ESG: The Future of Sustainability 6th Edition

MANAGING ESG RISKS FOR YOUR BUSINESS

By Asavela Lumkwana CA(SA), Agile Capital Associate

The development, execution, and reporting on the impact of ESG strategies is becoming a norm for business. ESG is a great tool for identifying relevant risks that can threaten the bottom line of a business. We need to look at ESG through the lens of what opportunities it can reveal within the market. When talking and assessing ESG, one must break it down to its subcomponents to fully understand the holistic objective of addressing Governance, Social and Environmental issues.

Environmental

Out of the debates at COP26 in 2021 came the Glasgow Climate Pact that focused on steps that must be taken to ratchet down on the use of coal and other fossil fuels. What was most interesting to note from the convention was the $8.5-billion package of grants and concessional grants that were provided to South Africa to help speed the transition away from coal. This presented a material business opportunity for entrepreneurs to focus on Green Energy which in turn would also alleviate the pressure on the overstretched Eskom grid.

These developments further highlight that the focus on ESG has the ability not just to change communities for the better, be used as a risk assessment tool but it also is an avenue for new investment and business opportunities.

Social

The S in ESG is one that tends to get overlooked when talking about ESG. The central question of Social is how businesses can better manage their relationships with the internal staff and external communities.

COVID-19 has put a spotlight on how businesses manage their relationships with staff. Employee mental wellbeing has been at the forefront of managing working conditions and staff morale but only to those businesses who understand the role they need to play towards their staff.

The up-skilling and development of a diverse pool of employees is also an important aspect of the Social considerations, steadily becoming crucial to business growth. Shown to improve not only staff morale but overall business performance – staff retention and diversity has an impact on bottom line earnings. Part of being a sustainable business means being able to attract, develop and retain a diverse range of top talent.

A White Paper by Cloverpop has found that inclusive teams make better business decisions up to 87% of the time and they make decisions twice as fast within half as many meetings. Similar research has been done by the Harvard Business review and McKinsey with similar conclusions.

Governance

South Africa has among the best standards globally for corporate governance thanks to the King reports, and with King IV addressing sustainable development and corporate citizenship, companies are now seen to be accountable and responsible for business decisions.

The PwC Global Private Equity Responsible Investment Survey 2021 states that ultimately, the governance of both firms and portfolio companies will determine the value creation strategies that are being shaped to meet the challenges of our changing world. As articulated well by Piyush Goyal: “The speed of decision making is the essence of good governance”.

Conclusion

The SAVCA Private Equity Industry Survey which speaks to how Private Equity firms are creating value indicates that 80% of respondents are in agreement that there is an increase in discussion around the importance of ESG in the sector, although further actions are needed to implement these while creating value. ESG information and performance is directly related to revenue and costs – whether it’s waste or water usage, or sustainability within a supply chain. By monitoring how organisations manage these variables, companies are able to continually fine tune and improve performance in these areas. We believe that ESG is able to drive returns and that being proactive about ESG can be a source of competitive advantage.