Issues of an ESG nature, and the risks and opportunities that these presents to companies and economies, have received widespread publicity over the past decades.
Examples of the financial repercussions of failing to consider the environmental impact of a companyâ€™s operations, of dismissing mounting social pressures and socio-economic challenges, or of overlooking the need for effective corporate governance processes, are well documented.
This demand for improved ESG performance translates into a need for companies to disclose and publish information on the impact of their operations on the environment, their activities to mitigate social challenges and their efforts to implement good governance.
A number of frameworks exist which provide a global standard against which companiesâ€™ ESG performance can be measured. South Africa is amongst the leading countries globally on ESG disclosure and reporting according to recent studies . However, growing demand for RI will drive the need for further and more sophisticated ESG data and analysis.
The major international frameworks developed include:
Global Reporting Initiative (GRI) Standards
The UN Global Reporting Initiative (GRI) Standards (2016) framework provides a set of reporting principles intended to improve transparency and accuracy of an organisations sustainability reporting.
The GRI framework has been used extensively around the world as the basis for sustainability reports. The framework enables companies to benchmark sustainability performance against global standards, norms and voluntary initiatives.
In South Africa, the King IV Report recommends the GRI as a guideline for sustainable reporting. See www.globalreporting.org
Carbon Disclosure project
The Carbon Disclosure Project (CDP) provides a system by which organisations can measure, disclose and manage their environmental information, promoting the inclusion of climate-related information in mainstream corporate financial reporting. A repository of greenhouse gas emissions data is maintained on the CDP website, and companies are ranked according to the quality of their reporting. In South Africa, the CDP has partnered with the National Business Initiative. The first CDP South Africa report was launched in 2007. The disclosure quality of the top 100 companies listed on the JSE is assessed in the report which is published here.
International Integrated Reporting Council (IIRC), International Integrated Reporting (<IR>) Framework
In South Africa, there has been a strong drive to introduce integrated reporting. To date, South African companies have placed a strong focus on the governance aspect of ESG considerations, regarded as a global leader in the establishment of principles defining better corporate governance. The Integrated Reporting Committee of South Africa launched in 2010 pursuant to King III’s incorporation of integrated reporting, and issued guidance in 2011 preceding the international framework. The international framework was launched in December 2013 with extensive application across South Africa, particularly since Integrated Reporting was further cemented in King IV and listed companies therefore essentially have to do it.
Integrated Reporting incorporates ESG considerations in financial reporting as it promotes a concept of a multi-capital approach to reporting across the entire business. This forms part of standard financial reporting, as opposed to a separate exercise.
The IRC of SA has annually released an information guidance document about an aspect of integrated reporting and the IIRC is currently refreshing the framework. Since 20XX there are two awards in South Africa that reward companies for their reporting.
The IR Guidelines are available at https://integratedreporting.org/resource/international-ir-framework/
ESG ratings and indices
There has been an exponential increase in ratings and indices that investment service providers offer to aid investors in assessing ESG performance.
The JSE currently operates the FTSE/JSE Responsible Investment Index Series which leverages the global FTSE ESG Ratings to offer investors access to ESG data as well as a benchmark and a tradable index product. Large organisations, such as HSBC and Bloomberg, provide information and analysis services to RI investors, and, third party firms use this information to classify companies for investors in terms of ESG compliance.
To this end, there is an onus on asset owners to ensure that reporting on material ESG impacts and imperatives continues to receive the attention from corporates required to promote the extensive uptake of this practice.
Some of the providers in this sector are major financial services companies that have developed an ESG research capability such as MSCI or independent companies that solely provide this kind of research (e.g. Sustainalytics, Vigeo, GES, Ethix, EIRIS, Solaron, InRate and others). The larger companies often cover several thousand listed companies globally; others specialise in companies in their region. These companies often also offer other aligned services, such as bespoke research on particular themes, proxy voting services and engagement with companies.
Many institutional investors now rely on these research providers rather than doing this primary research themselves. However, the challenge they face having bought this information is to set up effective internal systems that enable investment managers to properly integrate this research into investment decision-making and/or to use it as the basis for informed engagement. Often, additional in-house research is needed to be able to link this qualitative research to investment decision-making.
 See PRI service providers membership lists for a full list of such providers. http://www.unpri.org/signatories/#psp