mobilising of capital to fund transition in South Africa.

BY STUART

INGRAINED HABITS WILL HAVE TO SHIFT TO UNBLOCK INVESTMENTS INTO EMERGING MARKETS

In the institutional investing world few things matter as much as a benchmark. It is the line against which all fund managers are assessed. This can often seem frustrating to the end investor –who cares if my investment beat the benchmark but still lost 10%? For the fund manager, however, being better than the rest of the market is what matters. Indices are also the foundation of passive investment strategies – if that active investor is not beating the benchmark, why bother? Just invest in a portfolio that mechanically tracks the index.

As ESG has grown in prominence, professional investors have demanded new benchmarks that factor in ESG considerations. This has led to a cottage industry of index creation, but also considerable controversy.

As we make clear in much of this report, ESG is not a settled concept. While huge amounts of money are now being managed according to ESG frameworks, the specific companies that investors choose under those frameworks can vary greatly. So what should an ESG index contain?

A good example of the arguments that have arisen was the decision to exclude Tesla from the S&P 500 ESG Index last year. Tesla, the US-based manufacturer of electric vehicles, is a major disrupting force on traditional vehicle manufacturers. It has already shifted the entire industry to take electric vehicles much more seriously, promising to substantially reduce carbon emissions as a result. But the makers of the S&P Dow Jones Indices told Reuters it had kicked Tesla out because of issues including claims of racial discrimination and crashes linked to its autopilot vehicles. Critics were quick to point out that while Tesla had been booted, Exxon Mobil, one of the world’s biggest fossil fuel companies, was in the top 10 of the index. Tesla CEO Elon Musk responded on Twitter, “ESG is a scam”.

The problems arise because investors want very different things from an ESG index. Some see ESG as a way of reducing risks that arise from poor labour relations or relationships with customers. For them, kicking Tesla out of the index makes sense. But for others, ESG is about improving environmental and social outcomes in the world. For them, kicking Tesla out but keeping Exxon in makes no sense.

If there was a way of seeing the future, and determining what the longer-run impact of these companies is going to be on environmental and social outcomes, we could create the perfect index. But that is not how indices work. Fundamentally, they can consider only the information we have now, they are inherently backward looking. In this there is a sharp distinction between passive investors who follow the index and active investors who attempt to forecast and divine the future in making their investment choices.

These arguments have played out in South Africa. The JSE offers investors the JSE Responsible Investment Top 30 Index as its leading ESG index. A look at its members shows some surprises, including that half of the index is made up of mining companies. Tobacco and alcohol are in there too.

The index is maintained by FTSE Russell which has more than 300 indicators in its model that aims to measure the “quality of a company’s management of ESG issues”. Of course, the quality of management is not the same as assessing how material the ESG issues actually are. A company may well be a producer of coal, with no intention of diversifying into any sustainable alternatives, but still manage its ESG issues well in having good reporting standards, strong human rights and community engagement, good anti-corruption and tax compliance, and so on. If you are an investor who interprets “responsible investment” as avoiding any companies responsible for greenhouse gas emissions, then the index is not for you. But many other investors are aiming simply to boost returns by backing companies that are good at managing ESG risks, for whom the index is fit for purpose (see Introduction article).

As it is, retail investors would find it difficult to invest in the index as there are no exchange-traded funds based on it. The ETFs that are available along an ESG theme are all based on international indices. Satrix offers four and Sygnia offers two. How do the international indices do it? Given the controversy over Tesla, you won’t be surprised to learn there is quite some controversy over these too.

The MSCI index is based on MSCI’s proprietary ratings of companies, with only those earning a score above a certain threshold getting into the index. The index also excludes companies involved in alcohol, tobacco, gambling, fossil fuels extraction, thermal coal power and weapons manufacturing. Its design is therefore quite different to the JSE’s Responsible Investment index which includes British American Tobacco, Distell and Anheuser-Busch as well as at least one coal miner (Exxaro).

The MSCI World index similarly rejigs the weightings of companies but emerging markets make up a very small part of the basket. Research is increasingly indicating, though, that when ESG weightings are applied to such indices they end up downweighting emerging markets even more.

A recent report by ratings firm Fitch for the UK government’s Mobilist project found that ESG mainstreaming is exacerbating the under representation of emerging and developing economies in global capital markets. This is because there is an income bias in common ESG metrics in that wealthier countries tend to score higher and there are extensive ESG data gaps in emerging markets. This bias seems to be increasing – in 2018 the MSCI EM ESG index allocated 68% to countries that were rated by the OECD as emerging or developing countries but in 2022 this was down to 63%. If China and India are excluded, the decline is even sharper – from 33% in 2018 to 22% in 2022.

Here are the top 10 companies in the MSCI EM ESG index compared to its vanilla MSCI EM index:

COMPARISON OF THE MSCI EM ESG INDEX AND THE MSCI EM INDEX

So while investors have been clamouring for ESG indices, the execution of the task has been fraught with difficulty. One set of difficulties is at the conceptual level – just what does ESG mean and how should it be reflected into the ratings methodologies used. Another is systemic – if ESG ends up biasing capital away from emerging and frontier markets, it won’t be supporting economies most in need of capital to meet the SDGs (which would very much include South Africa).

Part of the answer is surely that ESG investors should be less reliant on indices, but that calls for a shift in one of the most ingrained habits of professional investors in trading against a benchmark. As ESG captures more investment flows, habits will have to shift.

MEMBERS OF THE JSE RESPONSIBLE INVESTMENT TOP 30 INDEX

1. Harmony Gold Mining Company Ltd

2. Distell Group Holdings Ltd

3. Nedbank Group Ltd

4. Clicks Group Ltd

5. AngloGold Ashanti Ltd

6. Exxaro Resources Ltd

7. Tiger Brands Ltd

8. British American Tobacco PLC

9. Impala Platinum Holdings Ltd

10. Gold Fields Ltd

11. Santam Ltd

12. Kumba Iron Ore Ltd

13. Absa Group Ltd

14. Anglo American PLC

15. Investec Ltd

16. FirstRand Ltd

17. Compagnie Financiere Richemont SA

18. Woolworths Holdings Ltd

19. Mondi PLC

20. Anheuser-Busch Inbev SA

21. Standard Bank Group Ltd

22. African Rainbow Minerals Ltd

23. Anglo American Platinum Ltd

24. Netcare Ltd

25. Sibanye-Stillwater Ltd

26. Aspen Pharmacare Holdings Ltd

27. MTN Group Ltd

28. BHP Group Ltd

29. Truworths International Ltd

30. Sappi Ltd

ESG BAROMETER

Intellidex conducted a survey of the top 40 companies on the JSE by market capitalisation in which they answered a detailed questionnaire on their projects related to environmental, social and governance issues. The aim was to generate a comprehensive

view of the activities that companies are undertaking to improve ESG outcomes. The results reflected in this section incorporate the views of 21 companies of the JSE top 40 index which together account for 20% of the market capitalisation of the all share index.

PRIMARY REASON FOR HAVING AN ESG STRATEGY

Respondents were asked to list two main reasons for having an ESG strategy. The top reason was evenly split between achieving a positive impact in society and attracting investors.

Note that regulatory compliance is not a major driver of ESG strategy development. Companies thus tend to see value in driving ESG, whether this is for expected financial gain or for more publicly minded objectives such as becoming a better corporate citizen and satisfying external stakeholders.

Finally, ESG is not often seen as a way to build goodwill among internal stakeholders; potentially a missed opportunity.

Of all companies that participated in the survey, only two did not have an ESG strategy. In one case the board hadn’t fully committed either way (indicating that perhaps a dedicated ESG strategy is perceived as not being worth the hassle, or that it is not distinct enough from what the company might already be doing from a CSI perspective). In the other, a decentralised business model was seen to be preventing the imposition of a top-down strategy; individual units would need to develop their own plans.

MOST RELEVANT ESG RISKS: #1

MOST RELEVANT ESG RISKS: #2

Respondents generally perceive social aspects of ESG to be the most relevant in their overall corporate ESG strategies. The most frequently mentioned risks were related to maintaining good employee relations, occupational health and safety compliance and finding ethical suppliers.

Environmental factors emerged as the next most relevant set of ESG risks with climate change, greenhouse gas emissions and responsible use of water topping the list. These findings are not surprising given South Africa’s context. It shows that companies are actively responding to local challenges and reckoning with the

effects of their operations on social outcomes rather than merely following global trends.

Regulatory risk is not perceived as important in general. This suggests that more active regulation and enforcement may be required.

Reputational risk is also seen as unimportant which, again, could reflect the external stimulus for much ESG-related activity. There is also very little awareness of ESG investing (and more broadly things like shared value and good corporate citizenship) among the public.

ESG STRATEGY ALIGNMENT WITH SUSTAINABLE DEVELOPMENT GOALS

The Sustainable Development Goals (SDGs) are the most widely used set of targets to structure planning for social and economic development and environmental action. Respondents note that

their ESG strategies are almost always aligned to the economic growth SDG. This is unsurprising given South Africa’s very weak GDP performance. Climate action is also a widely selected SDG.

MOST IMPORTANT STAKEHOLDERS IN ESG CONSULTATIONS

Most (35) companies note that they consult some or all of the following groups of stakeholders in the development of their ESG strategies: investors, employees, shareholders, peers and customers. Of these, investors are most often perceived to be the most important, with their inputs to strategy being the most highly valued. Employees are a distant second, with customers only rarely regarded as the most important stakeholders.

This contrasts with the contention that companies often take an outward, ESG-additionality view. The lack of importance assigned to customers and their views and needs – a proxy for broader society – in the development of ESG strategy and the prioritisation of investor concerns would be more consistent with a risk

FULL-TIME EMPLOYEES DEDICATED TO ESG

management approach that is oriented primarily towards serving the particular interests of investors; interests that will often be in conflict with other stakeholders.

RESOURCING AND PERFORMANCE

There is a fairly even split between companies that manage an ESG division internally (41%) and those that get their information about ESG risks and opportunities from external sources (46%). For about 60% of companies, fewer than 10 full-time staff are dedicated to the design and implementation of ESG strategy; 10% of companies employ 50 or more people in this capacity and the remainder fall in the middle.

Despite this, it does appear that ESG strategy is starting to be viewed as a core component of overall corporate strategy, with 75% of respondents indicating that their boards provide input to ESG strategy “often” or “at every opportunity”, and 60% report that between 10% and 30% of executives’ variable pay is affected by ESG targets.

This makes it quite different to the way CSI and philanthropy is typically resourced and structured: as an “add-on” activity that is conceptually and operationally separate from core company operations and is often designed to compensate for potentially negative corporate operations.

The benefits of ESG investing for operations and reputation

The graph below shows that for many companies, implementation of an ESG strategy has improved (a) reputation among the public and (b) operational performance. The first finding is selfexplanatory but the second is well explained by one respondent:

“Initially it can be expensive. But eventually you get a much more complete understanding of risk and opportunity because you’re looking at a much wider set of factors that influence risk and opportunity. So you’re not just looking at short-term profit/loss but a whole range of longer-term dimensions that affect company value. And that changes how you conduct your operations, which can lead to greater efficiencies. It can also be motivating for staff, which also enhances productivity".

SINCE IMPLEMENTATION OF COMPANY ESG STRATEGY...

ADDITIONALITY

An active approach to ESG investing?

The most common approach to ESG investing globally is a risk management one: companies and asset managers look at the risks emanating from ESG dimensions and try to minimise the potential impacts of these risks on their operations and profitability. This inward focus is not necessarily interested in the effects of the corporate sector on society and the planet; it is instead focused on the potentially negative effects of the planet and society on the corporate sector.

It is an approach that does not generally translate to proactive identification of investment opportunities that help to maximise ESG-related outcomes. For example, by investing in solar energy,

water efficiency interventions, or in companies or suppliers that provide decent work to people in high-unemployment demographics and/or impoverished areas, companies can bring about additional social and environmental benefits; additional because they have been enabled by new investment.

In response to the question, “Has your company identified particular products, projects or sectors to invest in so as to improve your ESG performance?”, almost all respondents claim to have a more active, additionality oriented ESG strategy.

This is also evident in the following graph, where most respondents indicate actively identifying new projects or strategies to improve social or environmental outcomes, in contrast to seeking to avoid environmental or social harm.

HAS YOUR COMPANY IDENTIFIED PARTICULAR PRODUCTS, PROJECTS OR SECTORS TO INVEST IN SO AS TO IMPROVE YOUR ESG PERFORMANCE?

Interestingly, 90% of respondents report measuring social and environmental outcomes associated with ESG projects. And –as shown above – 90% of that group conduct before and after measurements. This by its nature is concerned with change – and the extent to which investments and projects promote that change.

A big majority (90%) believe this to be true, that is, their ESG strategies and associated projects do achieve additionality in environmental/social outcomes. Furthermore, 70% believe their projects promote additionality from a financial perspective as well. They commit new funds to people- and planet-centred projects.

HOW IS THE CAUSAL RELATIONSHIP BETWEEN PROJECTS OR INVESTMENT AND IMPACTS ALONG ESG DIMENSIONS IDENTIFIED, IF AT ALL?

In the case studies we will explore in greater depth how the broad commitments to an additionality focused approach to ESG investing materialise, in terms of the types of projects that are pursued and their impacts.

CSR

In some cases, ESG investing may be seen as being equivalent to corporate social responsibility (or corporate social investment). For example, 15% report that they have no financial return expectations on their ESG projects.

CSR or CSI represent the work that companies do that is purely socially oriented. Its roots are in religious charity, where those with money provide resources to those without it. It isn’t necessarily concerned with how wealth itself is generated. In the corporate context this usually manifests in the creation of a CSI/CSR department or the establishment of a foundation that is given a budget to carry out projects for the public benefit.

EXPECTATIONS FOR FINANCIAL RETURNS ON ESG PROJECTS

ESG investing, in contrast, is supposed to be applied to entire businesses. Social and environmental objectives are not separate to profit but instead need to be maximised simultaneously. The entire governance of corporations and financial institutions thus needs to be subject to ESG factors in relation to risk management, operations, stakeholder engagement and assessments of company value. Because of this, ESG investing does not relate only to grants without financial return: because it concerns the way revenues and profits are derived, ESG-positive investments could and should have financial return expectations as well.

Just over 30% of respondents expect that their ESG investments will have returns in excess of their cost of capital – that is, that they will generate profits. A growing consensus in the global literature, however, is that these investments tend to outperform nonESG investments from a financial perspective.

BY HERB

FOCUS INCREASINGLY MOVING TOWARDS MEASURING IMPLEMENTATION OF STRATEGIES

While listed companies are working hard to improve ESG outcomes, the reality in South Africa with its struggling economy and high unemployment levels is that for many smaller companies, cutting costs is a priority. Their focus tends to be on community inclusiveness.

The inaugural Intellidex Environmental Social Governance (ESG) Barometer (South Africa) demonstrates impressive buy in to the concept with all but two of the JSE listed companies surveyed adopting ESG policies and strategies. Indications are, however, that South African companies may actually be lagging the leaders in some ESG reporting trends.

While the local focus is on the adoption of policies and strategies –implying an emphasis on financial risk rather than the impact these companies are having on the environment and social issues – the global investment focus is increasingly moving towards measuring the actual implementation of these strategies. There is also a strong drive abroad to achieve standardisation on ESG criteria with ESG ratings agencies using their unique methodologies that often don’t relate to each other.

“Imagine accounting, if we didn’t have a standard way of measuring accounting so anyone could label something as an asset or a liability on the basis of a whim,” says Brett Wallington, MD of Paragon Impact, which uses a digital tool and methodology to help companies around the world analyse their ESG performance. He says that shift is now beginning to happen. “If you are not doing ESG your social licence to operate is severely harmed, affecting your legitimacy regardless of whether you are a private or public company.”

Although there is as yet no regulatory requirement for JSE-listed companies to embrace ESG strategies, Laurie Hammond, senior associate at law firm Hogan Lovells, says there are several long-standing policies and laws in place which encourage good corporate governance.

One example is the 2008 amendment to the Companies Act which requires certain firms to have social and ethics committees

to monitor good corporate citizenship, environment, health and public safety, consumer relationships and labour and employment. Others include the voluntary Responsible Investing in South Africa initiative to provide guidance to institutional investors in developing and implementing sustainable, responsible and longterm investment strategies; and the King IV Report on Corporate Governance for South Africa embracing voluntary principles and practices to be applied – and set out in sustainability reports – in order to substantiate claims of practising good governance.

Wallington, however, observes that some sustainability reports are increasingly becoming documents that have a marketing feel about them, “telling a great story while staying very quiet about the negatives”.

Hammond points out that E, S and G policies have been around South Africa for a long time but it is only recently that they have been bundled together under the ESG umbrella. Thanks to these historical initiatives, according to Wallington, South African companies are at the cutting edge of reporting.

