SA is likely to make sustainability reporting mandatory for financial institutions, retirement funds, collective investment schemes and large listed companies within the next 18 months. This is therefore a good time to consider how effective environmental, social & governance (ESG) reporting has been in making the world a better place.
The reality is that ESG reporting often allows a company to demonstrate that it is aware of sustainability risks to its balance sheet without taking action that delivers positive real-world impact. We need a new reporting emphasis on the tangible actions a company has taken to improve the environment in which it exists: its impact materiality. Simply put, we need ESG reporting that includes impact.
The business case for sustainability is clear. Businesses cannot thrive on a planet that has run out of water and other natural resources. The common ESG reporting focus on input disclosures is not enough; we need to use sustainability reporting to argue, at executive and board level, for action that truly mitigates the full suite of sustainability risks a business faces. It is, after all, about survival.
Market pressure is rising
But will making ESG reporting compulsory be effective in this concrete manner? That is up for debate. International governance expert Mervyn King points out that corporate misconduct takes place regardless of legislated governance rules. “You cannot legislate for these things. Market and peer pressure is much more effective.”
Businesses cannot thrive on a planet that has run out of water and other natural resources.
The good news is that market pressure on companies to act in more socially and environmentally aware ways is ramping up. Two-thirds (75%) of millennial (aged 29 to 44) and Gen Z (13-28) investors believe investments can address climate change and inequality, according to a report by the Morgan Stanley Institute for Sustainable Investing (2023) and the UBS Investor Watch Report (2022).
These groups are driving surging demand for ESG funds, green bonds and investment products aligned to sustainable development goals. They show preference for impact measurement frameworks such as the SDGs, the UN’s blueprint for peace and prosperity for people and the planet, adopted in 2015.
The market pressure towards a more impact-focused reporting regime is good news for everyone: the SGD deadline is 2030, and the UN calculated this year that only 17% of the targets are on track to be achieved worldwide.
Risk awareness drives better governance
Added to the moral imperative of working to ensure our socioeconomic world is sustainable is the fact that to survive in our increasingly volatile, uncertain, complex and ambiguous world, businesses need to be fully aware of all the risks they face — social, economic and environmental — and take tangible action to mitigate them. It is a sound governance tactic in this world, because heightened risk awareness leads to better risk mitigation.
Making sustainability reporting mandatory will give legislative impact to an already growing trend.
Making sustainability reporting mandatory will give legislative impact to an already growing trend. However, there are many different reporting standards, which can be confusing and onerous for businesses to deal with. But there is further good news.
Already key stakeholders, such as the Financial Sector Conduct Authority and the department of trade, industry & competition, are working to formalise reporting requirements and draft an amendment bill proposing ESG reporting obligations.
Meanwhile, the JSE has aligned its disclosure guidance with the International Sustainability Standards Board’s international financial reporting standards.
The move to make ESG reporting mandatory in SA presents a powerful opportunity. By focusing on real-world impact, which is then reported, businesses can attract investment while also strengthening their own resilience and long-term viability in an increasingly complex and interconnected world.
• Van der Merwe, a long-standing member of the King Committee on Corporate Governance who was involved in writing most of the King reports and a member of the JSE advisory committee, is executive chair at FluidRock Governance Group and serves as a non-executive director of a number of other companies. This article was inspired by presentations delivered at FluidRock’s third annual conference in August.
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