ESG in SA firms still ‘bolt on’ rather than ‘built in’ – new research

As global reporting standards grow more rigorous, new research from Henley Business School Africa in collaboration with data science and risk management firm Risk Insights, shows that ESG (Environmental Social and Governance) implementation in SA corporations remains largely a patchy and firm-specific affair, often seen more as a ‘bolt on’ that ‘built in’. 

“The ESG agenda in South Africa is gradually becoming more embedded in businesses as a competitive requirement, not just as regulatory compliance or a means to appease a few investors. But while corporate SA has made good progress, there remains a long way to go,” says Professor Danie Petzer, Head of Research at Henley Africa. 

According to Petzer, researchers, led by Dr Filipe Morais from Henley Business School, found that a key roadblock to more comprehensive ESG integration is that many firms have an entrenched mindset and worldview about the moral imperative implicit in ESG standards. 

“There is a shared view that South Africa and other developing countries have less of a moral obligation to tackle climate change urgently as the problem has been born by the rich Global North,” he says. 

Andrey Bogdanov, Interim CEO of Risk Insights adds that the dominant understanding is that for South Africa, the priority is the ‘S’ or social in ESG, as this is where there are more significant and pressing challenges. “But the inability to tackle environmental concerns may mean a loss of competitive advantage or constraints in exporting goods and services to more mature markets, which ironically then impacts on social issues, such as employment,” he says. 

The research, which involved in-depth interviews with 15 senior business leaders – board members and executives – of leading South African JSE-listed companies and a survey of JSE-listed companies, identified three distinct categories of constraints challenging business leaders on ESG.

First, engagement and dialogue with powerful stakeholders can result in policy or regulation not being sensitive to business challenges. Second, organisational culture and people challenges including silo thinking, competition for resources among divisions, mindset, engagement, and skill set, can obstruct the smooth implementation of ESG strategy; and third, data availability and handling trade-offs and dilemmas can hinder good decision-making.

“A fundamental challenge that sits between the formulation and implementation of strategy concerns the buy-in, engagement, and alignment between what is strategized at one level and the reality of execution at another. Some participants referred to this lack of dialogue as those who strategize and formulate strategy and those who have to face the often-insurmountable challenges, trade-offs, and dilemmas of implementation,” says Bogdanov.  

He adds that as ESG audits and external assurance become mandatory, firms need to seek ways to overcome these roadblocks as well as to continue to invest in creating the infrastructure to measure and gather ESG performance data to enable more systemic management and reporting of ESG issues. 

“Businesses are no longer judged on the basis of their economic performance alone, but on their sustainable economic performance. This requires significantly longer-term thinking,” he adds. 

Most of the challenges identified require solutions that are co-created between government, business, and the third sector. For this reason, the whitepaper also recommends that there needs to be a true partnership between government, corporate South Africa and the third sector in creating the conditions, including the regulatory framework, infrastructure, and legal mechanisms, to enable firms to deploy effective ESG strategies that can create long-lasting value. 

“South Africa faces a unique opportunity to use ESG as a tool to deliver value for both business, government, and society,” argues Prof Petzer. 

“If framed correctly, ESG can be a framework to ensure better-quality foreign direct investment that creates real sustainable value, while enabling the social, economic and environmental change the country so desperately needs,” he concludes. 

Download the full whitepaper here.