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South African companies are urged to take action on sustainability because it will be mandated sooner rather than later by local and international standard setters such as the JSE, International Sustainability Standards Board (ISSB) as well as the US Securities and Exchange Commission (SEC), amongst others.
Identified as the defining issue for the 21st century, investors and stakeholders already expect companies to incorporate ESG risks and opportunities into their business strategies, operating models and processes - as well as products and services.
Challenges remain however.
While we see a convergence in the global frameworks around sustainability reporting which we expect will bring clarity and consistency in years to come, the level of uncertainty in where everything will land and what will be expected from companies is undoubtably high.
In South Africa, this is not helped by the daily practical challenges that companies face such as skills shortages, rolling blackouts and surging inflation. However local companies have already done a lot - at times probably more than European or American counterparts that have not had to deal with scarcity or the same social context. They should leverage this and articulate it clearly to stakeholders and investors, while acknowledging that more can be done. Expectations from stakeholders are only going to increase.
But sustainability initiatives are not just about wanting a gold star for good behaviour. They can support the foundations of companies’ value creation.
This is further underpinned by the recognition that climate change - if not addressed through mitigation actions - will have significant socio-economic impacts and consequences for the world as it interlinks with food security, health, ecosystems and social systems.
So how should companies respond?
- Understand what sustainability means in relation to your company purpose The key is to understand how sustainability relates to your company’s vision and to integrate it fully into your strategy.
- Recognise that everyone needs to be involved and identify clear roles and responsibilities. For instance, finance needs to ensure the right capital allocation to support addressing ESG risks and opportunities, while procurement needs to be on board to support sustainable supply chains.
- Invest in data systems and controls. The link between financial and sustainability reporting will only increase which means that the scrutiny on quality and consistency of sustainability information will increase as well. Companies need to ensure that ESG data is “investor grade”. Ultimately the old adage is true: you can't manage what you can't measure.
- Stay connected to your stakeholders and context to stay on top of emerging issues. Be crystal clear on how you understand what is material for you and don’t forget your employee and customers’ voices in this process.
- Adopt a multi-disciplinary approach to decision making acknowledging that when it comes to sustainability, there is often no correct action but a range of trade offs that must be navigated.
In the last 3 years, perhaps spurred by the pandemic and the recognition of the interconnectedness of the world, the sustainability issue has shifted within companies from discussions on the why and when to the what and how.
Increasingly this means that CEOs, CFOs and other functions are expected to contribute to the challenge. Chief Sustainability Officers’ (CSO) roles have shifted from a compliance focus to clarifying the long term value potential.
Despite the scale of the challenge, companies that embrace the opportunity to fully integrate sustainability into their purpose and strategy should be better positioned to navigate the upcoming changes and meet them with greater resilience. This will be fundamental to attracting capital to meet the costs of a changing world.
From a global sustainability reporting point of view and integration with financial reporting, it may be a few years still until there is a consistent set of guidelines.
However, considering the interconnectedness of SA companies to global markets via commodities and capital markets and the convergence in standards, companies should expect that mandatory reporting on issues is just around the corner and should prepare for this.
This should pay off in enhanced talent attraction and retention, improved brand positioning with customers, minimised risk and reduced cost of capital.
Companies should also be able to get significant rewards early if they continue to focus on the basics.
For example, while energy efficiency has been sidelined by the exciting prospects of investments in renewable energy, working on improved smart metering systems to enhance performance and drive efficiencies must remain the priority and many studies show these opportunities still exist. This will apply for water and waste and many of the inputs that drive our industries.
In the last 3 years, perhaps spurred by the pandemic and the recognition of the interconnectedness of the world, the sustainability issue has shifted within companies from discussions on the why and when to the what and how.
Companies should start their sustainability migrations now because the speed of change and expectations of stakeholders should not be underestimated. The rise in net zero commitments by companies may be derided as greenwashing but the fact that this is even on the agenda would have been unthinkable five years ago.
Summary
Once the ambition is set, there may be challenges to get there but it is a matter of time before stakeholders expect additional commitments such as zero waste, zero water, biodiversity impacts and gender balance and diversity across all levels of organisations. Many companies have started to commit to these goals but there is a lot further to go.