“We are now experiencing a growing compliance requirement that is a director’s responsibility, so it is not just about competitive advantage but now it’s about regulation. “Furthermore, there is a strong drive – emanating primarily from Europe and Britain with bodies like the International Sustainability Standards Board – to consolidate all the different indicators into one system of reporting. And, on the corporate side, you have the new Corporate Sustainability Reporting Directive – new EU legislation requiring all large companies to publish regular reports on their environmental and social impact activities – probably being promulgated in mid2024.” Another is the Sustainable Finance Disclosure Regulation –a European regulation aimed at improving transparency in the market for sustainable investment products and preventing greenwashing.

Wallington says South Africa used to have some of the best integrated reports and the best coverage of Global Reporting Initiative (GRI) reporting for sustainability data. “However, we seem to have fallen behind. Europe is now taking over and pushing hard on the ESG regulatory agenda. Now we are probably going to have to watch and see what happens and then follow suit.”

Keeping pace with European trends is important for our international trade prospects but the reality is that locally, given South Africa’s challenged economy and other issues, many companies are just trying to survive and on the face of it adopting ESG policies and applying these strategies may seem to be a luxury they cannot afford.

“It’s very tough for organisations to apply ESG principles when their focus is just on turning a profit,” says Wallington. “The reality is that it is mostly the big guys with big capital behind them – like the Old Mutuals of this world and the banks that are the leaders in this space.”

But the dilemma that the survivalists face, he adds, is that ESG is going to become increasingly essential for any organisation aspiring to global competitiveness. “If you don’t get on the train you’re simply not going to qualify to do business with the large European and British companies,” he says.

Despite these challenges, Lullu Krugel, ESG platform lead for consultants PwC Africa, believes there has been something of a step change in terms of how companies have viewed ESG over the past few years, particularly the last year. “There is a realisation that ESG should be part of who we are; it’s not something that is outside, it should be a cornerstone of our strategy.” At the same time though, she says companies are feeling immense pressure from the local and global economic climate and they realise the plans that they have in place and the rate at which they are moving at the moment is not sufficient to meet what we will need in a couple of years’ time.”

It is probably for this reason, according to the ESG Barometer (which canvassed the views of 21 JSE top 40 companies accounting for over 20% of the Top 40 Index’s market capitalisation) that only two of those surveyed did not have defined ESG policies and strategies in place.

Of the two, the one company had not fully committed either way –possibly indicating that a dedicated ESG strategy was perceived as not being worth the hassle, or that it was not distinct enough from what the company might already be doing from a CSI perspective. In the other case, the company operated a decentralised business model, preventing the imposition of a top-down strategy – in this case individual units would need to develop their own plans.

One of the findings to emerge from the survey revealed that the main reason for most companies having an ESG policy was to achieve a positive impact on society and to attract investors.

But it is far more complex than that. Dr Tsakani Mthombeni, sustainable development executive at platinum group metals mining house Implats, says: “Obviously, a company like ours must satisfy and create value for all stakeholders, including investors, through returns, but we also have to satisfy society through our taxes paid to governments, our social projects delivered, our jobs created, the salaries we pay, the local economic development we stimulate by procuring goods and services from communities surrounding our operations, the supply chains and SMMEs we create, upskill and grow, the housing, schools, clinics, libraries and sports centres we build and support, the bursaries we provide and the skills development we provide to mine-host communities –employees through salaries, incentives, wellness benefits, skills development and support and customers through the responsibly mined, superior products we deliver.”

He says that for Implats, sustainability is the strategic pillar rather than a narrower focus on ESG. “ESG is a useful metric to show investors how you are doing – but our sustainability agenda is not driven by investor expectations of E, S and G.” And, like Implats, South African Breweries (SAB) which last year launched its formal ESG strategy sees ESG as integral to every aspect of the way the organisation runs its business rather than a separate component.

Barbara Copelovici, SAB’s communitie and entrepreneurship director, stresses that the ESG policy is not a separate entity, but a core of its business and part and parcel of the organisation’s overall policy.

She says ESG, as a concept and component part of the drive for a sustainable future, is in its infancy although the elements that contribute to it have been in place and implemented by the organisation over many years. The concepts are applied throughout its operations which include seven breweries, 51 depots and swing depots (depots that receive stock from more than one brewery) and 14 distribution points. “Because ESG is about sustainability it is about the future. We aim to achieve global targets and deadlines in terms of emissions and sustainability –our contribution to climate change. If we aren’t seen to be doing the right thing we will not hang onto our reputation for very long and that will damage or destroy our business.”

The business case for protecting an unsullied reputation is endorsed by Hogan Lovell’s Hammond: “Notwithstanding that principles of ESG have been around for some time, there is a lot of pressure from consumers engaging with companies, especially technology companies, for transparency on the ESG strategies and the corresponding progress of any statements, pledges and policies. Where companies are not transparent or are merely making ‘greenwashing’ statements, without actually adopting any principles from pledges or policies and making the necessary investment by companies, this is likely to influence consumers’ decisions to engage with such companies,” he maintains.

It could also result in formal penalties where misleading claims are made. Regulators across the world, he says, are increasingly concerned about “greenwashing”, where companies describe products or investments as “climate-neutral”, “eco-friendly” or “ESG-compliant”. These types of statements are found more and more frequently on products and in advertising campaigns and investment brochures. Globally, there have been a number of high profile cases and multimillion-dollar fines for companies that have misrepresented their green credentials.

In another finding, respondents told the Intellidex ESG barometer researchers that they believe the most relevant risks to their

operations related to climate change, greenhouse gases, and the responsible use of water.

SAB’s Copelovici concurs, but says it is broader than that: “We have over recent years endured a series of extraordinary events, both natural and otherwise, ranging from extensive flooding to the coronavirus pandemic and even electricity load-shedding, all of which have a potentially negative impact on sustainability and ESG. In our case one of our production facilities was severely damaged by flooding and we realised that it was vital to include scenario planning and preparation for unpredictable events that could affect sustainability and ESG – in essence, risk mitigation.”

It also emerged from the barometer that since implementation, 71% of respondents believed their organisations’ reputations among the general public had improved compared with less than 30% who believed it was unchanged. The barometer also found that nearly 60% believed operational performance had improved since implementation of ESG while the balance felt that it had stayed the same and 71% of respondents claimed the cost of capital had improved since adopting ESG policies.

When it came to the expectations for financial returns on ESG projects, nearly 40% of companies believe their returns exceeded the cost of capital, just over 40% found it to be on a par and less than 5% achieved returns below the cost of capital.

While PWC’s Krugel agrees with the barometer that the main reason for most listed companies having an ESG policy relates primarily to achieving a positive impact in society and attracting investors, she says there is something of a dichotomy between the listed companies and other organisations. “Certainly with listed entities, one of their primary considerations is how do they use ESG as a differentiator from their competitors so they are seen as different and how will it benefit them if they need access to capital and attract investors.

“The big companies that do business with Europe, in particular, tell us that they realise that if they want to export to those markets they will be expected to meet certain requirements – like the carbon border adjustment tax introduced by the EU – and other similar legislation that is coming through, which means that the regulatory environment is of major concern to them.”

In contrast, “the smaller family businesses and larger unlisted organisations tell us that their ESG is focused on the big role that they play in the communities in which they operate. It is not formalised in the same way so the priorities are different to those of the listed entities.”

This view is endorsed by Philippa Rodseth, executive director of the Manufacturing Circle, a voluntary industry association for more than 50 generally larger manufacturing companies in different parts of the value chain. “Manufacturers must contend with the whole spectrum of ESG challenges from legal, through environmental and risk to regulatory, reputational challenges. ESG will not go away. It is clearly something that will become increasingly rather than decreasingly the important in terms of meeting the challenges of climate change and social challenges. And investment will have to keep pace with the demand for change.”

However, she adds the proviso that in terms of sustainability the biggest challenge currently is the lack of demand for manufactured products in a lacklustre economy. Because of this, areas of focus include cost-cutting issues and identifying demand-side opportunities for products and addressing many supply-side challenges.

A supply chain view is absolutely critical, not just from an export perspective but because it has to do with profitability and sustainability and the circular economy. This is an area where many manufacturers are focusing – where one manufacturing operation’s waste is the raw material for another’s production process.

“Manufacturers are at the rock face of ESG in that they use the raw materials to produce the products that are fed into the supply and value chains, and also interact with and have a direct impact on their communities – environmentally in terms of resources they use and any emissions that they might produce. They also have an impact socially in terms of the jobs they provide and wealth creation, along with other inputs into communities such as housing and education and recreation,” says Rodseth.

While the focus for many manufacturers may be primarily local and even parochial, sectors like motor manufacturing must blend this with a major eye on international perceptions of them and issues that affect them.

National Association of Automobile Manufacturers of South Africa CEO Michael Mabasa believes that the motor industry is at the forefront of ESG partly because transport, particularly road transport, is seen globally as one of the largest atmospheric greenhouse gas emitters. “The other aspect is that it is a global industry where we manufacture for the local and export market and many of the OEMs servicing the motor industry have centralised their environmental specific priorities at a global level because they involve global supply chains.” He points out that only 39% of the components used in the manufacturing process are actually sourced locally – the balance is imported. “It is, therefore, easier for them to then report globally in relation to their environmental footprints.”

At the same time, he adds, motor vehicle manufacturing is critical to the local economy, not just in terms of what happens on the production line, but also in terms of the materials, including raw materials, that are sourced and used right through the value chain, such as the steel used in the vehicles or the rubber, the plastics, the alloys and everything else that goes into the production process.

“It is obviously in our interest to ensure that we focus on building vehicles to a final product that is absolutely sensitive to environmental priorities. To achieve this we work with multiple sectors of the economy, whether mining or other manufacturing sectors, to ensure that as we set our own targets with regards to aspects such as carbon neutrality, we also work with those providing different services in a way that they help us to reduce our carbon footprint.”

Ultimately, however, it must be appreciated, as Hogan’s Hammond puts it: there is no one size fits all approach with ESG. What works in Europe or Brazil may not work in South Africa. The local context is key.

For example, in the US and European markets the main focus is on the E – environmental issues and the green economy. This focus on green opens companies up to a lot of funding and investment. In South Africa and other less industrialised countries, there needs to be more focus on investment on the S, though with environmental concerns increasing. South Africa has always been strong on corporate governance with the international standards set in the King reports on corporate governance driven locally by the Institute of Directors of Southern Africa.

For South Africa in particular, getting the balance right between the social and environmental will usually lead companies towards greener, more sustainable options.

CASE STUDY STANLIB KHANYISA IMPACT FUND

COMBINING SUSTAINABLE FINANCIAL RETURNS WITH POSITIVE SOCIOECONOMIC GROWTH

While additionality can be delivered by companies and their targeted investments, professional fund managers are also aiming to deliver positive social outcomes alongside acceptable returns to investors. We examine one fund launched during the pandemic. It provides an example of an investment strategy that goes beyond seeing ESG as a risk-based screening mechanism and positions it to drive additionality in social and environmental outcomes too. Key is assessing how it will measure success.

STANLIB Credit Alternatives, an investment team within STANLIB Asset Management, has developed the STANLIB Khanyisa Impact Investment Fund which seeks to combine sustainable financial returns with positive socioeconomic growth. Set to begin formal operations within the next few months, Khanyisa is a pooled proposition governed by ESG principles that cater to multiple beneficiaries who have a shared interest in the fund’s offerings.

CASE STUDY

The Khanyisa Impact Investment Fund aims to act as a conduit to match capital available from capital allocators or investors with the demand that exists within certain socioeconomic development needs.

It has three investment focus areas:

- Infrastructure

- Financial inclusion

- Agriculture

SDGs TARGETED BY THE FUND

1. Infrastructure:

The fund aspires to developing sustainable communities by investing in renewable energy, affordable housing, education and health care.

- SDG 7 Affordable and clean energy

- SDG 9 Industry innovation and infrastructure

- SDG 11 Sustainable cities and communities

- SDG 12 Responsible consumption and production

- SDG 13 Climate action

2. Financial Inclusion:

The focus here is reducing economic barriers to entrepreneurship and increasing financial literacy and access to financial services.

- SDG 1 No poverty

- SDG 5 Gender equality

- SDG 8 Decent work and economic growth

- SDG 10 Reduced inequalities

3. Agriculture:

Supporting sustainable agricultural practices to enhance food security and access to wholesome nutrition.

- SDG 1 No poverty

- SDG 2 Zero hunger

- SDG 3 Good health and wellbeing

- SDG 9 Industry innovation and infrastructure

- SDG 12 Responsible consumption and production

- SDG 13 Climate action

ESTIMATED MEASURABLE OUTCOMES OF THE PROJECTS

Khanyisa targets multiple sectors through various investment themes. Targeted outputs will depend on how much capital Khanyisa is able to raise.

In terms of financial inclusion, measurable outputs would be:

- How many SMMEs can be funded

- How much capital Khanyisa has invested into the sector

- How many jobs have been preserved or onboarded by funding the SMMEs

- How many consumers have been granted access to finance that they wouldn’t ordinarily be able to access through traditional means OR: Has the fund been able to enable such consumers to be able to avoid predatory lending practices?

Stanlib Credit Alternatives recently funded a social housing development, Greenfields Estate in Randfontein. This is overseen by the developers, The Housing Hub, under property manager Zelri Properties and will shortly deliver just over 1,000 units.

CEO Steyn Fourie describes The Housing Hub as a social entrepreneurship organisation.

Khanyisa aims to replicate the business’ success in this field and deliver several multiples of this over the medium to long term.

RISKS TO OUTCOMES FROM THE PROJECTS

The financial risk attached to any investment Investment/credit risk – the risk of your borrower being able to repay investor capital and pay back returns. STANLIB mitigates these risks through a rigorous due diligence process, meeting investee management teams and assessing industry risk. Given the due diligence processes and several risk mitigants that STANLIB puts in place, the risk and severity of loss is typically low.

Impact-related risks centre on the targeted outputs How does the investee company stack up against targets? What areas of development do they need to pay attention to? STANLIB assesses their ability to measure and report on what they need to deliver from an impact perspective and will procure the services of a third-party impact specialist to independently monitor and measure the various initiatives and report back.

The risk of not achieving desired outcomes generally varies according to the maturity of the investee companies, their scale and the quality and keen interest of management.

OPPORTUNITIES FOR EXPOSURE

Lone instruments that are bespoke on a bilateral basis are mainly used in line with the specific needs of the borrower as well as the extent of their required flexibility in terms of where they are in their lifecycle, and their ability to repay capital and meet returns.

Where more advanced borrowers have put together a note issuing programme, the Khanyisa Fund could purchase those notes on a private placement basis. Alternatively, should borrowers decide to list those notes on the JSE or an alternative exchange, Khanyisa would look to purchase those notes on the open market after conducting the necessary due diligence.

There has also been growth in sustainability linked bonds on the JSE which Khanyisa could access, depending on the return profile and other relevant criteria.

BY GILLIAN KLAWANSKY

DIRECTS ITS SOCIOECONOMIC DEVELOPMENT INVESTMENTS TO THREE KEY AREAS: INFRASTRUCTURE DEVELOPMENT, FINANCIAL INCLUSION AND AGRICULTURE

Armed with a belief that ESG factors form important considerations in delivering risk-adjusted returns to clients, STANLIB Credit Alternatives has developed the Khanyisa Impact Investment Fund. Khanyisa aims to catalyse economic development by increasing financial inclusion, thus reducing inequality and poverty.

“We use impact investing as a strategy and ESG as a framework for assessing risks as they pertain to environmental, social and governance factors,” explains Zeyn Ismail, head of the investment team at STANLIB Credit Alternatives and portfolio manager. Khanyisa will function according to this philosophy.

STANLIB Credit Alternatives, a franchise within STANLIB, is specifically debt focused, primarily within private markets, Ismail says. “We make debt funding solutions available predominately on a bespoke and a bilateral basis. We manage several mandates on behalf of different clients, the biggest of whom is Liberty Group.” The team also manages mandates on behalf of other third parties, essentially institutional investors such as pension funds. These institutional investors are managed on a segregated mandate basis catering to each of their specific requirements. “For the most part there is consistency across these mandates,” says Ismail. “This gives us the ability to get multiple investors invested into a particular credit asset.” Khanyisa is a pooled proposition which would allow multiple investors with a common or shared interest to benefit from its objectives.

Khanyisa aims to match capital with the socioeconomic development needs of beneficiaries in three key areas: infrastructure development, financial inclusion and agriculture.

“Our impact investment approach is one where we can leverage our skillset, track record, networks and capabilities to deliver on a positive outcome for both investors and investees,” says Ismail. Khanyisa goes a step further than STANLIB Credit Alternative’s general investment vehicles in that it undertakes to monitor the impact it can generate from these investments, to measure it and to report to its stakeholders.

“The thesis behind impact investing that we’ve adopted for Khanyisa is that we shouldn’t have to make a trade-off between financial return and some kind of positive socioeconomic return,” says Ismail. “We are able to marry these two objectives and deliver on each of them.”

He says Khanyisa is designed to be a pooled proposition. It therefore won’t be specific to one beneficiary but rather to multiple beneficiaries that have a shared interest in what the fund offers and that offer investors opportunities. It has three focus areas:

1. Infrastructure

This is distilled into two segments. One is economic infrastructure, which refers to large infrastructure programmes. This includes renewable energy, an area in which STANLIB has been invested in for years. Renewable energy has become increasingly topical as companies look to explore energy solutions that reside outside of Eskom. “That’s a significant area of growth and investment with which we’re already involved and will continue to build on through Khanyisa,” says Ismail.

