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.”