ESG. Yet another compliance cost or does it offer tangible benefits?

Sustainability should, hypothetically, make a company more resilient – but it is a fair question to ask if it really does. 

Compliance with ESG principles can be a divisive issue and will continue to be so, as more rules and regulations pressure companies to align with environmental, social and governance requirements, whether they care to or not. 

The division lies between a now largely silent cohort, which views ESG as a compliance issue, or an externally imposed requirement, and a far more vocal cohort, which believes that doing the right thing for the right reason will deliver tangible financial benefits for corporates.

So, is the move to compliance only a grudge shift from the silent cohort to appease the vocal actors, or does the investment in ESG really pay?

We think it is more than just a compliance cost and that there are tangible benefits for companies, their stakeholders and importantly, also for their shareholders.

The starting point is to remember that ESG has three components: Environment, Social and Governance – so any comprehensive discussion has to take a comprehensive view on the benefits of these three pillars.

EY’s surveys show sustainability as the single largest business risk in the Mining and Metals Sector in Africa. And, we have seen enough corporate scandal on the continent to ensure that all investors now appreciate the value of the “G” in maintaining shareholder value.

The theory underlying ESG is that – over the long term – companies doing the right thing will be more resilient to the threats occasioned by doing the wrong thing - like the poor corporate governance mentioned above. And they will actually deliver better results for the same reasons. Better results mean more money, more profitability, and an observably better bottom line.

Unfortunately, some companies still view ESG as a compliance issue – and therefore view the costs associated with it as a compliance cost. This short termism: foregoing better long-term results for the sake of doing things as they always have, or for cutting corners.

Sustainability should, hypothetically, make a company more resilient – but it is a fair question to ask if it really does.

In the energy and natural resources sector, there is absolutely no question. If we take a look at the items that have caused major crises for major companies in the sector over the last few years one can argue that the controllable factors that have had disastrous impact have been ESG issues.

Recent failings at the Jagersfontein dam disaster in the Free State mine killed three with four people critically injured is a recent example. Twenty-eight others were injured while nine houses were swept away.  Rehabilitation costs are expected to run into the tens of millions. This is a clear example of why environment and governance matters, and why shareholders need to take a more active role in holding companies in which they have invested accountable.

The environmental pillar in ESG has been an issue for a long time and is well-regulated and understood. Companies need to comply by prescribed rules and via permit applications.

But these are inching changes.

The shift to net zero carbon must be the goal and, encouragingly, we can finally see momentum building. 

Twenty-nine (29) mining companies in the South African mining and metals industry have, according to the Minerals Council, planned for 89 energy projects for 6.5GW of electricity, solar of 6.2GW, wind of 0.2GW and battery storage of 84MW and biomass of 8MW. This represents an investment in a lower carbon economy in excess of R100 billion (US$6 billion.)

These are big capital ambitions, and we therefore also have to consider green financing and ask if in fact it is cheaper or more readily available than conventional capital, with green financing simply being a loan or investment that supports an environmentally-friendly activity, such as building more environmentally friendly infrastructure linked to energy, water and other key requirements.

There seem to be masses of funding announced from various international donors, but there are roadblocks to unlocking it for South African companies. Common challenges relate to the red tape that is now rapidly being addressed by Government, as well as the perceived balance sheet impacts. Is the funding commitment for a project, for example, going to consume or sterilise balance sheet capacity that could have been used for growth?

There are practical implications of ESG for African companies.

They need to operate by strict compliance with environmental best practice – not just for legal reasons - but for the impact that it has on host communities and employees. They also need to operate in a way that gives host communities, employees and other stakeholders their fair share of the value generated by our operations. Ideally it has to be done within a governance environment that minimise the risks to which all operations are exposed.

If mining companies limit their engagement with ESG to a compliance cost to be controlled, they will not reap its benefits. Exploring how sustainability can drive growth, will ultimately enable a company not just to survive a tighter ESG environment, but to leverage it and thrive.