The fund will also invest in socioeconomic infrastructure. This specifically addresses areas pertaining to housing, health care and education – all massive needs within South Africa. The development of schools, hospitals and clinics under the education and healthcare sub-themes, while trickier to source, will be a focus here. “The benefit of infrastructure is that it will contribute significantly to GDP growth, because of fixed capital formation, because of the potential for job creation and because of the potential to introduce foreign direct investment in the economy,” Ismail adds.

Foreign investment is typically provided by developmental finance investors, the majority of whom are willing and able to provide commercial and/or concessionary finance and, in some instances grant funding. “That said,” says Ismail, “they do favour having local commercial investors alongside them. Combining commercial and concessionary finance gives rise to blended finance models.”

2. Financial inclusion

This refers to the banking or servicing of previously disadvantaged communities, the unbanked segment of the economy who are underserviced and unable to easily access finance. These communities represent a large percentage of the population and financial inclusion projects increase opportunities for both investors and investees. Such projects, for example, could address housing in terms of one’s ability to access home loans.

“It also addresses the ability to access unsecured lending, for example to cover basic costs like school fees, repaying expensive debt and so on,” says Ismail. “Couple that with the advances in technology through fintech solutions, particularly those that are scalable, within South Africa and across the African continent and in some instances globally, and the significant opportunities that exist within this space are evident.”

That’s not to discount the risks of predatory lending. This is something that Khanyisa will diligently manage by ensuring those borrowers who engage in various forms of consumer financing operate within relevant legislation, that collections policies and practices are legitimate and that humane and additional fees are reasonable.

“In addition to the benefits we’ve outlined, consumers further benefit by having an alternative to borrowing from unregistered entities and individuals – such as loan sharks – that may engage in unethical lending practices.”

3. Agriculture

Given food security risks globally and locally and access to funding within the sector, one can't talk about an impact investment fund without having some kind of focus on agriculture, says Ismail. While STANLIB was not initially very active in agriculture, this has changed. “Over the years that we've been busy trying to raise capital for Khanyisa and the extent of activity in the agricultural sector within our business has certainly grown,” he says. “In the process we’ve been developing our track record by investing into the space. We continue to see more new and recurring investment opportunities arising in agriculture, especially in terms of developments arising from the use of technology within the sector. Over time, we anticipate agriculture growing as a theme within our impact-related strategies.”

AN EXTENSIVE CAPITAL-RAISING PROCESS

Khanyisa’s various vehicles are currently only open to institutional investors, not retail investors, largely because of the minimum investment amount which tends to be in the hundreds of millions. “That said, we are working on solutions by which we can grant access to Khanyisa to retail investors, albeit via large discretionary fund manager platforms,” says Ismail.

While the fund was established in 2020, it is only now concluding its capital-raising activities before becoming officially operational. Having officially launched Khanyisa during the Covid pandemic, STANLIB Credit Alternatives had to contend with the implications, including the resultant economic slowdown.

The time it’s taken to raise fund capital has not been for lack of interest, says Ismail. “The economic cycle and pension fund trustees having to manage retrenchments and resultant withdrawals from pension funds has delayed and slowed their activity with investment into this type of vehicle.” Without growth in the economy and employment, trustees have also had to be more circumspect about where to place the capital they provide in this context.

Yet now the cycle is reaching the point where alternative investments and the benefits they offer are becoming more relevant. Investment into private debt or private credit is something that has piqued local investors’ interest, in line with global trends seen over the past four to five years.

This is something that Louise Gardiner, co-founder and CEO of Vukani Impact Collective, which helps investors and businesses innovate through better measurement and management of ESG performance and impact, has observed. In addition to running Vukani, she works with the International Finance Corporation (IFC), which is part of the World Bank Group, to develop national enabling frameworks for sustainable finance.

Through the IFC, she has participated in studies that have found that companies that achieve strong ESG performance in terms of risk management and improving efficiencies significantly financially outperform those that do not run ESG initiatives, a finding echoed by other studies.

Reflecting on Khanyisa’s lengthy capital-raising process, Gardiner says that anywhere between a year and three years of capital raising for such funds is the norm. “The impact space is evolving so investors might have had other due diligence requirements or questions that come with this changing space. Many companies around the world are having to put in place new policies and procedures that arise with their changing impact strategy.”

Investment risk assessments have formed a significant part of investors’ due diligence process, which can stretch over several months. “For example, they look at our track record as fund managers, individuals’ experience, our operational capabilities and our process and philosophy,” says Ismail. “This talks to how long our business has been in existence and how we’ve performed. From an impact fund perspective, investors are keen to understand our underlying pipeline of investments. There have been questions around the type of impact we think we can achieve, or we ought to be able to deliver on, what our ability to monitor and measure those is, and whether we will be reporting on them.”

The Khanyisa Fund works to mitigate both financial and impact risks. STANLIB has a proven track record in managing financial risk and in investing in sustainable businesses that can meet repayment and return requirements. Ismail says the in-house legal team conducts rigorous due diligence because “we must be comfortable that we are protected from a downside risk perspective”. Gardiner notes that this is something investors look for – a due diligence process that will both capture and manage ESG risks.

Ismail outlines further risk management processes: “We meet with management teams on the ground and dedicate time to getting to know our beneficiaries and to understand the risks that they perceive to exist in their business. We also assess industry risk as a whole, asking what could impact them, and how they stack up against those risks. All applications also have to be presented to an investment committee and we may only proceed based on an approval from committee members.”

Impact-related risks are also assessed in terms of what outcomes Khanyisa looks to achieve and whether an investee can measure and report on such outcomes. “In managing an impact investment fund and staying honest, we need to give our investors and our stakeholders the necessary comfort that we are truly delivering on some of those impact objectives, so that we don’t run the risk of impact washing or greenwashing,” says Ismail. For that reason, STANLIB will procure a third-party impact specialist to independently monitor and measure the initiatives and report back on activities and deliverables. “We’ve identified a preferred provider with more than a decade’s worth of experience in this space, who will formally come on board once Khanyisa capital is secured.”

AN ENGAGING ESG PHILOSOPHY

STANLIB’s ESG philosophy is characterised by one of engagement as opposed to exclusion, says Ismail. ESG has in fact become an important risk assessment tool that forms part of every due diligence that the company undertakes and presents on. “When we make an investment application, there’s a dedicated section to how we’ve assessed ESG concerns and risks. We tend to score that and report on it.”

There has therefore been a strong integration of ESG factors into STANLIB’s overall investment process. “Once we’ve identified the risks, we then go through a process of engagement.” This, he says, is “a constructive way of allowing borrowers and the economy, particularly as it pertains to South Africa, to evolve and transform”. Therefore, instead of simply discounting an ESG investment opportunity that doesn’t tick all the predetermined boxes, which is an almost exclusionary practice, investments are selected based on an engagement process. “Given the size of our economy and the fact that we are, in many respects, still a developing nation, a tick box exercise is not constructive. A basis of engagement and an ability to inform and encourage borrowers and management to evolve is more sustainable and constructive for the economy in the longer term.”

Once they have identified and debated the risks, the STANLIB Credit Alternatives team will decide how to proceed. “Following successful engagement with management, oversight is done in respect of how things have developed or will be developing over time, and in terms of how we as investors have managed the engagement with investing companies and borrowers.”

To measure impact there are regular check-ins with at least one full review annually on each of the underlying investments with reflection on performance against predetermined milestones.

Both quantitative and qualitative principles are applied in measuring impact. STANLIB Credit Alternatives has a R2bn target for impact-related investments over the course of this year of which R500m is reserved for Khanyisa in the short term. “For Khanyisa, over the medium term we’d like to get to about R1.5bn with the ultimate goal of exceeding R3bn.”

Impact measurement is determined in conjunction with investors, with outputs measured over the long term. “There is now a very strong focus on being able to report back to our various stakeholders around ESG initiatives, around progress that’s been made, as well as a need to be honest in instances where we haven’t been able to make progress and what our response has been,” he adds. Making ESG and stewardship reports available has therefore become a big talking point.

Conceptually, social return on investment would be applied with respect to the specific objectives that Khanyisa sets itself and the borrower, and tracking how and whether they have delivered against those objectives. “We are engaging with some of our borrowers on how we can actually track the improvement in quality of life when it comes to qualitative analysis.”

Gardiner endorses this approach, especially when it comes to measuring ESG impact. “I would prioritise stakeholder engagement more than anything else,” she says. “Make sure that you’re designing the ESG goals appropriately for those who will benefit, and then make sure that the benefit actually happened. Lastly, you have to make sure that the benefit wouldn’t have happened without your intervention.”

While in rare cases STANLIB Credit Alternatives has divested from particular investments that have not made necessary long-term progress in moving towards objectives, working with borrowers to understand and address challenges is always the first step. Yet they will make tough decisions when warranted.

APPLYING ADDITIONALITY

Khanyisa believes in the importance of applying additionality criteria when selecting investments. “Our investors apply additionality criteria when they think about where to place their funds,” says Ismail. “They ask what we are going to achieve that is going to be more beneficial than if they’d placed it somewhere else.”

Additionality is also one of the chief considerations around a particular investment opportunity in terms of Khanyisa’s impact objectives. “We are very alive to the risk that should we not make funding available, a particular borrower may not be able to access the funding out of the market,” say Ismail. “Assuming that we are comfortable with the risk profile, and we’ve done the necessary checks, I think it’s so much more meaningful to us and our investors if we are the party that can enable some of the growth that could come by funding a particular borrower.”

From an impact perspective, one would also consider whether because of not providing funding, a particular deliverable will not be achieved. “That can have serious ramifications for that particular socioeconomic need,” says Ismail.

A good example comes under the financial inclusion banner where Khanyisa has grown its footprint into the SMME financing space, an area where banks are hitting credit limits because of the size of some of these borrowers. “The banks can’t necessarily support further growth with respect to the borrowers and so they need to approach a non-bank financial institution, which is an opportunity for us to invest in SMMEs that are primed for growth and to help enable such growth.”

SANLAM FOCUS

SANLAM INVESTMENTS: ON A MISSION TO BECOME AFRICA’S PRE-EMINENT SUSTAINABLE AND IMPACT INVESTOR

As one of the largest fund managers on the African continent, Sanlam Investments works in partnership with listed companies as an investor to drive ESG commitment and action. We aim to help spur increased focus and impetus for these businesses to implement sustained and measurable ESG strategies and activities.

The first Sanlam ESG Barometer has given us excellent reasons for all listed companies to make integrating ESG in their strategy a considerable focus – with 71% of companies reporting an improved public reputation and 59% having experienced better operational performance since they implemented an ESG strategy.

Globally, we’ve seen that companies with ambitious ESG targets and better disclosures tend to outperform their peers over the long-term. We hope these positive outcomes mean that more and more companies will follow suit.

For companies to stand out as ESG leaders and change-makers, the focus must be on addressing all three aspects – the E, the S, and the G. We’re seeing, time and again, that investors want to move their money to companies that create positive and sustainable impacts on these three elements. Now more than ever, we must step up our effort and focus on measurable and visible sustainable impact outcomes.

Here are some mechanisms for companies to consider when integrating and implementing their ESG strategies:

It starts with a plan: know your ‘why’ and what success should look like.

Leaders in the corporate sector are distinguished by a clear ESG strategy which guides their approach to ESG risks and

opportunities. In the same way, a move to carbon neutrality starts with a clear climate policy and a climate roadmap with timelines supported by a strong employee and external stakeholder engagement.

Embrace the essence of ESG.

To be an ESG leader, a company needs to move beyond compliance and rather approach ESG as an opportunity to innovate and contribute to organisational growth, build a solid brand and reputation, and attain high employee retention and customer engagement.

It is thus important that companies consider the quality of their ESG activities in order to stand out as being additional or adding new value to ESG KPIs.

For example, on issues of diversity and inclusion, a diverse workforce is important across all levels of the business, however, the quality of inclusion is an important consideration that goes beyond a company being diverse. Current ESG KPIs on diversity and inclusion focus on a quantitative value (number of female directors, number of black people in management, etc.) and rather than on the quality of integration and power given to minority groups.

There remains an untapped additionality opportunity when measuring the quality of ESG KPIs that quantify a company’s

commitment to ESG. Introducing this new lens of quality to ESG measurement will drive better outcomes that can actually enhance societal and environmental change.

Support the “Just Energy Transition”: Financing bold green energy solutions is a must.

The onset of the border carbon tax in European markets may result in many South African-produced products attracting high carbon border taxes, making them uncompetitive. Companies should start thinking of carbon in monetary terms rather than just tons. Thus, directing research and development budgets towards research on innovations that address low-carbon or alternative energy solutions for the business is a critical part of an ESG strategy.

Corporations can use their CSI budgets to fund early-stage innovations around climate financing, investing in dynamic clean energy solutions, which they can test in parts of their business. An example is the green hydrogen value chain which the government has recognised as a key driver of economic growth and decarbonising the South African electricity grid.

Additionally, looking through the just transition lens, CSI budgets could be directed to provide poorer households with sustainable, green energy solutions, in the process reducing emissions and promoting access to a reliable and green energy source.

Overall, the interplay between environmental, social and governance issues is essential in devising innovative approaches to being greener. Pope Francis stated, “We are faced not with two separate crises, one environmental and the other social, but rather with one complex crisis which is both social and environmental.” Strategies for a solution demand an integrated approach to combating poverty, restoring dignity to the excluded, and at the same time, protecting nature.

As Sanlam Investments, we recognise the vital importance of ESG and commit to using our influence to ensure lasting social returns for our nation. The Sanlam ESG barometer is a robust engagement tool to gauge where SA Inc. is at and highlight the work that we must collectively do to empower all South Africans to live meaningfully in a country that feels inclusive and opportunity rich.

Our goal is to invest for good, for the future, for a just transition, without compromising on returns for our clients. We’re committed to fostering the just energy transition through our influence as one of the country’s largest asset management companies. We recognise that change doesn’t happen overnight, and we’re dedicated to driving positive systemic step-changesˮ

SANLAM INVESTMENTS: STEPPING UP THROUGH ACTIVE OWNERSHIP.

As part of the larger Sanlam Group, Sanlam Investments is committed to promoting conscious and sustainable investing practices and prioritising impact. A few years ago, we set out on a mission to transform our business into one guided by purpose, focusing on sustainable and impactful investments. By fully embracing this principle, we strive to create a future where individuals can thrive in communities full of opportunities and hope. We believe that this vision will leave behind a legacy of prosperity.

We’ve invested heavily in our sustainable investment capabilities and expertise to lead by example. Proxy voting and investor engagements are powerful means to demonstrate our preferences and expectations regarding governance and sustainability themes for portfolio companies. It’s a journey we’re proud to be on.

Active shareholding is a crucial aspect of our ESG framework and a chance to influence a portfolio company. We adhere to strict guidelines to vote on company resolutions on behalf of our clients in accordance with the SA Companies Act and JSE Listing requirements.

In 2022, Sanlam Investment and our partner Robeco facilitated 22 in-house and 206 engagements respectively. We voted on about 3 454 resolutions, 352 (10%) of which we voted against, primarily due to remuneration practices (40%), director re-election/ appointment (34%) and access to capital (18%).

CASE STUDY SASOL

BIG PUSH TOWARDS PRODUCING SUSTAINABLE AVIATION FUEL

Among the worst greenhouse gas emitters in the country, the energy and chemicals producer is embarking on an extensive decarbonisation programme across its array of operations with production of sustainable aviation fuel at the forefront of its transition to being a net-zero carbon emitter by 2050.

CASE STUDY

Sustainable Aviation Fuel (SAF) project – Sasol is set to produce sustainable jet fuel by 2025 for the aviation industry, which is said to be responsible for about 3% of global emissions. By targeting this hard-to-abate sector, Sasol is effectively poised to combat climate change globally while pursuing its vision to become fossil-free.

SDGs AFFECTED BY THE PROJECTS

SDG 13: Climate action – taking action to combat climate change.

SDG 17: Partnership and goals – forming global partnerships for sustainable growth.

ESTIMATED MEASURABLE OUTCOMES OF THE PROJECTS

Projected production of sustainable aviation fuel (SAF) from Sasol’s Secunda operation is pegged at 50,000 tonnes a year, potentially curbing up to 500,000 tonnes of carbon dioxide per annum.

For green hydrogen, which is essential for the production of SAF, production is projected at 3.5 tonnes per day at the Sasolburg facility, in Q1 2024.

RISKS TO OUTCOMES FROM THE PROJECT

Carbon tax presents a high risk for Sasol as one of the biggest emitters in the country. The tax rate attaches a rand value per tonne carbon dioxide equivalent emitted, therefore the higher the emissions the more tax the company is liable for.

Affordability of cleaner feedstocks presents a risk for Sasol as it moves away from cost-effective and abundantly available coal to more sustainable alternatives such as green hydrogen and sustainable carbon.

