CLEMENCE MCNULTY: Take action on sustainability before it is mandated

SA companies are urged to take action on sustainability, because it will be mandated sooner rather than later by local and international standard setters such as the JSE, the International Sustainability Standards Board (ISSB) and the US Securities and Exchange Commission. 

Investors and stakeholders already expect companies to incorporate environmental, social and governance (ESG) risks and opportunities into their business strategies, operating models, processes, products and services. 

However, while we see a convergence in the global frameworks around sustainability reporting, which we expect will bring clarity and consistency in years to come, the level of uncertainty in where everything will land and what will be expected from companies is high. 

In SA, this is not helped by the daily practical challenges companies face, such as skills shortages, rolling blackouts and surging inflation. However, local firms have already done a lot — at times more than their European or American counterparts that have not had to deal with scarcity or the same social context. They should leverage this and articulate it clearly to stakeholders and investors, while acknowledging that more can be done. Expectations from stakeholders are only going to increase. 

But sustainability initiatives are not just about wanting a gold star for good behaviour. They can support the foundations of companies’ value creation. This is further underpinned by the recognition that if not addressed through mitigation actions, climate change will have significant socioeconomic effects and consequences for the world as it interlinks with food security, health, ecosystems and social systems. 

So how should companies respond? 

• Understand what sustainability means in relation to your company’s purpose. The key is to understand how sustainability relates to your company’s vision and to integrate it fully into your strategy. 
• Recognise that everyone needs to be involved and identify clear roles and responsibilities. For instance, finance needs to ensure the right capital allocation to help tackle ESG risks and opportunities, while procurement needs to support sustainable supply chains. 
• Invest in data systems and controls. The link between financial and sustainability reporting will only increase, which means scrutiny of information will increase as well. Companies need to ensure that ESG data is “investor grade”. Ultimately, the adage is true: you can’t manage what you can’t measure. 
• Stay connected to your stakeholders and context to remain on top of emerging issues. Be clear on how you understand what is material for you, and don’t forget your employee and customers’ voices in this process. 
• Adopt a multidisciplinary approach to decision making, acknowledging that when it comes to sustainability, there is often no correct action but a range of trade-offs that must be navigated. 

In the last three years, perhaps spurred by the pandemic and the recognition of the interconnectedness of the world, the sustainability issue has shifted within companies from discussions on the why and when to the what and how. Increasingly, this means CEOs, CFOs and other functions are expected to contribute to the challenge. Chief sustainability officers’ roles have shifted from a compliance focus to clarifying the long-term value potential. 

Despite the scale of the challenge, companies that embrace the opportunity to fully integrate sustainability into their purpose and strategy should be better positioned to navigate the upcoming changes and meet them with greater resilience. This will be fundamental to attracting capital to meet the costs of a changing world. 

From a global sustainability reporting point of view and integration with financial reporting, it may be a few years until there is a consistent set of guidelines. However, considering the interconnectedness of SA companies to global markets via commodities and capital markets and the convergence in standards, companies should expect that mandatory reporting on issues is just around the corner.

While there may be those who remain sceptical, decisive action grounded in an understanding of where the greatest risks and opportunities lie is essential. This should pay off in enhanced talent attraction and retention, improved brand positioning with customers, minimised risk and reduced cost of capital.  Companies should also be able to get significant rewards early if they continue to focus on the basics. 

For example, while energy efficiency has been sidelined by the prospect of investment in renewable energy, working on improved smart metering systems to enhance performance and drive efficiencies must remain the priority and many studies show these opportunities still exist. This will apply for water and waste and many of the inputs that drive our industries.

Companies should start their sustainability migrations now because the speed of change and expectations of stakeholders should not be underestimated. The rise in net-zero commitments by companies may be derided as greenwashing, but the fact this is even on the agenda would have been unthinkable five years ago. 

Once the ambition is set, there may be challenges to get there, but it is a matter of time before stakeholders expect additional commitments such as zero waste, zero water, biodiversity impacts and gender balance and diversity across all levels of organisations. Many companies have started to commit to these goals, but there is a lot further to go. 

• McNulty is partner: sustainability & climate change at EY Advisory Services SA.