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Picture: 123RF
Picture: 123RF

 After a decade of growth, environmental, social & governance (ESG) investment is facing a mountain of challenges globally, from net outflows of ESG funds towards the end of 2023 to mounting negative scrutiny, fuelled in part by economic pressures such as rising inflation and the rise in populism in some parts of the world.

This is mirrored in the SA context. Over the past 10 years there have been positive moves in SA’s corporate sector regarding strategic decision-making on ESG matters, but new research on ESG integration in JSE-listed companies reveals that this is only skin-deep. The report, The State of ESG strategic integration in JSE listed companies, shows that gains from ESG strategic integration are incremental and still evolving. In other words, we are not yet seeing the kind of impact SA needs.

The report is based on an extensive survey of companies, mostly large corporations with reported annual revenues of more than R90bn. One of the intriguing points it highlights is the high level of ESG maturity (the number of years since the company adopted ESG), with more than 60% having adopted ESG principles more than six years ago, 27% of which have more than a decade of experience.

Barriers to successful ESG outcomes 

Perhaps expectations are higher for companies that declare such mature ESG integration. Since the first green bond was issued by the City of Johannesburg Metropolitan Municipality in 2014, more than R27.8bn has been issued in sustainable bonds. In 2021, there was a high of R13.8bn, but in 2022 this number dropped to just under R5bn. Nearly half of the bonds in 2021 were focused on social impact projects, such as low-cost housing.

But why the drop in investment when we know the need is pressing and companies demonstrate ESG compliance? The report makes a case for the theory that while interest and willingness are certainly there, SA corporations face barriers when stepping up ESG execution, especially the innovation of financial instruments at JSE-listed companies. Executives reveal that there is often a fight for resources among different business units.

Almost half of the people surveyed said there was a lack of integration within the organisation, which resulted in decoupled business and sustainability strategies. Most organisations have allocated ESG to a chief sustainability officer and a small team, moving it away from the company’s core business interests.

Motivated executives are often isolated and not empowered to make decisions and implement strategies. This indicates that more support is needed at board level. Some executives bemoaned the lack of incentives tied to performance on sustainability as well as the different views among the board and top management teams regarding prioritising ESG. 

Need to up environmental investment 

To date, the most significant ESG improvements at the corporate level in SA relate mostly to diversity and inclusion and the improvement of health and safety conditions, as well as investment in community development projects. The environmental focus is lagging. Many corporates seem to be missing the boat here. For instance, SA has a huge opportunity to be the first coal-based economy in the global south to successfully transition to a low-carbon economy, especially in the energy sector.

According to the Climate Bonds Initiative (CBI), green bonds can be a part of the solution. Global experience to date has shown they are a vital tool in harnessing the increasing investor appetite for investments with green and social impacts.

The onus is on company boards to look more at ESG-driven innovation in areas such as asset divestment, mergers and acquisitions, change of distribution channels and joint ventures. Until ESG becomes an integral part of the competitive game, the sector gains will be incremental at best and often illusive.

A fundamental strategic move could be acquiring companies with ESG capabilities to involve joint ventures to help compete and innovate products and services that are environmentally and socially sustainable.

Purpose-driven growth vital to tackle collective challenges

Far from what the critics claim, such initiatives are not merely woke capitalism but have been shown to stimulate job creation and economic upliftment. Furthermore, in a country as unequal as SA, which continues to face myriad social and economic challenges, it has never been more important for organisations to understand their internal motives for adopting ESG and how best to strategically integrate the discipline and purpose throughout the business.

This is so important because the private sector is a primary engine of innovation in most economies, and we will need innovation to tackle the significant social, economic, and environmental challenges facing SA. Fortunately, it seems most of the barriers to ESG strategic execution in SA’s corporate realm remain internal and within corporate control, revealing tensions between business management and ESG rationales.

As ESG globally undergoes something of a rethink in the face of its naysayers, corporate SA has an opportunity to take a leading role in refocusing ESG on what really matters. Instead of ticking boxes and playing it safe, they could make a deeper commitment to the ESG agenda and empower those at the top of their organisations to make the decisions that will benefit themselves and SA as a whole.   

• Dr Morais is a lecturer in governance and programme director of the MSc in Management for Future Leaders at Henley Business School. He is also co-author  — with De Villiers, a research consultant at Henley — of the report The State of ESG Integration in JSE Listed Companies. Bogdanov is interim CEO of risk insights and board member of the World Economic Forum New Champions SA country chapter. 

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