Technologies such as direct air capture and Carbon Capture Utilisation and Storage are essential for the production of SAF but are not yet economically viable. Grant funding has been applied for to counter the costs inherent in this endeavour.

OPPORTUNITIES FOR EXPOSURE

Sasol has launched a new corporate venture capital fund, Sasol Ventures. It will invest €50m over the next five years in start-ups providing pioneering technology to complement Sasol’s research and development.

As yet, Sasol has not introduced any green bonds or similar instruments through which investors can partake in its sustainable aviation fuel production and transitional journey.

As critical as green hydrogen is to the production of sustainable jet fuel, so is renewable energy in the production of green hydrogen through electrolysis. For this reason Sasol has signed power purchase agreements bringing cumulative renewable energy to be procured to about 550MW.

SASOL PLAYING LEADING ROLE IN DEVELOPING SA’S GREEN HYDROGEN POTENTIAL

Sasol’s target for first production of sustainable aviation fuel (SAF) by 2025 signals a shift towards a fossil-free future. Counted among the worst greenhouse gas emitters in the country, the energy and chemicals producer has set itself a 30% carbon-reduction target by 2030 with a net zero ambition by 2050.

A cumulative sustainability capital expenditure of between R25bn and R35bn up to 2030 is projected, although it is not immediately clear how it is disbursed across the various projects. In its response to the ESG Barometer survey, Sasol emphasised that the amount was inclusive of maintaining feedstock and decarbonisation costs.

The petrochemical giant is guided on its mission to produce SAF by Sustainable Development Goals (SDG) 13 and 17, where SDG 13 is about taking action to combat climate change and SDG 17 focuses on creating global partnerships for sustainable development.

Given it has been using its proprietary Fischer-Tropsch (FT) technology to produce fuel and chemicals from coal and gas for more than 70 years, Sasol views itself as distinctly placed to produce SAF and other climate friendly products. In 2021 it established Sasol ecoFT specifically to drive the company’s aspirations to produce sustainable jet fuel for the hard-to-abate aviation industry. The sector is said to be responsible for about 3% of global emissions.

Sasol ecoFT is set to leverage FT technology to produce SAF and other chemicals via the power-to-liquids (PtL) process, using sustainable carbon and green hydrogen as feedstock. The PtL process uses unavoidable carbon sources from solid waste, biomass or direct air capture (DAC) and converts them to carbon monoxide. While green hydrogen is produced through electrolysis powered purely by renewable energy generated from solar or wind. In the end green hydrogen and carbon monoxide are transformed into SAF using Sasol’s FT technology.

To ensure first SAF production by 2025, Sasol has signed several memorandums and entered into partnerships including

a joint venture with German electricity producer, Uniper. Dubbed SkyFuelH2, the joint venture aims to produce SAF from green hydrogen and biomass through FT. As per the memorandum of understanding (MoU) signed in November 2021, Sasol has committed to supply the FT catalyst, technical services and marketing of the product on behalf of the venture.

For the HyShiFT SAF project, Sasol has gone into partnership with German chemicals company, Linde, German renewable company Enertrag and South African green hydrogen investment company Hydregen. The HyShiFT project involves repurposing the Secunda operations to produce jet fuel by transitioning it from predominantly using coal to progressively integrating more sustainable feedstocks.

Transitioning operations to use only sustainable feedstock will require 20GW of electrolysis capacity, which will take time. So to begin with 200MW of electrolysis capacity and 400MW of renewable energy will be utilised to produce 50,000 tonnes of SAF a year, depending on sustainable carbon feedstock, potentially curbing up to 500,000 tonnes of carbon dioxide per annum. Last year the German government granted the HyShiFT consortium €15m to support the project.

SUSTAINABLE AVIATION FUEL

In February Sasol announced it had signed an MoU with a global supplier of decarbonisation technology, Topsoe. The MoU set out the companies’ intent to form a 50/50 joint venture in 2023 to produce SAF. Sasol president and CEO Fleetwood Grobler said the MoU furthered Sasol's long-term global SAF ambition. "We are fundamentally transforming our business by focusing on decarbonising our operations, while preserving and growing value," he added.

Sasol and Topsoe have been strategic partners for 25 years and are set to employ Sasol’s FT and Topsoe's SAF technologies to produce jet fuel from green hydrogen, sustainable sources of CO2 and/or biomass.

Green hydrogen is clearly essential in the production of SAF but also widely considered an enabler to achieving global net zero commitments. Considering Southern Africa’s endowment of renewable energy, Sasol believes the region has the potential to produce green hydrogen competitively and for this reason the multinational has taken it upon itself to play a leading role in transitioning the region to a green hydrogen economy.

In March 2022, Sasol approved a project to produce green hydrogen towards the end of 2023 using existing chlor-alkali electrolysers at its Sasolburg site. “There will be a ramp up in the production of green hydrogen linked to the start-up and ramp up curve of the Msenge 69MW renewable energy curve, with green hydrogen production reaching 3.5 tonnes per day in quarter one of 2024 when renewable energy is at full capacity,” media relations manager Matebello Motloung says.

In addition, Sasol signed a memorandum of agreement with the Northern Cape government to lead a 24-month pre-feasibility study to explore Boegoebaai's potential as an export hub for green hydrogen and its derivatives. “This project at full-scale could create significant direct jobs, as well as further indirect jobs across the ecosystem, unlocking unprecedented economic growth for the Northern Cape region,” Sasol maintained in its climate change report.

GAZETTED

In December 2022 government gazetted the HyShiFT project, the Boegoebaai study along with the renewable energy project as strategic integrated projects. “This designation enables the programmes implementation to be expedited, demonstrating government's commitment to supporting the private sector in developing the new green hydrogen economy,” said Grobler during the interim results presentation.

As critical as green hydrogen is to the production of sustainable jet fuel, so is renewable energy in the production of green hydrogen through electrolysis. For this reason Sasol has signed power purchase agreements bringing cumulative renewable energy to be procured to about 550MW. Among the agreements is one with TotalEnergies and its partner, Mulilo, signed in January 2023 for 260MW, for which TotalEnergies and Mulilo are set to create a 140MW capacity wind project and 120MW solar project.

All renewable energy projects, including the 69MW Msenge Emoyeni wind farm intended to power the Sasolburg operations, are set to be operational in 2025 subject to regulatory and financial approvals.

"This puts Sasol well on its way to achieving its ambition to procure 1,200MW of renewable energy capacity by 2030,” said Priscillah Mabelana, executive vice-president of Sasol's energy business.

As Sasol progressively moves away from using coal as a feedstock, gas will be utilised as a bridge energy source, even though it is a fossil fuel, until cleaner alternative feedstocks are fully integrated into the production process. Sasol views gas along with renewable energy as springboards to green hydrogen, and has extended its gas plateau to 2028.

VENTURE CAPITAL FUND

A new corporate venture capital fund was launched in February. Named Sasol Ventures, it has targeted investment of €50m over the next five years to complement research and development, as well as pursue investment in start-ups developing breakthrough technologies for sustainable energy and chemical solutions.

Sasol has roped in global venture capital firm Emerald Technology Ventures as investment advisor and to identify and evaluate opportunities to grow the fund portfolio. As part of the partnership, Sasol has invested directly in Emerald's global energy transformation fund to propel its innovation opportunities.

With its fossil-free vision mapped out, Sasol counts stringent policies and regulations, carbon tax in particular, among its risks in the short to medium term.

South Africa ratified the Climate Agreement in 2016, signalling its commitment to a just transition towards a climate-resilient, low-carbon economy. Via the emitter pays principle, carbon tax attaches a cost to GHG emissions and has proved effective in getting large emitters to change behaviour. SA’s carbon tax regime finally came into effect in 2019 after it was delayed by consultations and debates. Its implementation was then further delayed by the Covid-19 pandemic.

In his 2022 budget speech, Finance Minister Enoch Godongwana announced an increase in the carbon tax rate to R144 per tonne carbon dioxide equivalent emissions effective as of 1 January 2022 from R120 previously. The rate would increase by at least US$1 each year until it hit $20, Godongwana said. From 2026 the cost would increase rapidly every year to reach at least $30 by 2030 and $120 beyond 2050.

The second implementation phase of the carbon tax regime was originally meant to kick off in January 2023 but the minister extended the first phase by three years to 31 December 2025. Until then taxpayers will continue to receive tax-free allowances which reduce their tax liability.

Sasol along with Business Leadership South Africa, Business Unity South Africa and other groupings are calling on government to consider higher carbon tax rates only after 2035; to delay the annual tax hikes until at least 2030; and they want to retain and increase the tax-free allowances that reduce their tax liability.

Judged by international standards, the proposed tax rates are low. Still Motloung argues that the recently proposed $20 carbon tax rate by 2026 and $30 by 2030, with an aggressive removal of allowances, will have an adverse financial impact on Sasol.

“National Treasury has indicated that the proposal is still subject to public input. In a conservative scenario, assuming all allowances fall away and the increase in price is applied, we would need to consider trade-offs to balance the people, planet and profit agenda. At this stage, there is still uncertainty on what rate, trajectory and allowance phase-out will be applied. We are awaiting further clarity from the ongoing government consultation process.”

Sasol also counts the affordability of sustainable carbon feedstocks among the risks it faces. Sustainable carbon feedstocks are critical if the company is to optimise its FT PtL advantage. The plan is to decrease reliance on coal and gas by gradually incorporating sustainable carbon sources such as biomass, recycled CO 2 and captured atmospheric CO 2. Currently the cost of DAC is not suitably competitive for large-scale application, consequently small quantities of carbon derived from biomass are being accommodated in the existing gasifiers. A new set of

gasifiers will be required if higher quantities are to be incorporated. In addition, effective biomass sourcing will call for collaboration to ensure optimal land and water use as well as logistics. Various partnerships as well as enterprise supplier development in this area are currently being sought.

Technological advancement as well as the costs attached to it present a headache for Sasol. The cost of technologies such as DAC and Carbon Capture Utilisation and Storage (CCUS) are currently not economically viable to the point Sasol has not built in CCUS into its energy roadmap to 2030, though foundational work towards the 2050 net zero ambition is under way.

On the upside, Sasol has identified market opportunities for SAF and other sustainable products in the European Union, North America, Middle East and Australia. Grant funding for the various projects has been applied for to counter the high costs of advancing its fossil-free vision.

COMMUNITY RELATIONS

Sasol has some work to do to improve relations with its fenceline community in Secunda, where Sasol’s plant is said to be the biggest source of greenhouse gas emissions from a single site in the world. MS Environmental Projects, a community-based activist group which works in the area, has levelled some criticism at the company. Although it has been active since early 2019, it only started working on a community air quality awareness project with Sasol in April 2022.

“People in the fenceline community of eMbalenhle suffer from various respiratory diseases and cancer,” said the organisation’s coordinator, Khehla Mahlangu.

In response Motloung said: “We are aware of the link between our activities and air quality and the need to act responsibly in managing air quality impacts in the regions where we operate.”

She explained that Sasol’s approach to air quality management is informed by internationally accepted practices including ongoing efforts to prevent pollution and air quality degradation. The approach also complies with the National Ambient Air Quality Standards that establishes ambient concentration levels for tolerable or permissible human health risk as informed by the World Health Organisation, Motloung added.

Administrator at the activist group, Fana Sibanyoni, added to the criticism saying Sasol is not a willing participant. “They are only involved in this air quality awareness project because it is a condition of their licence. We had to push them to work with the community.” Mahlangu adds that Sasol “did not recognise the value of working with community-based organisations, preferring to work with international organisations instead”.

Motloung disagrees, insisting that Sasol is a responsible corporate citizen whose efforts extend beyond compliance to its licences. The project, she clarified, is in its second iteration after it initially concluded in 2019. It was initiated following consultation with the Gert Sibande District Municipality and the Department of Education.

The scope of the project was expanded to include 27,000 primary school pupils; 11,000 high school pupils and approximately 7,600 households in eMbalenhle and Lebohang.

The project educates the community about the harmful effects of pollution and covers various pollutants including sulphur dioxide, PM10 and PM2.5 particles that can cause a spectrum of health issues from mere irritation of the eyes, nose and throat to more serious lung issues.

The project also aims to raise awareness of how community members contribute to the air pollution in the area when they use coal to cook, for instance.

MS Environmental Projects acknowledged Sasol’s value as an employer and taxpayer, Sibanyoni said, but the company had to invest more in its fenceline communities given the profits it makes from the area.

Motloung says that over the years Sasol has implemented various projects in eMbalenhle including educational support at local schools through the Osizweni Science Centre as well as handing over educational resources and mobile classrooms. It upgraded a clinic in Ext 14; built a clinic in Bethal; handed over two mobile clinics; provided medical resources to various clinics and hospitals and conducted health care outreaches; provides SMME support via the Bridge To Work programme; and has upgraded electricity substations and provided capacity building to NPOs in the area.

CASE STUDY THARISA PLC

ESG CRITERIA FACTORED INTO ALL INVESTMENT DECISIONS

Tharisa is in a race to meet its goal to reduce its carbon emissions by 30% by 2030 and to be net carbon neutral by 2050. Its mechanised mine near Rustenburg produces platinum group metals (PGMs) and chrome concentrates. While its open-pit operation has a remaining life of 18 years, its planned underground mining operations will have a 40-year span and it is expected one day to be the last mine operating in the area.

This, among other business imperatives, has driven the company to develop a solid ESG strategy with a detailed plan to meet its goals and go guide it towards achieving the impact it desires.

CASE STUDY

Tharisa plc is an integrated resources mining group based in Cyprus. Its principal asset is the long-life open-pit Tharisa Mine, which produces both platinum group metals (PGM) and chrome concentrates near Rustenburg in the North West province of South Africa. Tharisa also owns Karo Mining Holdings, a low-cost, open-pit PGM asset under construction and located on the Great Dyke in Zimbabwe.

Its ESG target is to reduce its carbon emissions to 30% by 2030 and to be net carbon neutral by 2050. To achieve this, it has a comprehensive ESG strategy that has the full support of the board. Plans are at an advanced stage for Tharisa’s mines to establish solar power plants (to be built by a third party with a power-purchase agreement with Tharisa) so that Tharisa will be self-sufficient and even send power to the national grid.

Among its ESG goals is a plan to reduce air, sound and water pollution at its operations. Tharisa already recycles 85% of water and uses non-municipal water at the mines, including borehole and dam water, and also provides water to the community where municipal supply is lacking. It also seeks to foster a harmonious relationship with mine host communities.

SDGs TARGETED BY THE FUND

SDG 6: Clean water and sanitation.

SDG 12: Responsible consumption and production.

SDG 13: Climate action.

SDG 15: Life on land.

Rising temperature levels will have an adverse effect on the availability of natural elements required by the mine, such as access to water and also on the physical wellbeing of the workforce. It needs to regulate greenhouse gas emissions and the responsible use of energy and use water responsibly. Hence it is imperative that the group plans ahead to mitigate against these factors, ensuring that it invests upfront in conducting all mining and processing operations in an environmentally responsible manner.

ESTIMATED MEASURABLE OUTCOMES OF THE PROJECTS

Tharisa has set out what it needs to do in its comprehensive ESG strategy in the short, medium and long term. These activities include the construction of new water storage facilities to cater to projected water shortages and the replacement of diesel fuel as an energy source. It requires relevant skills to manage ESG effectively at economical rates to implement these.

Ongoing training programmes will assist the group to develop the skills it requires locally, within the host communities, strengthen relations and influence behaviour. The skills development investment will improve the group’s relations with host communities and uplift them socially and economically.

Community engagements through SLP and local forums.

RISKS TO OUTCOMES FROM THE PROJECTS

Tharisa plc is exposed to risks arising from climate change on operations. It is at a risk of reputational damage from perceptions that it harms the environment by virtue of being a mining company and is not contributing sufficiently and timely in addressing climate risk. Potential legal risks that could lead to sanctions such as class action suits, which could result in halting mining production and even the loss of its mining licence. Increased costs of remediation and rehabilitation due to legislative changes are among the risks. Relations with mining host communities are a critical risk as a collapse of this relationship could bring all activities to a halt. Noncompliance to ESG standards and requirements may affect capital raising, and affect its growth and acquisitions. Negative media coverage and stakeholders’ perceptions, including different sections of the community and various levels of government, can influence perception and result in it losing support in equity markets and amongst other key stakeholders.

OPPORTUNITIES FOR EXPOSURE

Access to capital will assist Tharisa plc to decarbonise its operations and supply chains timeously and achieve its goals. This can be accessed in the form of equity listed on the JSE and LSE, and Karo bonds listed on the VFEX. An association with an organisation that prioritises its ESG will also assist in improving the carbon footprints of its investors.

The host communities’ social and economic advancement is informed by the local municipality’s integrated development plan and translated into action through local initiatives incorporated into each mine’s social and labour planˮ

Dr Carol Bell, Chairperson Climate Change and Sustainability Committee

BY AURELIA

MASSIVE PUSH TO RENEWABLES DRIVES DECARBONISATION STRATEGY

Listed on both the Johannesburg Stock Exchange (JSE) and the London Stock Exchange (LSE), Tharisa is a major player in mining, providing China, the world’s biggest stainless steel producer, with some 10% of its annual chrome needs.

