Firms conducting trade in Africa must develop and implement environmental, social and governance (ESG) strategies to avail of the business growth and economic development gains on offer from ESG performance. Urgent action is also required to ensure firms’ resilience and sustainability in the context of climate change, with recent research by the World Meteorological Organisation highlighting the increased risk of global warming on the back of record greenhouse gas levels.
PwC South Africa has issued a stern warning to Africa domiciled firms to coincide with the launch of its latest South Africa-focused ESG research, titled: South African business cannot succeed if our society fails: acting on your ESG strategy. “This report shows that local organisations are lagging behind their global peers in adopting ESG goals and strategies,” noted the firm. Although penned for the South African market, this writer believes the report is relevant to firms operating across the continent.
The ESG strategy report identified disruption and vulnerability in socioeconomic circumstances; regulatory requirements; changing market supply and demand priorities; environmental anomalies, the transformation of investor perspectives; and technological and academic progress as key drivers influencing the relevance and importance of ESG strategies globally. Aside from these observations, the writer drew two positives from the report findings.
First, it raises awareness that the responsibility for climate change action goes beyond the insurers and reinsurers that are expected to pay up following climate-related natural catastrophe loss events. To date, insurers and reinsurers have led the quest for better environmental outcomes, armed with trillions of dollars in reinsurer capital. We note, for example, that Santam, SA’s largest non-life insurer, is among the founding signatories of the UN Environment Programme’s Principles for Sustainable Insurance initiative, as are all of the large reinsurers active in the South African market.
Second, the report reinforces the link between environmental and social consequences of failing to limit global annual temperature increases. Lullu Krugel, PwC ESG lead for Southern Africa, commented that the risks associated with climate change have many social implications, including unemployment, food insecurity, increasing health risks and migration. “Last, but not least, all of the risks mentioned increase the risk for social unrest and upheaval; this emphasises the need to always evaluate the social impacts of climate risk rather than dealing with it in isolation,” she said.
The good news is that the audit firm’s 25th Annual Global CEO Survey showed that 73% of South African CEOs are very or extremely concerned about social inequality in the country impacting on their company over the next 12 months; their concern no doubt elevated by the shock loss event that played out in SA in July 2021. Africa Ahead readers will recall the widespread looting and rioting that shook areas in the Gauteng and KwaZulu-Natal provinces last year, causing more than ZAR50bn in economic losses. It turns out that fast tracking the development and implementation of ESG strategies could avert similar events from unfolding.
Research conducted by the University of Oxford’s Sustainable Finance Programme confirms that an increase in company-level ESG performance can result in a positive effect on a country’s living standards, both in developed and emerging markets. “Business leaders can no longer afford to ignore the importance of ESG performance as this can have a direct impact on societal wellbeing,” PwC wrote.
PwC’s CEO Survey also found that six out of every ten South African CEOs are moderately, very or extremely concerned about physical and transition risks associated with climate change. “Nonetheless, eight out of ten respondents indicated that their company has not yet made a carbon-neutral or net-zero commitment; globally, 28% of CEOs indicated that their company had made a carbon-neutral commitment, compared to only 20% in SA,” wrote PwC.
Its ESG strategy report identified four factors preventing wider ESG strategy development and implementation in SA as follows (paraphrased from the PwC report):
A challenge of human resource capacity: an internal understanding of ESG issues is a fundamental necessity for a successful transition to sustainability; firms need to recruit the right talent to deliver on sustainable value creation goals. The good news is that those firms that demonstrate a commitment to ESG will likely be best placed to attract and retain such sought-after talent.
You need a sustainability champion at the top of the corporate ladder: Among the c-suite, the title chief sustainability officer (CSO) is growing in prominence, whether as an official title or a responsibility integrated into another job title. In the absence of an empowered CSO that can lead from the top, an organisation’s ESG risks and opportunities are less clear.
Local regulation might not require reporting of sustainability metrics: Compared to multinational companies operating from the world’s largest financial centres, many South African companies, whether listed or unlisted, do not face the same level of reporting scrutiny and responsibility as their global counterparts.
Responding to ESG issues is seen as a cost, not an investment: In the short run, the implementation, compliance and reporting of ESG issues might still be treated as a cost line by some businesses, instead of being treated as an investment. From this perspective, ESG is not seen as a lever for transformation alongside other levers such as digitisation and internationalisation.
PwC’s view is that South African companies should integrate ESG considerations into their corporate and investment initiatives and activities, and internalise ESG holistically to build trust and ensure long-term sustainability, agility and competitiveness. It noted that the global PwC network was leading the way in this area, having committed to achieving net-zero greenhouse gas emissions by 2030 by decarbonising its supply chain; embedding ESG factors into its client engagements; and supporting efforts to develop ESG reporting frameworks and standards.
African and South African firms will have to follow the PwC example by making ESG strategy implementation a priority in the coming financial year, because there is little doubt that ongoing inflationary pressures consequent global supply chain constraints and the Russia-Ukraine conflict will add to both environmental and societal pressures in the coming year.