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