To realise its vision of an environmentally and socially responsible future, Tharisa’s board established the Climate Change and Sustainability Committee in 2021 to oversee its climate change and sustainability strategy, policies and functions across its operations at the highest level. This is in addition to existing committees such as the Safety, Health and Environment Committee, Social and Ethics Committee and the Risk Committee.

When it comes to making investment decisions, says committee chair and independent non-executive director Dr Carol Bell, the board factors in ESG criteria. For the 2022 financial year the group’s focus was on energy security.

Tharisa’s goal is to create a circular economy, beneficiating its products and producing critical metals for the decarbonisation of the global economy.

One of its big moves, in February 2022, was the signing of a memorandum of understanding (MoU) with Total Eren, a renewable energy independent power producer that is part of the Total group, and Chariot, an energy company listed on the Alternative Investment Market (AIM) in the UK, to develop a solar photovoltaic project at Tharisa. Under the MoU, Total Eren and Chariot will develop and maintain a solar photovoltaic project that will supply Tharisa mine with 40MW (peak), set to increase over the life of the mine. The renewable energy partners will also develop a solar power station that will provide up to 300MW in Zimbabwe. This switch to renewable energy forms an important part of Tharisa’s strategy to reduce carbon emissions by 30% by 2030 and become net carbon neutral by 2050.

Bell says energy storage is also seen as a vital component of the sustainability strategy. “Arxo Metals (a subsidiary of Tharisa based in Cyprus) is also actively researching battery technology solutions utilising our own mineral products. We expect to develop our energy storage business over the years, which will greatly assist our decarbonisation efforts and make our business part of the circular economy.”

Bell believes Tharisa’s detailed ESG efforts will be well received by investors and financiers who pay particular attention to efforts to generate clean energy. “We believe that Tharisa will be viewed as a responsible supplier of its products.” That’s important because it enables access to a wide range of capital to finance and grow the business.

Tharisa’s decarbonisation strategy forms part of a fast-growing trend among mines globally. According to BMO Capital Markets’ trends summary from its 2023 BMO Global Markets, Mining & Critical Minerals Conference held in Florida, US earlier this year, global mining management teams are closely managing ESG-related risks and opportunities. There is a shift, particularly, towards energy transition and an emphasis on the critical role played by minerals to mitigate risks relating to climate change.

“We were surprised at the level of detail that some companies went into when explaining their ESG programmes and performance, particularly some of the smaller-cap miners,” BMO Capital Market’s Doug Morrow states in the report. “Several mining companies told us that they are frustrated with their ESG rating from the mainstream providers. Several said that their rating is either missing the mark or based on poor technical understanding of the issues.”

To avoid any misunderstandings and even unfair ratings, Bell says Tharisa emphasises the importance of providing relevant information to its stakeholders and to keep improving over time as plans become operationalised. She notes though that corporate disclosures in this area are in their early stages of development but the group is committed to disclose accurate information that carries an appropriate level of assurance.

For its “SDG 6: Clean water for all” outcome, it recycles and reuses grey water, has implemented boreholes and pollution control dams while also reducing reliance on municipality supplied water. Recyling waste is among the priorities to achieve SDG 12 outcomes (ensuring sustainable consumption and production patterns). To address climate change, it regularly monitors and calculates greenhouse gas (GHG) inventory to ensure compliance as set out in SDG 13: Take urgent action to combat climate change and its impacts.

The company has been reporting on its scope 1, 2 and 3 emissions for more than six years, which Ilja Graulich, Tharisa’s head of investor relations and communications, says not even some of the major miners have managed. Scope 1 covers direct emissions from operations; scope 2 covers indirect emissions from power generation; and scope 3 covers all other indirect emissions.

While taking care of the environment is among the top priorities set out in the ESG strategy, an emphasis is also placed on developing the group’s workforce and communities.

SAFETY FIRST

Here labour disruptions form part of the risks to the execution of the ESG strategy. Graulich notes that the mine has not lost a single day to industrial action since it commenced construction over 12 years ago. Tharisa has committed to providing a safe working environment with no casualties. The group’s 2022 integrated annual report lists safety as a key performance indicator for all executives and managers across operations. It aims for a zero-harm working environment.

One of the initiatives put in place is a short-term cash bonus scheme for all employees to adopt a culture of safety and have a zero tolerance for noncompliance. Through the cash bonus scheme, employees at all levels are incentivised to comply with all safety requirements in support of injury-free, sustainable operations. Despite the various measures to ensure safety, one fatality was reported in October 2022, the first fatality in over seven years.

GOVERNANCE

Employing 3,965 people (including contractors) across subsidiaries in South Africa, Zimbabwe and Cyprus, Tharisa declared turnover of R11bn with net profit after tax of R2.6bn for financial year 2022. In addition to keeping its workforce safe, it instils a culture of learning that drives engagement while continuously investing in the professional development of its employees.

Bell says Tharisa also strives to improve the lives of employees and their communities. “We have a direct and indirect impact on our employees and the greater community and we believe the role we play will ensure a better environment for all on a long-term sustainable basis.”

Graulich says this impact is achieved through structured developmental programmes that are made available to assist all employees, irrespective of their level of education.

“We have a highly educated workforce. All employees at Tharisa need to have a matric certificate with mathematics and science, otherwise they cannot work for us. We are one of the few companies that provides a private medical aid to all our employees and they all belong to a company-wide provident fund,” says Graulich.

EMPOWERMENT

Though it is registered in Cyprus, the board falls short on both SA’s racial and gender diversity goals with 80% of board members being white while only 20% are female. Tharisa has, however, fully committed to meeting or exceeding the targets set out in the Mining Charter for ownership, procurement and enterprise development in relation to the communities living around the mine. And through its transformation initiatives it contributes substantially to community upliftment.

Now wholly owned, Tharisa plc previously held 74% of Tharisa Minerals, acquired from its black women black economic empowerment (BEE) partner, Thari Resources. It took advantage of the court ruling in South Africa that clarified the “once empowered always empowered” position for mining companies and saw an opportunity to acquire 100% of Tharisa Minerals, while allowing the BEE shareholders to benefit from the wider and diversified asset portfolio of the Tharisa plc group. This subsidiary, says Graulich, is fully compliant with the requirements of the Mineral and Petroleum Resources Development Act.

The new deal converted the 6% share previously held by the Tharisa Trust in Tharisa Minerals to 1%, or 3-million shares, of Tharisa plc and will remain throughout Tharisa Mine’s lifespan. Thari Resources controls ~4% of the group and has not indicated any immediate plans to sell down.

COMMUNITY

Situated in the Bojanala District Municipality close to Marikana, communities surrounding Tharisa Minerals are marked by high unemployment and poverty levels. Tharisa’s social strategy is pegged on socioeconomic upliftment, with a view to empower these communities in their different capacities as shareholders, suppliers and employees. The communities neighbouring the mine’s operations are Mmaditlhokwa and Lapologang and about one-third of employees and mining contractors are from these communities.

Also, explains Bell, the host communities’ social and economic advancement is informed by the local municipality’s integrated development plan (IDP) and translated into action through local initiatives incorporated into each mine’s social and labour plan. The company’s SLP focuses on addressing job creation, poverty alleviation, basic infrastructure, education and development needs.

Skills development training was one of the key focus areas and received a considerable budget from the CSI spend. Thousands of youth and community members benefited from a variety of human development interventions provided by Tharisa Minerals. These included basic numeracy and literacy training; learnerships and internships; and portable skills initiatives such as driving licence programmes and career guidance exhibition programmes to expose learners to various careers available in the mining industry.

Tharisa’s preferential procurement approach also contributes to socioeconomic upliftment, in line with its operating licence. It creates efficiencies in the supply chain to ensure reliable access to critical supplies, in the process creating shared value in the communities.

“Our procurement department assists our SMME suppliers to grow their businesses and we try and create more businesses for services that are required on site and those SMMEs are paid within seven days to eliminate cash-flow problems. All our other suppliers are paid within 30 days, with SMMEs paid in less than seven days,” says Graulich.

COMMUNITY ACTIVISM

The various initiatives are aimed at building a bridge between the communities and the mine but there is growing mistrust between the parties involved. Residents surrounding the mine’s activities have raised a number of concerns, among them high levels of noise and dust pollution from the mine’s drilling activities. Graulich, however, says this is simply not true.

Aubrey Winfried, deputy chairperson of the Mine Host Communities in Crisis Network which addresses issues in mine-affected communities, alleges that Tharisa Minerals does not comply with its SLPs and has expanded its operations to encroach on the communities. “They have expanded operations and blast within a short distance from the community, sometimes 35 metres away from the shacks”.

Graulich says the relocation programme being undertaken is comprehensive and being conducted under the auspices of an expert consultancy in conjunction with legal advice and oversight from a leading law firm. On blasting, Tharisa has strict controls in place while DMRE directives determine the entire process, from how blasting takes place to informing communities, with which the company strictly complies.

Danjelle Midgley, attorney at the Centre for Environmental Rights, has also weighed in on the effects that blasting at Tharisa Mine has on the surrounding communities, saying the “ground and air vibration shockwaves” have significant impacts on neighbouring communities. Graulich points out that Midgley has never visited the mine nor afforded Tharisa the opportunity to respond to the centre’s allegations.

Responsible for the activist support and training programme at the centre, Midgley has called on the DMRE and its Mine Health and Safety Inspectorate to investigate the blasting activities and ensure compliance with conditions contained in blasting permits issued to mines, and to work harder to meet demands from mining-affected communities for transparency and consultation.

“It is time that government re-examines the formal regulation of mine blasting. At present mine blasting is not well regulated in South Africa. For instance, there are no legally binding mine blast standards which provide limits for the shockwaves generated by the explosions,” says Midgley.

Graulich disagrees. He says: “The allegations that certain people make are frustrating. I wouldn’t put too much credence to those reports because they can’t even get their facts rights. For example there’s an organisation that referred to pollution coming from our No 4 shaft. We run an open pit and we don’t have shafts.”

He says Tharisa is fully compliant with all directives by the DMRE and stopped blasting voluntarily to investigate various matters with the DMRE “and they gave us the all clear to continue blasting”.

He points out that Tharisa Minerals conducts a quarterly, half-year and an annual survey on noise and dust pollution through an independent third party that monitors systems around the broader area, not just on site. He says the data is independently audited and analysed and made available in the company’s annual report.

SANLAM FOCUS

“S” AT THE CENTRE OF ESG

Being the second largest continent by land and population, Africa is a treasure trove of untapped talent and potential. However, we are also the continent with the largest share of extreme poverty globally and home to some of the most vulnerable communities in the world. Systemic, structural, and historical issues have a major impact on economic activity, and we know that if your community is starved, ill and vulnerable, your long-term economic sustainability hangs in the balance.

For this reason, we at Sanlam believe the ‘S’ in ESG should take centre stage, particularly in the African context. Africa has a significantly younger population compared to other continents, and our population is our greatest resource. Therefore, as a responsible and caring corporate citizen with a Pan-African footprint across 33 countries and counting, Sanlam is committed to improving the areas in which we operate through ESG, which goes far beyond a tick-box exercise.

The Sanlam ESG Barometer tells us that, among the top 40 JSE-listed companies, risk and compliance management are the biggest reason for investing in ESG. At Sanlam, we’ve undergone a profound metamorphosis from being a compliance-based organisation to an impact-focused organisation - and the results have been clear. This includes the Sanlam Foundation, which plays a big role in compliance by making significant contributions to the B-BBEE scorecard of the Group. However, we have evolved to the point where we believe that achieving compliance and meaningful and measurable impact in communities can be done simultaneously. In fact, compliance and impact can and should be complementary and mutually reinforcing. Now, in our 12th year, the Sanlam Foundation remains the embodiment of the group’s ongoing dedication to addressing socio-economic and environmental challenges. We aim to bring hope, opportunity, and confidence to marginalised and vulnerable communities across Africa, and we are hoping to inspire other businesses to follow suit and integrate impactful ESG roadmaps as core to their overarching strategies.

Investing in the “S” in ESG speaks directly to our purpose to empower generations of Africans to live with confidence.

If we can help build more resilient and confident communities, we can drive financial inclusion and contribute to a more robust economy. Resilience has a ripple effect. If you catalyse greater financial resilience, you capacitate communities for greater climate change - and disaster resilience as well. However, as a population, we are not as “climate change ready” as we should be. This is primarily due to circumstances that have not equipped us to thrive in the face of climate change.

Therefore, empowering our communities, starting with a quality education from the Early Childhood Development phase right through to SMME support initiatives, is key. Making our population resilient and ‘climate change proof’ is of utmost importance if Africa is to survive the social and economic effects of climate change.

The move to being an impact-oriented organisation has taken deep, deliberate planning. The Sanlam Foundation’s vision is built on six pillars:

• Strategy to ensure we are a fit-for-purpose organisation as the Sanlam Foundation and a serious player in tackling some of our continent’s systemic problems;

• Governance to ensure proper procedure and ethics;

• Operations and Delivery to ensure efficient process flow and delivery of our programmes;

• Leverage and Integration to enhance Sanlam’s reputation and reaffirm the Group’s credibility as a responsible and caring corporate citizen;

• Amplification to drive the visibility of our work, and finally;

• Monitoring and Evaluation because we believe in the measurable impact that can be tracked via granular data.

These six pillars are our north star in delivering impactful, data-driven work.

Since our inception in 2011, the Sanlam Foundation has invested more than R652 million, uplifting and empowering communities across the country and continent through 26 different programmes during this time. Here is a sample of the projects we are committed to across the Foundation’s five programmatic pillars:

1. Socio-Economic Development

• Education

Rooted in the belief that every child has the right to the highest standard of education regardless of socio-economic background, the new Sanlam Education Programme kicked off in 2022. It uses a pipeline approach, from early childhood development to secondary school, to deliver interventions designed to address the most chronic challenges facing our education system by focusing on reading, home language development and science, technology, engineering and mathematics (STEM).

• Environment

Through our partnership with the WWF-SA, we fund projects aimed at improving water security by controlling alien vegetation, encouraging the sustainable use of groundwater, and facilitating water source partnerships for water-scarce areas.

• Youth Soccer

In partnership with The Motsepe Foundation and Ubuntu-Botho Community Development Trust, the Sanlam Foundation cofunds the Kay Motsepe Schools Cup. Sport offers a significant opportunity for leadership skills development and the potential to empower young people in other areas of life.

2. Consumer Financial Education

As Africa's largest non-banking financial services provider, we believe that financial education is the cornerstone of our promise to empower generations to be financially confident, secure, and prosperous.

Among our consumer financial education projects are - WageWise and Money fo’Sho. They aim to upskill individuals through facilitated training focusing on money management, savings, debt, credit and insurance. Together, these projects reached a total of 16 776 people in 2022, 97% of whom were black, 72% female and 57% were youth. Additionally, 45% of the participants were based in rural areas.

3.

Enterprise and Supplier Development

SMEs are the backbone of sustained economic growth and job creation. The Sanlam Foundation invests in initiatives that strengthen existing value chains while creating opportunities to establish new ecosystems in the communities within which Sanlam operates.

We do this through the Sanlam Group ESD Programme, implemented through various projects, including Project Accelerate, Project Elevate, and Project Migrate. Project Accelerate focuses on commodity-based supply chain-aligned SMEs, while Project Elevate and Project Migrate focus on transforming Sanlam’s distribution network.

During the Covid-19 pandemic in 2020 and 2021, an average increase of 37% in revenue has been achieved across all the businesses participating in Project Accelerate. For Project Elevate businesses, an average increase of 37.4% has been achieved, with beneficiaries able to access soft loan funding. For Project Migrate businesses, a 2% increase in revenue was noted.

4. Sanlam Pan Africa

The UN reports that Sub-Saharan Africa has the highest rate of education exclusion worldwide. To help play our part, Sanlam Foundation, Sanlam Uganda, and World Vision Uganda started the Pader District Education Strengthening Project. This initiative improves schools by creating comfortable and safe learning environments for 2883 scholars in this region of Uganda. Using the same tri-partite collaborative model, the Foundation kicked off the Sanlam Kenya Schools Project in 2022 in Mwingi and Kiawara, Kenya, with World Vision Kenya as our partner.

There is a drive to roll out several more projects across the continent in 2022, starting with an education project in Morocco.

5. United for Impact

To us, being purpose-driven means putting care into action. The Sanlam Foundation enables staff across the group to support causes they care about. Under our three staff volunteerism pillars – payroll giving, community-based volunteering, and skills-based volunteering – our team lend a hand to NGOs that are doing good work that resonates with them.

We are committed to using our influence to be the change this continent needs. For us, it’s about creating a legacy we can be proud of for generations to come.

CASE STUDY GROWTHPOINT PROPERTIES

GREEN BUILDINGS FORM JUST ONE PLANK OF OVERALL STRATEGY

Growthpoint Properties is an international property company invested in real estate in South Africa and across the African continent, the UK, Australia and Eastern Europe. It is also a co-owner of the V&A Waterfront in Cape Town. The company is the biggest primary JSE-listed real estate investment trust (REIT) and owns an extensive portfolio of green-certified buildings in Africa. Growthpoint has also been instrumental in developing the SA REIT ESG framework, through the SA REIT Association and Green Building Council South Africa, which is likely to be launched in the second quarter of this year.

