ESG Barometer reveals major focus areas for SA, Kenyan firms
Green technology, renewable energy, resource management and social development are core environmental, social and governance (ESG) focuses among South Africa’s listed firms. This fact emerged from the 2024 Sanlam ESG Barometer which surveyed 69 large, listed firms on the South African (50 firms) and Kenyan (19 firms) stock exchanges.
From governance to impact
Teboho Makhabane, Head of ESG and Impact at Sanlam Investments, commented at the report launch that the conversation was shifting from risk-focused governance matters towards social and environmental impact, as exemplified by the United Nations Sustainable Development Goals (UN-SDGs). Over 90% of respondents admitted that the 2030 UN-SDGs were ‘in focus’ as part of their ESG strategies. In South Africa, the top five included SDG 8, decent work and economic growth; SDG 1, no poverty; SDG 13, climate action; SDG 12, responsible consumption and production; and SDG 10, reduced inequalities.
You may be excused, dear reader, for thinking that ESG has taken a backseat given local and global media’s current obsession with elections, social upheaval and war. Nowadays, diving into the online news, you are more likely to encounter stories about Harris vs Trump; Hamas vs Israel; South Africa’s GNU or two-tier policing in the United Kingdom than stories covering environmental or social issues. But climate change remains an issue; and Sanlam’s report places ESG strategy firmly back in the spotlight, raising awareness around the main issues facing allocators of capital in this field.
The ESG Benchmark is full of the flowery language one has come to expect from such initiatives. Under the headline ‘future ESG investment priorities’ the survey reveals: “a strong focus on social development, resource management and renewable energy and green technology; these areas offer immediate social and environmental benefits and are also crucial to creating shared value, where market potential is interwoven with societal needs and policy actions, driving sustainable and inclusive economic growth and wellbeing.” Ugh.
Concerns over climate adaptation, resilience
Your writer’s whining over the report’s style aside, the survey does raise real concerns over a lack of corporate imagination in addressing climate adaptation and resilience. These areas “have received limited attention despite escalating climate risks and vulnerabilities in both Kenya and South Africa that pose significant threats not only to society but also the financial and operational sustainability of companies,” Sanlam wrote.
In his foreword to the survey, Group CEO Paul Hanratty said that modern approaches to ESG must be deliberate, shared and sustainable. “Balancing capital attraction with ESG; shifting to low-carbon technologies while looking after vulnerable communities; and engaging rather than simply excluding are some of the tough questions we must explore,” he wrote. Your writer pored over the 94-page benchmark in an attempt to extract the key challenges that listed firms face when designing and implementing ‘measurable and impactful’ ESG strategies, and allocating capital to same.
Data and measurement were singled out as the most significant obstacles, with respondents highlighting issues related to the availability, accuracy and consistency of ESG data and metrics. The ‘measurement of impact’ task is compounded by wide variances in African versus European markets as to what constitutes an ESG investment, let alone the arguments that play out under the heading ‘just transition versus transition’. “ESG strategies are often tailored within the limits of what is quantifiable, potentially side-lining more ambitious or long-term initiatives such as those focusing on adaptation and resilience,” the report conceded.
Top ESG strategy implementation constraints
South African respondents mentioned technology and infrastructure; external factors; supply chain and external partnerships; and operational constraints as top ESG strategy implementation challenges. According to the report, “operational constraints include budgetary issues that limit ESG initiatives, such as the cost of new technologies, training programmes or sustainability certifications.” Firms plying their trade out of South Africa remain concerned about “the complexities involved in managing sustainable supply chains, particularly in sectors such as transportation and construction which are difficult to decarbonise.”
In keeping with the recent trend of creating catch-phrases to drive home a point, Sanlam has conjured up the phrase ‘ESG additionality’ which is loosely described as the outcomes from actively redirecting capital towards fostering a more sustainable future. “This approach moves beyond merely avoiding investments in firms with poor ESG profiles or where ESG initiatives entail significant costs; instead, ESG additionality evaluates firms based on their potential for enhanced sustainability through strategic investments,” Santam writes. The approach seems to be bearing fruit.
When asked ‘Does your company actively look for new projects that have positive outcomes on society or the environment?’ 95% of South African and 94% of Kenyan listed firms answered in the affirmative. This approach was reinforced by respondents’ commitment to social and environmental impact, with the majority of projects expected to deliver developmental additionality. In the South African context, the focus was strongly on something called financial additionality, described as providing capital for sustainability-focused projects that would not otherwise have been available.
Investors still worried about return erosion
The big question that bugs investors and shareholders centres on how ESG strategies, and the redirection of capital to sustainability and impact, affects returns. “ESG is often conflated with corporate social responsibility (CSR) which focuses on activities like charitable donations, community engagement, and volunteering aimed at societal goals and enhancing company reputation,” wrote Sanlam. “This is evinced in this year’s survey, where 22% of South African and 20% of Kenyan companies expected no financial returns on their ESG projects, and 5% of South African companies expected returns below their cost of capital.”
The above revelation is somewhat misleading because genuine ESG investments are meant to yield financial returns in addition to delivering impact. Restated in this way, most respondents expected returns from ESG investments in line with their cost of capital, with around a third of respondents from both countries anticipating financial returns exceeding their cost of capital. The survey concluded that the low percentage of respondents expecting returns below their cost of capital indicates that ESG projects are increasingly viewed through a lens of profitability, not just corporate philanthropy.
Doing ESG the African way
“We are making progress as a business community in Africa; most companies now seek projects with positive societal and environmental outcomes,” concluded Hanratty. “The idea of additionality is deeply embedded in Africans’ way of doing business ... as corporate Africa Inc we have the influence, resources and capability to move the needle and make change happen.”
Writer’s thoughts:
The pressure for retail consumers and their advisers to bake ESG factors into their investment decision making seems to have abated. Do you agree or disagree? And should ESG be driven by institutional rather than retail capital? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
