Environmental, Social and Governance (ESG) has gained noteworthy traction in recent years. The concept can be explained as a holistic framework used to assess an organisation’s management of risks and opportunities in each of these spheres. The attraction of ESG compliance emanates from the confidence that it provides for investors. It is trite that an organisation that is able to perform well financially whilst operating with well managed ESG  awareness will garner favour with investors when considering the decreased risk and increased long-term potential for success. With ESG considerations coming to the fore, this demonstrates that investors are increasingly becoming aware of and taking active steps to support organisations that place social and environmental sustainability along with principles of good governance within the framework of their organisation.

In South Africa, ESG draws heavily from the King IV Code (an important South African corporate governance code which adopts an inclusive approach and was first introduced in 1994 by the King Committee, chaired by Mervyn King) which should be well recognised by most organisations in South Africa. The King IV Code (King IV) contains 17 guiding principles that were drafted in accordance with international standards. For example, Principle 4 states ‘the governing body should appreciate that the organisation’s core purpose, its risks and opportunities, strategy, business model, performance and sustainable development are all inseparable elements of the value creation process’.

King IV provides a detailed benchmark for all organisations in South Africa to strive to comply with (whether or not such companies are JSE listed). Compliance with King IV is not explicitly required by legislation, but the JSE does place compliance and reporting requirements on King IV for JSE listed companies. King IV seeks to impact organisations at a board level by encouraging principles related to effective and ethical leadership. It pushes organisations to adopt principles of ‘good governance’ that require them (at a governing body level) to adopt a sustainable approach to their operations. If an organisation complies with King IV, it will be better placed to substantiate claims that it conducts its business operations in an ethical manner, with good performance, effective control and legitimacy.  

In line with the approach adopted by King IV and to give context to the aforementioned concept of sustainable development, the JSE has formulated the Sustainability Disclosure Guidance 2022 (JSE SDG) which aims to improve the quality and availability of information both about the sustainability-related risks and opportunities that affect an organisation’s financial performance, as well as information about an organisation’s impact on people, the environment, and economy. While the JSE regulates listed South African companies, the JSE SDG could also be used as a guide by private companies and other organisations when compiling their sustainability plans. Against this pretext, the question to be posed is what sustainability information should a company disclose?

The JSE has identified certain key narrative disclosures being an organisation’s governance (board oversight); strategy; management and metrics which should be set out in the sustainability disclosure and which will signal to shareholders and other stakeholders that the organisation has a sound appreciation of the impacts, risks and opportunities associated with running its business.

The JSE SGD also provides guidance when dealing with disclosure on specific metrics, which  include (i) ‘governance metrics’ that comprise board composition, ethical behaviour, compliance and risk, and tax transparency;(ii) social metrics that comprise labour standards, human rights and community development, health and safety and customer responsibility and (iii) environmental metrics which include, climate change and energy, water use, pollution and waste, biodiversity and land-use.

Organisations making a sustainability disclosure may compile it in a variety of reporting formats, which may take the form on an integrated report, a sustainability or subject specific supplementary report, a combined report, or a representation of monetary figures dealing with sustainability issues in the organisation’s annual financial statements. Further details of the options are contained in the JSE SDG. The sustainability disclosure must make clear what its purpose is (for example, informing investors of the company’s long-term strategy), who the target audience is (i.e which stakeholder group) and information that will be of material interest to the target audience.

The JSE is of the view that if done properly, the sustainability disclosure can result in valuable benefits for the reporting organisation. The include enhancing the ability to attract capital and securing more favourable financing conditions; driving profitability and growth by identifying opportunities for cost savings, revenue generation and risk mitigation; improving compliance and risk management, and enhancing corporate reputation and stakeholder relationship. The noble intentions brought about by the JSE SDG is certainly a step in the right direction considering global efforts in furtherance of ESG.