CASE STUDY

1. Solar PV project: The company has13.9MW of solar projects in various phases of construction.

2. Early childhood development (ECD): Growthpoint has committed to funding several training programmes for ECD practitioners.

3. Enterprise development programme (Property Point): Growthpoint targets local economic development through Property Point, its enterprise development initiative.

SDGs TARGETED BY THE FUND

1. Solar PV projects:

• SDG 1 No poverty: PV installations will have an impact on the just transition

• SDG 2 Zero hunger: PV installations will have an impact on the just transition

• SDG 7 Affordable and clean energy: PV installations provide affordable and clean energy

• SDG 13 Climate action: PV installations reduce carbon emissions

2. Early childhood development (ECD):

• SDG 1: No poverty: Training for ECD practitioners ensures formal training for practitioners in rural areas

• SDG 2 Zero hunger: Training for ECD practitioners provides career opportunities for unemployed volunteers

• SDG 4 Quality education: Training for ECD practitioners is a critical component of the education value chain

3. Enterprise development programme (Property Point):

• SDG 8 Decent work and economic growth: Property Point implements Growthpoint’s local economic development policy

• SDG 9 Industry, innovation and infrastructure: Property Point has collaborated with the National Business Initiative to train people to repair commercial buildings

• SDG 11 Sustainable cities and communities: Capable businesses are identified in communities adjacent to Growthpoint’s operations

ESTIMATED MEASURABLE OUTCOMES OF THE PROJECTS

1. Solar PV: Growthpoint is expected to achieve its target of 27.4MWp of installed solar by its 30 June 2023 financial year end.

2. Early childhood development (ECD): Fourteen 14 ECD students whom Growthpoint sponsored in FY21 were set to graduate in 2022.

3. Enterprise development programme (Property Point): In FY22 the company’s investment in Property Point resulted in an additional 74 full-time jobs, while 848 jobs were sustained.

RISKS TO OUTCOMES FROM THE PROJECTS

1. Solar PV risks:

• Solar availability

• Pricing

• Regulatory uncertainty

• Skills availability

2. Early childhood development:

• Macroeconomic fundamentals

3. Enterprise development programme (Property Point):

• Macroeconomic fundamentals

OPPORTUNITIES FOR EXPOSURE

1. Solar PV: Green bonds issued by Growthpoint Properties helps the company to finance energy efficiency improvements in its commercial properties.

2. Early childhood development: Investors can gain exposure to this project by holding shares in the company.

3. Enterprise development programme (Property Point): Investors can gain exposure to this project by holding shares in the company

HEEDING DEMANDS OF TENANTS AND ATTRACTING INVESTMENT DRIVE GROWTHPOINT’S ESG STRATEGY

Growthpoint’s environmental social and governance (ESG) strategy embraces nine of the 17 United Nations Sustainable Development Goals (SDGs):

1. No poverty: Support of educational initiatives and organisations addressing hunger alleviation. Support for social concerns, risk assessment and impact on a Just Transition

2. Zero hunger: Support of organisations addressing hunger alleviation. Support for social concerns, risk assessment and impact on a Just Transition

4. Quality education: Support of educational initiatives

7. Affordable and clean energy: Investment in solar, focused utility management, supporting innovation and focusing on green financing

8. Decent work and economic growth: Support of Property Point, the enterprise development initiative created by Growthpoint Properties, as well as local economic development policy implementation

9. Industry, innovation and infrastructure: Innovation through the Greenovate Programme. Focusing on green financing and green building certifications. Social empowerment and support of Property Point

11. Sustainable cities and communities: Local economic development policy and local community engagement. A focus on energy, water and waste management and climate change risk mitigation. Focusing on green financing, green building certifications, social empowerment and support of Property Point

BY JANICE ROBERTS

13. Climate action: Carbon-neutral objectives, innovation through Greenovate Programme, focusing on green financing/green building certifications. Support of Property Point, climate change risk analysis and mitigation

17. Partnerships for the goals: Active role in industry bodies ensuring adherence to government requirements. Collaboration with strategic partnerships

Growthpoint’s board sees ESG as a risk and its objective of addressing ESG-related matters is viewed as a way of mitigating risk. Through its ESG strategy, Growthpoint aims to:

• Achieve carbon neutrality by 2050 and with all buildings directly controlled by the company to operate at net zero carbon by 2030

• Create a positive work experience for employees and drive sustainable impact for the communities in which it operates, including a focus on education initiatives

• Provide all stakeholders with the confidence that the company is well-governed

Growthpoint confirms that it has identified particular projects to invest in so as to improve its ESG performance, indicating that it has an active, additionality orientated ESG strategy. The company’s expectations for financial returns on its ESG projects are in line with its cost of capital.

The goal of its strategy is to “provide space to thrive in environmentally sustainable buildings, while improving the social and material wellbeing of individuals and communities.”. In developing the goal, it consulted investors, peers and employees.

In addition, Growthpoint says tenants are becoming particularly fussy when it comes to the environmental footprint of the space they rent. "THE MSCI Global Green Building Index shows that green buildings have lower vacancies and offer better returns,” says Joanne Solomon, CEO of the SA REIT Association. “The Green Building Council South Africa (GBCSA), established 15 years ago, has been instrumental in bridging the gap between owners and tenants through their advocacy, education and certification. While many stakeholders play a role, tenants are fundamental to property owners' ability to deliver on their ESG strategies."

Apart from heeding the needs of tenants, attracting investors is also a primary reason for developing an ESG strategy. “From an investor perspective, ESG has become increasingly important,” says Solomon. “Due to the numerous existing rating tools and frameworks, reporting in a comparable and consistent manner is essential for South African REITs. The association has been putting in tremendous effort into developing the SA REIT ESG Framework to guide REITs to further develop their broader ESG strategy. The framework will produce a holistic picture of REITs’ sustainability performance, allowing investors to make informed decisions."

Solomon adds that the SA REIT ESG framework may be released as soon as the second quarter of this year. Referencing the JSE Sustainability and Climate Disclosure Guidance, the SA REIT ESG Framework focuses on areas requiring additional real estate guidance. “As an example, land rights and green building certifications are matters that come to mind. And as REITS like Growthpoint and Redefine have advanced ESG strategies and deliverables, we felt it important to incorporate guidance to equip the smaller REITS on their ESG journey.”

ENVIRONMENTAL STRATEGY

Growthpoint is a founding member of the GBCSA which works with its membership community to create a sustainable built environment. The quality of the built environment has a significant impact on the planet and according to one estimate, is responsible for around 40% of greenhouse gas emissions.

“The commercial property sector forms part of the built environment and is therefore also a major contributor to natural resource and materials use, greenhouse gas emissions, landfill waste generation and unsustainable water use, while it can also affect tenants, building users and society in a myriad ways,” says Kevin James, CEO and founder of GCX, a company that offers sustainable business consulting and management services for corporate organisations. He says sustainability linked factors

such as energy, waste and the environment can present serious business continuity risks, as evident in South Africa currently. Fortunately, the sector has made significant advances in recent years and “impressive sustainability leaders are emerging among real estate companies in Africa and beyond”.

For the last decade, Growthpoint has played an active, critical role in the greening of buildings. For FY22, the company focused on its carbon-neutral pathway, renewable energy as well as reducing energy intensity. It acknowledges that its aim of being carbon neutral by 2050, which is in line with SDG 13, is not straightforward. In setting its targets the previous year, it had yet to determine the cost implications of this objective. It has subsequently realised that its FY26 targets could have a substantial cost implication for the investment in energy efficiency initiatives and renewable energy.

The company supports the intention of the carbon tax to discourage the use of fossil fuels. The review of the Carbon Tax Act will now take place in 2025 as opposed to 2023 and as Growthpoint engages in activities that make the requirements for carbon tax applicable, it has been trying to register with the appropriate SARS department to ensure that it complies with the requirements. While such registration is proving to be difficult, the company says it will persevere. It will benefit from its investment in renewable energy as this will reduce the potential effect of the tax. In FY22, one tonne of carbon cost the company an average of R2,241 (FY21: R1,934).

With load shedding worsening, energy security has become a significant risk faced by many businesses. Growthpoint sees investing in a large energy plant as having limited opportunities and has therefore explored other options. It has carried out a feasibility study on wheeling and power purchase agreements at utility scale. While it has considered entering into power purchase agreements to supply a portion of its portfolio, it has found that there are limitations on which buildings it can procure energy for. Battery storage backup, however, is an option that the company continues to investigate.

SOLAR

The company’s challenge to investing in solar power is to find reliable, socially conscious service providers. What makes financial planning complex is that solar components are procured internationally and therefore are affected by exchange rate movements. The annual cost for maintenance of Growthpoint’s existing solar plants is around R1.42m. In the Sanlam ESG Barometer survey, Growthpoint lists one of its biggest challenges

in the design and implementation of its ESG strategy as solar availability and pricing. (The other major risks are regulatory uncertainty and skills availability.)

With 13.9MW of solar projects in various phases of construction, Growthpoint is expected to achieve its target of 27.4MW of installed solar by its 30 June 2023 financial year end. “Our investment in solar power reduces our reliance on the national grid. There is a great need for this right now and ramping up our investment in solar makes perfect sense for our ESG goals,” says Growthpoint Properties SA CEO Estienne de Klerk. Of its 24 solar installations, half are at office and mixed-use properties, nine at shopping centres and three at industrial buildings. However, retail installations represent the highest capacity by far, accounting for a combined 9.4MW.

Growthpoint’s largest solar installation undertaken this year is the 2.5MW plant at Paarl Mall in the Western Cape, which is paired with a 4.5MWh battery system to form a hybrid renewable energy and storage system. This is the first battery system of its size to be used at a shopping centre in South Africa.

“Battery technology has come a long way in recent years. Batteries that were previously prohibitively expensive have become increasingly affordable, especially considering rapidly rising electricity prices and our imperative to help prevent costly business disruptions for our clients caused by load-shedding,” says Grahame Cruickshanks, Growthpoint head of sustainability and utilities.

While the retail sector is best suited to this type of grid-tied integrated solar and battery system, Growthpoint sees potential value in using it at suitable properties across all its assets. “We want to push the boundaries on the range of energy solutions available for our properties and our clients, expand our mix of energy sources and storage and boost the supply of renewables to our assets as part of our proactive energy management,” he adds.

As a direct result of Growthpoint’s national energy management programme, at least 1,053 shops, 833 office tenants and 38 industrial tenants are can continue doing business during load-shedding. In addition, all the nearly 1,000 tenants of the V&A Waterfront, which Growthpoint co-owns, have full access to backup power from the precinct’s 48 generators. “In this way, Growthpoint is helping much of SA Inc avoid business disruption during power outages and, in the process, safeguarding businesses, jobs and livelihoods,” De Klerk says. However, these obviously consume diesel.

Growthpoint provides generator backup power to just over 70% of its office portfolio by gross lettable area, offering standby power for

a huge 1.2-million square metres of offices with 223 generators, where state-of-the-art technology has been implemented to monitor diesel levels. It also has a supply chain of in-house capabilities and external providers to keep them fuelled and operating.

In the remaining 30% of office space, most tenants have their own power solutions, or buildings are in areas that do not experience heavy load shedding, for instance, parts of Pretoria and Cape Town and near national key points. There are some office buildings without generators, and Growthpoint is reassessing these requirements. At industrial properties, tenants mostly use their own generators, however, Growthpoint provides backup power across three industrial parks in its portfolio, accommodating multiple tenants in 84,153m 2

DIESEL PARADOX

However, burning diesel at unprecedented rates weighs on Growthpoint’s strategy to be carbon neutral by 2050 and counteracts its environmental goals. Added to this is the significant capital outlay and a substantial monthly diesel bill.

Growthpoint spent just over R47m on diesel to power all its buildings in the six months from July to December 2022. The monthly bill topped R10m in both October and December and was just short of this figure in November. The V&A Waterfront independently spent R14.8m on diesel over the same period. “The costs are substantial, but the burden is mostly shared, with tenants paying for their own additional diesel consumption costs,” De Klerk says.

Hot on the heels of South Africa’s electricity crisis are water and waste emergencies. Water is scarce in some areas of the country while its landfill sites are filling up. Growthpoint is prioritising the monitoring of water usage of its buildings while also ensuring that all buildings with contracted waste service providers in FY22 will achieve zero organic waste to landfill by FY26. When asked in the Sanlam ESG Barometer Survey about the areas in which it can improve its ESG performance, both water and waste were on its list, as well as biodiversity.

Biodiversity is important to the company. Establishing how Growthpoint can make a positive impact on the natural environment is being considered, with its approach likely to be set out soon. It adheres to the South African National Building Standards relating to environmental issues and as its operations are mostly in urban areas, they are unlikely to affect any species on the International Union for Conservation of Nature Red List of Threatened Species.

While Growthpoint’s property development could affect biodiversity, it believes that this impact is relatively small. It has nevertheless stepped up its focus on making sure that all the company’s processes sustain biodiversity. In this regard an environmental and social review has been undertaken to mitigate risk.

As increased funding for green buildings is vital in South Africa, and because green funding remains limited in the country, Growthpoint welcomed the IFC’s announcement in December 2022 of its R1bn investment in a green bond issued under Growthpoint’s existing Domestic Medium-Term Note (DMTN) programme, which is registered at the Johannesburg Stock Exchange. "Green bonds are playing a very important role in driving ESG initiatives at the moment, as they provide companies with ring-fenced capital that can only be spent on sustainability projects,” GCX’s James says.

The green bond also gives ESG investors interested in additionality a way to directly finance Growthpoint’s efforts to improve its ESG performance. It is a good example of how a focused additionality strategy can be put into practice.

SOCIAL STRATEGY

When it comes to the S in ESG, South Africa has probably led the world on some fronts, and its situation is unique in relation to many Reits globally. “South Africa's workforce diversity continues to progress well, with the pace of adoption aided by the B-BBEE legislation and the imminent Employment Equity Amendment Bill,” says Solomon. “In anticipation of the President signing the Employment Equity Amendment Bill into law, we are determining our current benchmark, identifying potential obstacles and strategising avenues to accelerate meeting the transformation objectives. From a real estate perspective, responsible citizenship and community engagement have always been top of mind, especially considering the long-term nature of our assets and the location."

Growthpoint is tracking its progress against its transformation targets on a quarterly basis and has received a level 1 B-BBEE rating. These targets enable it to show diversity and integration within the workforce. A challenge for transformation is the current shortage of skills at all occupational levels as in the real estate sector, with many companies competing for the same skills.

One of the company’s corporate social responsibility (CSR) initiatives involves funding several successful early childhood development (ECD) training programmes for ECD practitioners. An ECD practitioner at Ntataise Lowveld Trust said that while she had worked in ECD on a voluntary basis, the level 4 training provided by Growthpoint had enabled her to assist children with special needs and she now receives a salary that will help her further her studies.

Through its enterprise development programme known as Property Point, Growthpoint targets local economic development. In FY22 the company’s investment in Property Point resulted in an additional 74 full-time jobs, while 848 jobs were sustained. “Property Point is even used by other property companies, indicating that there will be more collaboration between real estate companies in the future,” James says.

Property Point works closely with several REITs to unlock opportunities for SMEs operating in South Africa's property sector. “Providing support to SMEs is an investment in our communities and an investment in our collective future,” says Solomon. “Their programme is focused on SMEs to bring the required skills to the sector. Their track record of the opportunities created is truly excellent. It illustrates their diverse programmes' impact in contributing to long-term ESG outcomes. We're working on several initiatives with Property Point, one of which involves benchmarking our current employment equity landscape and exploring potential solutions to address inequality within the sector."

One of Property Point’s successes is Zamafuna Trading and Projects at Festival Mall in Kempton Park on the East Rand. Starting with developmental interventions to ensure compliance and growth of the business, Property Point then undertook basic financial management training, a compliance audit, and health and safety training for Zamafuna as part of its growth journey. The company is registered as a Growthpoint vendor and provides minor maintenance works to Festival Mall. Zecks Zamafuna of Zamafuna Trading and Projects proved to be a good ambassador for Growthpoint Properties in his local community of Thembisa during the July 2021 unrest when he mobilised community members to defend both the Festival and Lakeside malls.

The important part that REITs play in South Africa’s economy came to the fore during the Covid-19 pandemic. Total relief made up of rental discounts and deferrals of R3.5bn was provided by local REITs, including Growthpoint, to support tenants. Unrecoverable discounts to curb business failures made up 80% of the relief while deferrals on rental payments made up 20%.

CORPORATE GOVERNANCE STRATEGY

Growthpoint’s board is guided by the board charter, which sets out its responsibilities as:

• Governing, directing and monitoring the performance of the business as a going concern and presiding over material business decisions

• Approving the company’s strategic plans and objectives

• Managing risks through the risk management and audit committees

• Providing direction to and evaluating the performance of management

The board either itself or through the Governance and Nomination Committee periodically reviews its composition relative to the knowledge and experience needed to provide strategic direction as well as equitable representation in terms of gender and race and in terms of its composition. Non-executive directors are independent of management.

