Scoring SA: Are we beating ESG biases?

Environmental, social and governance (ESG) imperatives have become fundamental to how businesses make investment decisions.

By including and implementing ESG in their business strategies, South African companies can become more attractive to foreign investment needed to boost the country's economic growth.  

But far more than this, the impact that investing for good has on the whole of SA is immeasurable, creating a better world and leaving a positive legacy for future generations. 

Scoring SA: the country's first ESG barometer

Globally, ESG investments are expected to reach $53-trillion by 2025 — that's close to half the world’s institutional assets.

SA, however, performs poorly on a number of ESG measures, which could make it harder to attract investment at a time when it desperately needs international finance to fund its just transition and grow the economy. 

The Sanlam ESG Barometer is the first study of its kind in SA to evaluate the current state of ESG and assess how JSE-listed companies are changing their businesses to deliver improved ESG outcomes.

This report, researched by Intellidex and published in partnership with Business Day, was launched during the recent Sanlam ESG Barometer Conference — watch the recording below.

During this event, experts discussed what the report has revealed about SA’s international investor appeal and the attitude of local investors towards ESG.

Karabo Nondumo, an independent non-executive director at Sanlam, said there's the risk that global investment will bypass SA unless organisations can demonstrate progress in their commitment to ESG.

Incorporating ESG into business strategy is good for bottom-line financial performance and helps position organisations sustainability for the future, including helping them to cope with external risks such as climate change, said Stephanie Giamporcaro, associate professor of responsible and sustainable finance at Nottingham Business School NTU and an adjunct associate professor at UCT’s Graduate School of Business.

She cautioned that there remains significant pushback along the investment value chain with companies and investors not always seeing eye to eye on how fast progress should be made, as evidenced by ESG engagement about climate change. 

The ESG Barometer Research revealed that SA is an outlier on a number of ESG metrics with different ESG priorities compared to more developed countries, most notably ranking economic growth and inequality more highly than the rest of the world.

South African companies, however, are ahead of the curve in terms of delivering on the social aspects of ESG, their ability to manage ESG risks, and their capacity to make ESG disclosures. 

As a country, SA scores poorly on several ESG metrics, including being the 15th-largest carbon emitter globally and performing badly on several governance indicators. 

Intellidex’s research revealed that the most common reasons companies give for implementing an ESG strategy is to make a positive impact in society (41%) and to attract investors (41%).

Most companies said that implementing an ESG strategy has had a positive affect on their businesses, improving their reputation (71%), improving operational performance (59%) and improving the cost of capital (29%). 

Intellidex chair Stuart Theobald explained there are typically three ESG approaches. “In our research, we found that asset managers and consultants focus on ESG integration; asset owners, particularly pension funds, endowment and sovereign wealth funds, focus on reputational risks; while the public at large, including many retail and fund managers, think of ESG outputs as key, which has created an expectations gap.” 

The importance of additionality 

The Sanlam ESG Barometer Report emphasised additionality. Additionality is about enabling a positive environmental or social outcome that would not have been possible — or would have been unlikely — without the investment.

Emerging markets will tend to rate poorly in practical terms on most ESG scoring systems, which does not auger well for emerging market flows, a UK-based emerging market specialist asset manager told Intellidex. Incorporating additionality into ESG assessments is one solution to this, 

“SA needs investors to recognise additionality, particularly as far as social and environmental metrics of local companies are concerned,” said Theobald. “We know that additionality is hard to measure and requires proving causality. That’s not easy to do in an investment given the many moving parts. Our research set out to understand what companies are doing to identify additionality.” 

The report also included case studies aimed at interrogating additionality, how the UN sustainable development goals were affected, the measurable outcomes intended by the projects, the risks to outcomes being achieved and opportunities for exposure. 

“There is a global concern that ESG is leading to harmful biases in the fund world. There is no question that emerging markets are negatively affected by ESG reporting frameworks,” said Theobald.

“Our aim was to recommend how investors should analyse ESG performance and to try to shift the global policy debate away from focusing only on climate change to also address other pressing South African challenges, including poverty and inequality.”

The trick for investors is not to invest in “good ESG companies” that score well on ESG metrics, but rather in “improving ESG companies” as these businesses tend to beat the market, said David Aserkoff, JPMorgan’s equity strategist for the Central and Eastern Europe, Middle East and Africa region.

ESG experts advised that management teams and company boards need to focus on those ESG aspects that make the most business sense because, when they are able to focus on the most material issues, they will inevitably outperform financially. 

“ESG should not be a race to the top in terms of rankings but should rather be about making a visible and sustained impact,” said Abel Sakhau, chief sustainability officer at Sanlam. 

Read the full Sanlam ESG Barometer Report 

Use the arrows to page through the report below (zoom in or go full screen for ease of reading) or download it.

This article was sponsored by Sanlam.