Although it entered the international corporate scene in the early 2000’s, Environmental
Social Governance (ESG) has only recently begun to attract attention in South Africa’s
corporate sector. But what is "ESG", why is it gaining such popularity within the corporate
community and why should you, as a business owner or director, consider its
implementation?
Simply put, ESG is a set of principles that requires business owners and directors to look at
operating the companies they manage with more than just the traditional bottom line
approach in mind (where profit-maximisation by any means necessary is the order of the
day). Instead, it promotes giving attention to the non-financial factors of environmental
impact, social responsibility and governance of a company.
The “Environmental” arm of ESG requires companies to consider the impact of their
operations on the environment, ways to reduce their carbon emissions and waste and how
to better manage their resources. Companies spearheading the “E” in ESG include
Unilever which is currently transitioning to renewable energy across its operations and
developing fossil-fuel-free cleaning and laundry products. By incorporating sustainability
strategies, companies positively impact the environment and avoid contravening
environmental legislation and the financial penalties and litigation that could arise as a result
of such contravention.
ESG’s “Social” branch is people-focused, requiring companies to consider their stakeholders’
interests (where stakeholders include employees, suppliers, investors and the communities
in which such companies operate) in decision-making and operations. Despite the daily
advancement of artificial intelligence and other kinds of technologies, humans still play a
crucial role in the advancement of business today. As such, human and labour rights are a
critical component of this branch as the promotion of human rights, both internally and
externally, and fair labour practices in the workplace are analysed when measuring a
company’s ESG performance. Companies that implement policies aimed at creating positive
social impact can expect to have their reputations positively boosted which will in turn likely
result in increased support from stakeholders. Focus on the “S” in ESG has additionally seen
companies experience increased employee retention and attract talented prospective
employees as current employees experience job satisfaction and feel a sense of pride
towards their employers while prospective employees become attracted to socially committed
companies which seem considerate of their staff and society as a whole.
Lastly, “Governance” considers the practices and composition of a company’s leadership
team. The ethics of those in leadership are also considered, requiring companies to
investigate and discipline those accused and subsequently found guilty of improper conduct.
One of the benefits of diverse leadership include the diversified and expanded thinking
capabilities within such teams. This results in a positive outcome where those in leadership
have increased ability to pre-empt a multitude of risks, identify opportunities, develop creative
problem-solving strategies and address complex issues. This is supported by a study
conducted by McKinsey and Company wherein the executive board composition, returns on
equity (“ROE”) and margins on earnings before interest and taxes (“EBIT”) of 180 publicly
traded companies were analysed over a 3year period. The study’s findings are as follows:
Companies ranking in the top quartile of executive-board diversity yielded ROEs which were 53% higher than companies in the bottom quartile; and
EBIT margins at the most diverse companies were 14% higher than those of the least diverse companies.
With increasing global environmental awareness and advocacy for improved human and
labour rights, the need to integrate ESG into corporate policy has become all the more
important as stakeholders are no longer merely concerned with associating themselves with
profitable companies, but rather with profitable companies that simultaneously prioritise the
environment, society and good governance (hence the rise in ESG investing).
Essentially, ESG is not just a temporary corporate fad. Although South African companies
are not yet legally required to implement ESG, those companies that elect to do so are likely
to reap the benefits of the competitive advantage this improved way of doing business would
afford them (just as many of their international counterparts have benefitted). Companies
are therefore encouraged to consult with legal practitioners and other appropriate
professional advisers to assist in aligning their businesses with ESG.