Growthpoint was one of the first organisations to take part in the Gordon Institute of Business Science’s Ethics Barometer, a national initiative in 2019 in partnership with Business Leadership South Africa. The company has a whistleblowing policy that enables concerns to be raised about corruption, theft or racism and all whistle blowers remain anonymous.

Green buildings have lower vacancies and offer better returnsˮ

Joanne Solomon, SA REIT Association

CASE STUDY BARLOWORLD

THREE PILLARS TO ESG STRATEGY: SOLAR, WATER RECYCLING AND SOCIAL ENTREPRENEURSHIP

CASE STUDY

1. Solar PV project: To reduce its energy and emissions footprint, various operations have switched to renewable solar PV energy. For the 2022 financial period, around 1,728MWh of renewable energy was generated and consumed within the group. To date a total of 1.7MW of solar energy capacity has been installed in the equipment business. The intention is to roll out a further 1.4MW capacity over the next four years. Similar projects are being considered within the consumer industries segment (which produces maize products) although these are still in the feasibility stage.

2. Water recycling capacity project: The group recycled approximately 1.63-million litres of water that would have otherwise been drawn from municipal supplies. Operations within the group regularly assess the feasibility for recycling of water to reduce strain on municipal water supplies. A water effluent treatment plant is under consideration to reduce the volume of effluent to the municipal reticulation and allow for reuse of water back into the manufacturing process, thus reducing demand for municipal freshwater and reducing associated costs.

3. Social entrepreneurship programme (Mbewu) and supplier development programme (Siyakhula): Mbewu provides seed funding, access to finance and incubation to social enterprises. Siyakhula is the enterprise and supplier development vehicle for Barloworld. Both initiatives also provide access to market for beneficiaries.

4. Refresh of employee wellness strategy: Cognisant that the wellness of its people is key to organisational wellness, Barloworld has refocused to better understand the various issues affecting employees mental, emotional, financial, physical and social wellness. The outcome is an evolving wellness strategy for its people.

5. Training and development project: Structured ESG training and development programme for senior and executive management is being planned. It includes a collaboration with a recognised South African business school to co-develop a programme with Barloworld, which is in the content material development stage.

SDGs TARGETED BY THE FUND

1. Solar PV:

• SDG 7 (Affordable and clean energy): Solar PV reduces consumption from grid electricity which is predominantly fossil-fuel based.

• SDG 12 (Responsible consumption and production): Efficiency targets and solar PV installations result in reduced energy consumption and further switching to renewable energy sources.

Equipment component rebuild and remanufacture centres extend the useful life of the company’s products and reduce waste to landfill.

• SDG 13 (Climate action): Switching from fossil fuel energy sources to renewables results in a reduction of greenhouse gases, which in turn helps alleviate global warming and climate change.

2. Water recycling capacity project:

• SDG 6 (Clean water and sanitation): Recycling waste water allows for adequate filtration ahead of disposal into the municipal reticulation and for re-use of water into the relevant processes, reducing the amount of freshwater drawn from municipal supplies.

3. Social entrepreneurship programme (Mbewu) and supplier development programme (Siyakhula):

• SDG 1 (No poverty): Mbewu supports entrepreneurs to be sustainable.

• SDG 2 (Zero hunger): Mbewu supports entrepreneurs in the agricultural space while the Barloworld Trust focuses on, among other issues, food security.

• SDG 4 (Quality education): The Barloworld Trust focuses on, among other issues, education.

• SDG 8 (Decent work and economic growth): Mbewu’s incubation includes training and development.

• SDG 10 (Reduced inequalities): These programmes include various initiatives to support entrepreneurs to grow and scale their businesses and to grow the group’s supplier base.

4. Refresh of employee wellness strategy:

• SDG 3 (Health and wellbeing). The strategy promotes healthy lives, as well as the physical, mental and financial wellbeing of employees. Product safety standards are applied to ensure the health and safety of Barloworld’s customers.

5. Training and development project:

• SDGs 4 (quality education) and SDG16 (promoting peaceful and inclusive societies). The training provided aims to improve ESG awareness so that this knowledge can be incorporated into business decision-making. It improves management appreciation of ESG and improves the company’s capacity to contribute to a more just, inclusive society.

ESTIMATED MEASURABLE OUTCOMES OF THE PROJECT

1. Solar PV: For the 2022 financial year, Barloworld avoided emissions estimated at 1,831 tCO2. The company plans to commission an additional 300KW during its 2023 financial year which will result in increased renewable energy consumption compared to 2022.

2. Water recycling capacity project: The business recycled and reused 1.63-million litres of water in its 2022 financial year.

3. Social entrepreneurship programme (Mbewu), supplier development programme (Siyakhula) and Barloworld Trust: Siyakhula disbursed more than R25m in 2022 to 35 beneficiaries, supporting 900 jobs. An additional 28 SMMEs had loans brought forward from previous years. In total, Siyakhula has funded 87 beneficiaries which support nearly 2,500 jobs.

4. Refresh of employee wellness strategy: The success of this strategy is measured in terms of utilisation of the wellness programme and the support centre. Key performance indicators for employee wellness are tracked and monitored internally.

5. Training and development project: Training and development follows formal and ad-hoc training within the group and includes internships, apprenticeships, inductions, functional training programmes.

RISKS TO OUTCOMES FROM THE PROJECT

1. Solar PV risks:

• Theft of solar panels: Likelihood – medium | Severity – medium

• Damage to solar panels or infrastructure rendering the installation ineffective or reducing yields: Likelihood – low | Severity – medium

• Unavailability of solar panels and related infrastructure: Likelihood – low | Severity – low

• Economic downturn results in reprioritisation of earmarked funding:

Likelihood – low | Severity – low

2. Water recycling capacity project:

• Facility failure resulting in unfiltered effluent discharge: Likelihood – low | Severity – medium

• Power interruptions resulting in facility disruption: Likelihood – medium | Severity – medium

• Economic downturn results in reprioritisation of earmarked funding for future projects: Likelihood – low | Severity – low

3. Social entrepreneurship programme (Mbewu), supplier development programme (Siyakhula) and Barloworld Trust:

• Consistent and effective processes for beneficiary selection and allocation of funds: Likelihood – medium | Severity – medium

• Continued dependence by beneficiaries on Mbewu, Siyakhula and Barloworld Trust for funding, access to market and sustained growth: Likelihood – medium | Severity – low

4. Refresh of employee wellness strategy:

• Wellness strategy will not meet the set objectives: Likelihood – low | Severity – medium

• Ineffective execution of wellness strategy: Likelihood – medium | Severity – medium

5. Training and development project:

• Lack of buy-in from attendees – in other words, ESG is not a consideration in business decision making: Likelihood – low | Severity – medium

OPPORTUNITIES FOR EXPOSURE

1. Solar PV: Solar PV consumption targets are included in sustainability linked funding, including financial instruments.

2. Water recycling capacity project: Barloworld’s water-related initiatives are not currently linked to any financial instruments. Funding instruments will be considered where relevant and appropriate in the future.

3. Social entrepreneurship programme (Mbewu), supplier development programme (Siyakhula) and Barloworld Trust: Barloworld has funding agreements in place with financial institutions. Future agreements and facilities are under consideration.

4. Refresh of employee wellness strategy: Initiatives in support of the strategy are funded through operational budgets. The only way investors can hold exposure to this project is by holding shares in the company.

5. Training and development project: Training and development is included in operational budgets. The only way investors can hold exposure to this initiative is by holding shares in the company.

BY LYNETTE

ONE OF JSE’S OLDEST COMPANIES SETS EXAMPLE ON HOW TO EVOLVE WHEN CIRCUMSTANCES DEMAND IT

An ESG approach has to have positive environmental, social and governance outcomes, but it also has to make business and commercial sense, says Barloworld, and that philosophy drives its holistic, integrated strategy. While the group has been driving the ESG agenda in earnest since 2008, its operations are at varying levels of maturity on the ESG journey.

Introduction

Barloworld is an industrial processing, distribution and services company which operates in about 15 countries. The business has two primary areas of focus. The first is industrial equipment & services, which enable the operation and maintenance of a variety of mining, construction and power solutions. The second is consumer industries which provides food and ingredient solutions. The 121-year-old company is one of the longest listed stocks on the Johannesburg Stock Exchange.

The company says the main reasons for its ESG strategy is to make a difference through having a positive impact in society aligned with its broader value creation philosophy. Its purpose statement, “To inspire a world of difference, enabling growing and progress in society,” guides the strategic direction of the group and explicitly aspires to make a positive contribution to and impact on the communities in which it operates. In terms of boosting the company’s value, it refers to the International Integrated Reporting Commission (IIRC)’s framework in which it has developed “six capitals of integrated reporting”: financial capital, manufactured capital, intellectual capital, human capital, social & relationship capital and natural capital. The company says it recognises the interdependencies and inter-relatedness between the six capitals available to it and therefore adopts a shared value model for value creation.

Its corporate strategy is to become a purpose-led, highperforming organisation driven by responsible leadership through the principles of value-based ethical conduct; responsiveness to stakeholder issues and needs; and creating, growing and sustaining shared value and prosperity.

Occupational health and safety; climate change and its potential negative effects on company resources; and emerging regulations

are examples of material ESG matters within the group, all of which receive attention at executive and board levels.

When it comes to risks, the group is cognisant that what constitutes its material ESG issues today won’t necessarily be the same in the future. At the same time, different regions in which it operates face different challenges and risks. Climate change, for example, has a higher relative impact on less developed communities.

While the group has been driving the ESG agenda in earnest since 2008, its operations are at varying levels of maturity on the ESG journey. Its industrial equipment & services division has been on the ESG journey since inception in the group, and is consequently more mature, while more recent acquisitions, such as Ingrain, a producer of starch, glucose and related products, are still building ESG strategies.

Gale Lemmert, group executive responsible for risk, ethics and governance at Barloworld, says that although the manufacturing nature of the Ingrain business has a relatively higher environmental footprint than the traditional Barloworld business, it does present greater opportunities for responsible business practices, including reducing its environmental footprint, responsible sourcing, remuneration practices and safety of its people.

In addition to opportunities for improving its ESG performance in the consumer industries division through improvements in production and energy sources, there are also opportunities to improve the group’s performance in other areas. In the industrial equipment & services segment, for example, there are opportunities to introduce high efficiency, low carbon and renewable energy products. Improvements can also be made in

sourcing more responsibly by enhancing ESG in supplier due diligence and risk assessment processes and practices.

The group has incorporated ESG into its overall business strategy. Budgets for initiatives in support of the ESG aspirations are incorporated into the respective operational and capital budgets for each division and segment.

Notable projects

Barloworld’s most notable ESG projects in the past three years include a solar PV project aimed at reducing its energy and emissions footprint; a water recycling capacity project which recycled around 1.63-million litres of water that would otherwise have been drawn from municipal supplies; and a social entrepreneurship programme that supports entrepreneurs and develops suppliers.

Specific ESG initiatives include efficiency targets to reduce nonrenewable energy, emissions (scope 1 and 2), water consumption, as well as targets for safety, diversity and inclusion, assurance and governance matters. ESG targets are included in the scorecards of group and divisional chief executives. Progress against these set targets are tracked monthly to ensure accountability and to ensure that the intended impacts are being achieved.

Energy, emissions and water-related targets are improvementbased using the 2021 financial year as the baseline year against which targets have been set and performance tracked. At the end of each target period, the actual performance is assessed against the baseline year.

The targets it sets frequently include improvement against set baselines. Safety related targets, on the other hand, consider improvement against the baseline year. The measurement considers the incremental improvement in light of additional initiatives, management focus and investments made against defined key performance indicators. The performance of past projects is tracked and used to inform new investments.

In order to establish the causal relationship between a project and its ESG impacts, the company also measures and compares relevant ESG indicators both before and after a project and conducts qualitative interviews with project stakeholders to understand behavioural changes.

ESG frameworks

Barloworld’s ESG approach is influenced by a number of ESG frameworks. It has aligned its reporting and disclosures to frameworks including the Global Reporting Initiative (GRI), recommendations of

the Task Force on Climate-related Financial Disclosures (TCFD), the International Integrated Reporting Framework, the UN’s SDGs, the B-BBEE Codes and King IV, among others.

“The challenge with so many different available frameworks and assessments – all with different nuances – is to choose the ones that are most appropriate for your particular business,” says Lemmert. “We’ve invested time in understanding which frameworks and assessments respond most appropriately to the needs of our stakeholders. We’re also pedantic about ensuring the integrity of the data included in these reports because investors are using this information to inform investment decisions.”

The financial return

Barloworld’s approach to the financial return it expects from its ESG strategy is to consider the commercial rationale, including risk management and leveraging opportunities. Solar PV projects, for example, ensure the company becomes more energy efficient and also improve resilience to energy price increases and supply disruptions.

Capital and operational expenditure decisions are starting to incorporate the full life cycle costs of assets, including the cost of use such as carbon taxes as these become applicable. Expenditure models are expanded to full cost models to predict the costs and/or savings over the life of the asset.

Social aspects of Barloworld’s ESG strategy, including employee wellbeing and safety, are not measured in financial terms. However, as Lemmert points out, these initiatives do intuitively contribute to higher productivity, leading to reduced costs or improved margins.

Neither is the governance aspect measured in financial terms, although the company believes that driving an ethical culture and business practices results in increased levels of compliance and reduced instances of fraud and corruption, which ultimately influences financial performance and investor confidence.

“When it comes to ESG not everything can be quantified in financial terms,” points out Kavendrin Naidoo, sustainability manager at Barloworld. “This is why it’s important that you are able to draw linkages and understand trade-offs.”

Growing stakeholder expectations the biggest challenge

The company says the biggest challenges around designing and implementing its ESG approach relate to integrating ESG into its strategic and business process including frameworks, reporting, assurances and compliance. It also to tie in with increasing and

evolving stakeholder expectations. Finally, data collation and integrity of ESG reporting remain a challenge, as is the case across most companies.

The company has entrenched engagement processes across the group where feedback relating to its ESG activities is canvassed. At a group level this takes the form of governance roadshows, institutional investors shareholder engagement, the annual general meeting as well as continuous monitoring of and participation in ESG-related frameworks, assessments and ratings. At a divisional level it takes various forms, including continuous customer engagement, customer satisfaction indices and an employee perception monitor survey.

An additionality approach has helped the group to better meet expectations, says Lemmert. “Increased capital expenditure provides positive outcomes for water, energy and renewable energy investments. As far as employees are concerned, we have introduced a living wage and addressed remuneration, pay parity and employee benefits.”

Governance

When it comes to governance, the group is very aware that Barloworld is a microcosm of the environment in which it operates. The challenge is to reinforce a values-driven, ethical culture that is expected of every one of Barloworld’s employees irrespective of the operating context, which may in certain instances be characterised by corruption and failing state organs.

Lemmert says that a critical part of her role is to grow conscious leaders and a more conscious organisation. “ESG is ultimately about good business practice. My goal is to raise the consciousness of leadership to ensure that there is not a singleminded focus on shareholders only.”

Conclusion

A number of operational performance metrics have improved since the company implemented an ESG approach, Barloworld says, including safety statistics (work-related fatalities and lost-time

injuries), diversity and inclusion, and cost savings. The company took top honours at the 2022 SARA Remuneration Report of the Year Awards and was the Gender Mainstreaming Awards champion in 2022. It won the ESG Bond Deal of the Year for its R1.143bn senior unsecured gender-linked bond issued in August 2022.

Has the implementation of an ESG approach been worth the effort? Lemmert insists that as a values-based company which upholds ethical and responsible business practices, an ESG lens is necessary to address stakeholder issues. At the same time, as the inter-dependence of the “six capitals of integrated reporting” grows stronger and improves the commercial performance of Barloworld, it makes business sense to proactively address these issues. “We appreciate that the effective management of ESG aspects does contribute positively to our operational performance and reputation and we’re refining how to measure these impacts within the business.”

She’s the first to admit, however, that the group still has much to achieve in an increasingly evolving ESG landscape. Understanding its business model and its impacts is key to moving the business forward on its ESG journey. “There is still much to be done and I don’t know that we’ll ever arrive at an end point,” says Lemmert. “ESG is a journey which requires taking one step at a time and continually focusing on areas for improvement. A diversified organisation like Barloworld can’t address all ESG aspects at once. Realistically, we’re able to achieve different things in different areas. Ultimately, it’s about trying to find a balance between the material issues and the needs of our stakeholders.”

Although the links between the environmental, social and governance aspects of ESG are still in their infancy – particularly in South Africa – Lemmert believes that ESG has moved further away from its original “environment only” perspective and is increasingly focusing on ESG holistically as a driver of more sustainable businesses. “An ESG approach has to have positive environmental, social and governance outcomes, but it also has to make business and commercial sense. However, as stakeholders become increasingly vocal, it’s also rapidly becoming a licence to operate.”

