Photo by Anastasia Palagutina on Unsplash
South African listed companies are feeling the heat from industry regulators and watchdogs when it comes to integrating Environmental, Social and Governance (ESG) into their operations, but this has not yet translated into significant strategic change or innovation.
According to new research published by Henley Business School and Risk Insights, the vast majority of JSE-listed firms surveyed are using ESG to avoid the destruction of value and to optimise existing value rather than to create new value and build a competitive edge through ESG*.
“South African firms are engaging with ESG, but they are mostly playing it safe investing in incremental change, but not really pushing the boat out,” says Dr Filipe Morais, one of the report's authors.
The research, entitled The State of ESG Integration in JSE Listed Companies, provides a comprehensive analysis of ESG practices among 63 Johannesburg Stock Exchange (JSE) listed firms. This is the second in a two-part research collaboration between Henley Business School and Risk Insights, Africa's largest ESG data provider.
What drives ESG adoption in SA firms?
According to Dr Morais, the top three reasons cited by firms for ESG adoption included:
- To mitigate risk and improve risk management (46%)
- To foster innovation within the business (46%)
- To improve financial performance (30,2%)
“While driving innovation can be seen as a competitive reason, there are reasons to believe this is mostly referring to operational efficiency gains rather than more fundamental innovation or strategic shifts such as introducing new products and services, asset divestment, mergers and acquisitions, change of distribution channels, and joint ventures,” he said.
“This tells us that the vast potential that ESG offers is largely untapped in South Africa. One of the reasons for this could be that pressure felt by corporates from marketplace stakeholders (suppliers, customers, and competitors) is relatively low, reinforcing the idea that the main motivations for ESG are not strongly competitive in nature.”
“The ESG curriculum in South Africa is still relatively immature with pressure starting to mount on ESG in the marketplace but still a way to go,” says Andrey Bogdanov CEO of Risk Insights.
The survey delved into various aspects of ESG, including demographics, motivations for ESG adoption, stakeholder engagement, materiality approaches, governance structures, and ESG reporting frameworks. Most companies surveyed were large or very large, with 30% employing over 10,000 employees and 70% reporting annual revenues of more than R90 billion.
Regarding shareholding, 27% of companies in the sample had a large majority controlling shareholder (over 50% of shares), and some 30% of the sample companies had foreign institutional shareholders controlling 25%–49.9% of company shares.
Most companies surveyed were relatively seasoned in terms of ESG integration, with almost 30% of the sample having been engaging with ESG for more than a decade.
Why ESG matters in South Africa and globally
According to Bogdanov, ESG matters for companies now more than ever, even as the concept of ESG is facing ‘a mountain of challenges’ globally.
“Unpredictability and disruption – from rising climate change-related impacts to social unrest, economic migration, and rising geopolitical tensions and conflicts – continue to underline the importance of effectively assessing and mitigating the threats posed by ESG risks,” he says.
“In a country as unequal as South Africa, that faces 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 integrate the discipline throughout the business.”
Bogdanov says that the research shows that in the last five to ten years, ESG in SA firms has mostly focused on social factors and governance improvements. “Significant improvements have been made on diversity and inclusion, improvement of health and safety conditions, for example, which given the context of South Africa is perhaps not surprising. But the progress will be incremental at best and often illusive until ESG becomes an integral part of the competitive game.”
What’s stopping SA firms from going further and faster?
To understand what is stopping South African firms from making faster progress when it comes to ESG, the researchers asked respondents to identify constraining factors. The five top barriers identified include:
- The fight for resources among different business units (73%)
- The pace of change in the regulatory environment (71.4%)
- Pressure on quarterly earnings rather than long-term capital gains (52,4%)
- Lack of resources allocated to transform the business (47,6%)
- Lack of integration when the organisation decouples business and sustainability strategies (46%).
“Another real problem relates to capacity building and the costs associated with transition and transformation of people, processes, and systems for most organisations due to ESG risks and opportunities. The long-term gain will set companies of the future apart,” says Bogdanov
“While progress towards ESG has undoubtedly been made, much more still needs to be done to unlock ESG’s potential to refocus business, government, and society in South Africa behind a common purpose in which people, planet, and profit can coexist in balance and mutual benefit.”
Dr Morais adds that a clear finding is that more board involvement could be transformational, specifically in steering a purpose-led response to ESG.
“For many companies in our sample, ESG adoption clearly does not start at the top strategic level with a review of purpose but emerges instead from operational requirements. But it is important to start with purpose. Purpose can galvanise employees and provide strategic clarity, which research has shown can lead to higher future accounting and stock market performance.”
He says that this is particularly important because society relies heavily on the private sector to drive the innovation needed to tackle collective problems.
“The extent to which boards are involved in ESG strategy development is imperative for providing executive teams with the legitimacy, resources, and the mandate to pursue often difficult long-term strategies that create sustained value for all,” he concludes.
Download the full report here.
* ESG covers a variety of issues related to the environment (e.g., climate change, energy and water use, carbon emissions), social responsibility (e.g., fair trade principles, human rights, product safety, gender equality, health and safety), and corporate governance (e.g., board independence, corruption and bribery, reporting and disclosure, shareholder protection).
About Henley Business School Africa: Henley Business School is a leading global business school with campuses in Europe, Africa and Asia. It is the only international business school in Africa with quadruple accreditation from the leading UK, European, US and African accrediting bodies: AMBA, EQUIS, AACSB and AABS. Henley is committed to transformation and holds a level-2 BBBEE status. For six years running, it has been rated by corporates as the #1 MBA business school in South Africa (PMR.africa 2018-2023). Henley is also the highest-ranked business school in Africa for executive education (FT 2023) and is ranked number one in the world for faculty diversity. Offering qualifications from NQF level 5 to 9, Henley’s vision is simple: we build the people, who build the businesses, that build Africa.
About Risk Insights:
Risk Insights™ (RI) is a Data Science boutique with key focus on ESG. RI launched the first on-continent AI-powered ESG rating tool – ESG GPS™ made by Africans for Africa. ESG GPS™ ensures balanced application of global ESG standards to local realities. All listed companies in major African Exchanges have been rated by ESG GPS™. RI is a member of the World Economic Forum New Champions and founder of the World Economic Forum New Champions South Africa Chapter. For your ESG GPS™ rating and more information about ESG in Africa, please refer to https://riskinsights.co.za/