There is still much to be done and I don’t know that we’ll ever arrive at an end point. ESG is a journey which requires taking one step at a time and continually focusing on areas for improvementˮ

Gale Lemmert, Barloworld

SANLAM FOCUS

SANLAM INVESTMENTS: FUNDS THAT MAKE AN IMPACT

“

At Sanlam Investments, we estimate that we will help support more than 38 000 lives, directly and indirectly, over the life of the investments we have made to date through our impact funds, ˮ says Mervyn Shanmugam.

Over the past few years, Sanlam Investments has launched several funds to impact the environment and society positively. Here is a snapshot of the funds and their successes:

SANLAM INVESTORS’ LEGACY IMPACT RANGE

The Sanlam Investors’ Legacy Range was launched to create and preserve jobs in response to the sharp economic downturn and significant job losses experienced due to the Covid-19 pandemic. The fund range looked to find investable opportunities that enable South Africa to grow more equitably and inclusively while aligning with the National Development Plan 2030 of job creation. As of 2022, the business had approved 19 transactions totalling R1.5 billion (15 paid away, totalling R1.38 billion) towards businesses that will preserve and create jobs.

SANLAM PRIVATE EQUITY MID-MARKET FUND

The Fund provides equity-type finance to medium-sized South African companies to support business growth and ensure jobs are retained in the short-term and increased in the longer-term.

Examples of impact:

• Cavalier Group

Sanlam Investments’ Private Equity capability is committed to supporting Cavalier – an AAA-grade red meat business – in its aim to add 200 jobs to its labour force over the life of the investment and to contribute to the upliftment of the people situated in the nearby communities. Cavalier is the largest employer in the Cullinan region, with 60% of its workforce being women, and Sanlam Investments has helped to create 100 new jobs already

in the first two years of investment. The business has also been working to roll out several projects for the benefit of the community and its employees, most of whom are local, previously disadvantaged individuals.

• Absolute Pets

Since the Fund’s investment in Absolute Pets in April 2021, the business opened 45 new stores (well above the 15-store annual target). Absolute Pets has created over 150 new jobs throughout the investment to date. The profile of Absolute Pets’ employees is worth noting:

• 92% of previously disadvantaged

• 69% of female

• 66% under 35 years old

SANLAM INVESTORS’ LEGACY SME DEBT FUND

The Sanlam Investors’ Legacy SME Debt Fund provides debt capital to good-quality SMEs with the intention of preserving and creating jobs.

Examples of the fund’s impact:

The Fund supported black-owned specialist retailer Oilstar. The funding provided job security to around 630 employees, mainly from low-income households. Oilstar now expects to open additional sites, which will lead to the creation of further onsite jobs and indirect employment through its range of service providers.

The Fund provided finance to Mettle, an invoice discount business which has been in operation for over 15 years and will create jobs by extending funding to SMMEs.

RESILIENT INVESTMENT FUND

Sanlam Investment’s private debt portfolio focuses on lending to established SMEs in South Africa that require capital for growth but cannot access suitable finance from traditional sources. Various Funds in the business’s private debt portfolio provide capital to entrepreneurs and commercially viable businesses that are well-positioned to address some of South Africa’s most pressing challenges.

Beneficiaries of the portfolio’s lending include:

• Oasis Water: a leading clean water supplier outside the public sector. The funding will support Oasis’s strategy, which includes new stores in the township and rural areas.

• Capital Harvest: a specialist non-banking financial institution providing financing to farmers and the broader agricultural sector.

• Energy Partners: a utilities provider of unique energy-saving solutions which enables its clients to free up capital to grow their businesses.

SUSTAINABLE INFRASTRUCTURE FUND

The Sustainable Infrastructure Fund forms part of Sanlam Investments’ mission to make a real, sustainable difference to the community, economy and planet. Investing in infrastructure also provides investors with compelling financial outcomes from opportunities not readily available in the market.

The Fund finances projects and companies across the broad spectrum of essential infrastructure sectors, prioritising energy (wind, solar, hydro, biomass and natural gas), water, ICT and transport. The Fund has an impact framework focused on economic growth and job creation, market development and environmental sustainability.

The Fund is financing the development of Redstone, a 100MW molten salt Concentrated Solar Plant tower (“CSP”) in the Northern Cape. Due to the thermal storage, this project is the first renewable energy project that can provide baseload energy into the grid.

We are committed to helping to secure a sustainable future for South Africans and those beyond our borders.

We believe that safeguarding economic, environmental, and social assets is the foundation for a healthy economy that generates sustained returns for the future.ˮ

CLIMATE FUND MANAGERS

Climate Fund Managers, a joint venture with the Dutch Development Bank, FMO, uses blended finance methods to combat the climate crisis by constructing long-term sustainable infrastructure in global developing markets. Core to its responsible investment mandate is delivering a net positive impact for every dollar committed.

CLIMATE INVESTOR ONE’S NOTABLE INVESTMENTS

CLIMATE INVESTOR ONE

Climate Investor One, Climate Fund Managers’ first facility, is focused on renewable energy infrastructure.

CLIMATE INVESTOR TWO

Climate Investor Two is a financing facility mandated to invest in water, sanitation and ocean infrastructure projects. Several new project approvals and development agreements have been signed by Climate Investor Two across the water, oceans, and sanitation sectors.

CLIMATE INVESTOR TWO’S IMPACT

Kelp Blue: This kelp farm project should produce around 241 000 tons of kelp annually across 820 hectares.

Solar Water Solutions: At full scale, this project will treat 1667m3 of water each day, benefitting 400 000 people.

Azur: These facilities will treat 570 tons of municipal solid waste daily, generating 63.36 GWH per year.

Spectainer: This will encourage wide-scale industry adoption of collapsible shipping containers to reduce the carbon intensity of global cargo transport.

TRA VINH

A near-shore wind project in Vietnam with the capacity to produce 48MW.

AFRICA HYDRO HOLDCO LIMITED

A run-off river hydro project in Uganda, with the capacity to produce 113MW.

AMPYR ENERGY INDIA PTE LIMITED Wind projects in India with the capacity to produce 138MW.

A ROADMAP FOR THE FUTURE

A clear roadmap is followed at Sanlam Investments, with distinct goals the business uses to measure itself against. The business will steadily advance these goals, improving ESG incorporation and fostering partnerships with like-minded organisations such as Robeco and FMO. These partnerships boost Sanlam Investments' efforts to meet greater sustainability objectives. Together with the partners, the focus is on where the greatest impact can be made.

The mission is to build a better world for the next generation to inherit. This responsibility drives everything Sanlam Investments does.

Identifying outcomes and targets

Mapping excisting investments to the SDGs and other potential regiments.

Setting policies and positioning statements

Setting relevant ESG themed and asset class policies, and position statements.

Ensuring consistency throughout investment disciplines

Development of overnight mechanisims to ensure that risk management of sustainability matters is applied to all investment.

Our aggregated contribution to the colective reporting framework, considering the UNSDG*

Monitoting, tracking and measuring the extent of our aggregated contribution over time to the *United Nations Sustainable Development Goals, local NDP or other goal frameworks.

BY JANA

IS CORPORATE PRIORITISATION OF THE SDGs IN SYNC WITH DOMESTIC MARKET NEEDS?

The field of practice related to environmental, social and governance (ESG) aspects is peppered with acronyms – from the headline “ESG” acronym to the various reporting standards, frameworks and guidelines.

We have the International Sustainability Standards Board (ISSB), Global Reporting Initiative (GRI) and Task Force on ClimateRelated Financial Disclosures (TCFD), to name but a few. The most well-known framework in the ESG and indeed broader sustainability field, however, is the United Nations Sustainable Development Goals (SDGs).

The 17 SDGs underpin the 2030 Agenda for Sustainable Development, a plan adopted by all UN member states in 2015.

The agenda is intended to act as a guide that provides strategic direction to achieve peace and prosperity for people and the planet, now and into the future 1

The goals encompass issues spanning from poverty alleviation to gender inclusion from a social perspective, to climate, biodiversity and a circular economy from the environmental perspective, and finally to peace, justice and strong institutions from a governance perspective. Each SDG has a subset of targets (169 targets in total) and indicators, as well as data collected periodically to track progress for each of the indicators. The table below provides an overview of the 17 SDGs and a summary of the highlights for each of these indicators as captured in The Sustainable Development Goals Report 20222

The Covid-19 pandemic followed by the war in Ukraine and global rise in inflationary pressures have derailed and erased four years of progress for this SDG.

End hunger, achieve food security and improved nutrition and promote sustainable agriculture

Ensure healthy lives and promote wellbeing for all at all ages

Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

Achieve gender equality and empower all women and girls

Factors such as conflict, Covid-19, climate change and growing inequalities is undermining food security. This is likely to be compounded by rapidly rising food prices. Approximately 1 in 10 people globally are suffering from hunger.

Decreases in global life expectancy and immunisation coverage in conjunction with the prevalence of anxiety and depression and rise in deaths from tuberculosis and malaria demonstrate how Covid has disrupted decades of progress in global health.

The pandemic worsened entrenched inequities in education –147-million children missed over 50% of in-person instructions in 2021-2022 and 24-million learners (pre-primary to university level) may never return to school.

While women represented 39% of total employment in 2019, 45% of global job losses in 2020 were women. One in four women is subjected to partner violence at least once in their lifetime. Women representation in politics remains low (26.2%) and it will take another 40 years to achieve equal representation at the current rate.

1 https://sdgs.un.org/goals

2 https://unstats.un.org/sdgs/report/2022/

SDG DESCRIPTION

Ensure availability and sustainable management of water and sanitation for all

Ensure access to affordable, reliable, sustainable and modern energy for all

Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all

HIGHLIGHTS FROM THE SUSTAINABLE DEVELOPMENT GOALS REPORT 2022

Drinking water, sanitation and hygiene targets won’t be met unless the pace of progress increases fourfold in the run-up to 2030. Failure to do so will leave 1.6-billion people without safely managed drinking water, 2.8-billion people without safely managed sanitation and 1.9-billion people lacking basic hand hygiene facilities.

Electrification rates continue to improve yet the rate of progress has slowed. Energy efficiency needs to improve and the number of people reliant on inefficient and polluting cooking systems remains high at 2.4-billion. Renewable energy (RE) consumption is rising but remains proportionally low at 17.7% of total energy consumption. Financial flows for RE to developing countries more than halved from $24.7bn in 2017 to $10.9bn in 2019.

Global unemployment rates rose during the pandemic and only pulled back slightly to 6.2% in 2021 (compared to 5.4% pre-pandemic). Factors stifling global growth include rising inflation, supply chain disruptions, policy uncertainty, labour market challenges, new Covid-19 waves and the Ukraine crisis. Worker productivity in least developed countries (LDCs) has not rebounded from pandemic levels. One in 10 children was engaged in child labour as of 2020 (160-million total children worldwide).

Build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation

Reduce inequality within and among countries

Make cities and human settlements inclusive, safe, resilient and sustainable

A strong rebound in global manufacturing masks a continued decline in manufacturing in LDCs. The post-pandemic recovery for small-scale industry continues to be hampered by a lack of access to financial support, with one in three manufacturing jobs negatively affected by the crisis. Higher-tech industries, meanwhile, have been far more resilient to pandemic shocks.

Between-country income inequality increased for the first time in a generation during the pandemic and the global refugee figure hit a record high in 2021. The latter will be pushed even higher by the Ukraine war. Between 2015 and 2021, the number of refugees outside their country of origin increased 44% to 311 per 100,000 people.

At least 1-billion people globally live in slums and these communities remain the most vulnerable to disaster risk. Access to public transport remains highly restrictive in sub-Saharan Africa, while air pollution affects 99% of the world’s urban population.

Ensure sustainable consumption and production patterns

Take urgent action to combat climate change and its impacts

Excessive consumption remains the root cause of climate change, pollution and biodiversity losses while reliance on natural resources continues to rise. At the same time, between 13.3% (post-harvest) and 17% (at consumer level) of food is wasted every single day.

The climate change crisis is now deemed an imminent climate catastrophe, threatening coral reefs, a 30-60cm rise in the sea level by 2100, displacement of 700-million people due to droughts by 2030 and a 40% increase in medium- to large-scale natural disasters (droughts, hurricanes, forest fires and flooding) from 2015 to 2030. Carbon emissions are still rising, as are global temperatures, while climate finance falls short of requirements.

Conserve and sustainably use the oceans, sea and marine resources for sustainable development

Conserve and sustainably use the oceans, sea and marine resources for sustainable development

Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels

Plastic pollution remains rife – more than 17-million tonnes of plastic entered the ocean in 2021 and this volume is projected to at least double by 2040. The broader oceanic ecosystem continues to be threatened by marine pollution, ocean warming, acidification, eutrophication and over-fishing.

Biodiversity spend remains neglected while 10-million hectares of forest are destroyed every year (mostly due to agricultural expansion); 40,000 specie remain at risk of extinction in coming decades.

A quarter of the global population lives in conflict-affected areas, while a record 100-million people having been forcibly displaced worldwide as of May 2022. Meanwhile, corruption remains endemic globally, with nearly one in six organisations reporting bribe requests from public officials.

Strengthen the means of implementation and revitalise the Global Partnership for Sustainable Development

Official development aid, foreign direct investment and remittances rebounded strongly in 2021 after taking a hit during the pandemic, while internet uptake accelerated from 54% in 2019 to 63% in 2021. However, the alarming trend of rising debt-to-GNI ratios in sub-Saharan Africa (from 23.4% in 2011 to 43.7% by 2020) persists.

A major breakthrough took place in 2015 for collaborative global policy setting and multilateralism with the adoption of several landmark international agreements, including the SDGs, the Sendai Framework for Disaster Risk Reduction (March 2015), the Addis Ababa Action Agenda on Financing for Development (July 2015) and the Paris Agreement on Climate Change (December 2015). To achieve the SDGs by 2030, between $3.3-$4.5-trillion in finance must be mobilised each year. As it stands, the financing gap for developing countries to reach this target is approximately $2.5-$3-trillion per year.

The SDGs have been widely adopted by stakeholders with an interest in sustainability – from the public sector to private corporations, development aid providers and nonprofit organisations – to support strategic integration of these goals into the activities selected to improve either ESG performance or achieve positive social and/or environmental impact. The findings from the ESG Barometer survey are consistent with this

global trend, as the SDGs are the most widely used set of targets to structure planning for social and economic development and environmental action.

Furthermore, respondents’ ESG strategies are almost always aligned with SDG 8: Decent work and economic growth. The second-most targeted SDG is number 13: Climate action, and the third was SDG 12: Responsible consumption and production.

How does the SDG prioritisation by domestic companies match up to international trends? A 2016 study by the Ethical Corporation titled “State of Responsible Business 2016” 3, which surveyed 2,045 individuals from 114 countries, found that 86% of corporate respondents indicated that sustainability was becoming an increasingly important part of their company’s business strategy. At the time, however, only 46% of corporate respondents indicated that they were looking to engage in the UN SDGs.

3 http://s3.amazonaws.com/cms_assets/accounts/690b848f-131d-4af6-a319-824db8c89e5b/site-50109/cms-assets documents/264163-193652.ec-state-of-sustainability-2016-1.pdf

The SDGs have gained significant prominence in recent years and it is, therefore, unsurprising that a much larger proportion of South African companies are engaging in the SDGs than in the global 2016 survey. This also offers some explanation for why South African companies generally had a meaningfully higher engagement with SDGs than international companies.

The average engagement across all SDGs in the local market is 50% vs 39% for international companies. Nevertheless, the top three SDGs that companies are engaging with both domestically and in the international market are the same:

• SDG 8: Decent work and economic growth

• SDG 12: Sustainable consumption and production

• SDG 13: Climate change

The chart illustrates that the order of priority differs, with South African companies engaging with SDG 8 more frequently than SDG 13. This makes perfect sense considering South Africa’s deeply entrenched structural challenges related to unemployment and poverty, as well as perpetually sluggish economic growth. It is striking, however, that although South Africa is the most unequal nation in the world based on the Gini coefficient 4, SDG 10: Reduced inequalities, only ranks fifth on local company SDG engagement. Meanwhile, SDG 13 ranks second. While South Africa is an outlier on carbon emissions per capita, addressing climate change issues is only one part of the equation.

That said, given the overwhelming focus globally on the climate crisis, it is unsurprising that companies in the domestic market place significant focus on this goal, especially as they deem

investors the most important stakeholders that influence strategic ESG decision-making (as discussed in the introduction article to this report). This highlights how there might be divergences in development needs based on the local market’s context, yet prioritisation of development needs does not always offer a true reflection of the most pressing development issues.

Companies should pause and reflect on whether their SDG prioritisation is being driven by actual domestic needs and aligning with national objectives (such as those set out in the National Development Plan, in South Africa’s case) or whether strategies are being driven by political (or other) agendas dictated by the northern hemisphere. Failure to do so risks misalignment between allocating resources for development purposes and actually solving country-specific development goals.

4 https://worldpopulationreview.com/country-rankings/gini-coefficient-by-country

Source: Intellidex, Ethical Corporation, UN Sustainable Development Goals

NOTES

www.sanlamesgbarometer.co.za