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The importance of ESG for all organisations
On the 14th of June 2022 the Johannesburg Stock Exchange (JSE) released its sustainability and climate disclosure guidelines which assist listed companies on best practices ESG disclosure. What this means for JSE listed companies is that investors and other stakeholders use a set of criteria known as ESG, which stands for Environmental, Social, and Governance, to assess a company's sustainability and ethical impact. Since investors and other stakeholders demand greater transparency and accountability on environmental and social issues, ESG considerations are becoming more crucial for companies, even those that are not listed. Although it is not yet a regulatory requirement to implement ESG disclosure for non-listed companies, it is noted that ESG-focused businesses are viewed as being more ethical, responsible and sustainable, which can lead to better financial results and the creation of long-term value.
It is important to note that ESG considerations have been around for a while now, but they have become increasingly important in recent years. The rise of ESG can be attributed to several factors, amongst others, which include growing concerns over climate change and the impact that businesses have on the environment.
In terms of the environmental criteria, organisations need to take into account their environmental impact, including its use of natural resources, energy, and waste, as well as its carbon footprint. Therefore, companies must consider how they affect the environment, including how they consume natural resources, emit carbon dioxide, and their waste production. The hazards and risks related to climate change as a result of their production processes should also be known.
The social criteria take into account how the business affects individuals, such as staff members, clients, and the community as a whole. This encompasses community involvement, diversity and inclusion, labour practices, and human rights. What this means for businesses is that they must think about how they affect society as a whole, including their interactions with staff, clients, suppliers, and the local communities where they operate. An effort to uphold human rights while promoting diversity, equity, and inclusion needs to be made.
The governance criteria take into account an organisation's management style, ethics, accountability and transparency practices. This encompasses the make-up of the board, executive compensation and shareholder rights. Firm governance frameworks such as independent and diverse boards, efficient risk management procedures and open reporting are necessary for businesses. An effort should also be made to ensure that executive compensation is in line with objectives for sustainability and long-term performance.
In addition to the above-mentioned criteria, businesses should also take into account their supply chain, product quality, safety, technology, data privacy as well as security. In order to produce long-term value for all stakeholders, it is critical for businesses to incorporate ESG into their overall strategy and decision-making processes.
For a business looking to implement ESG practices, the following process can be followed:
- Perform a preliminary evaluation of the business’s current ESG performance.
- Based on the results of the preliminary evaluation, develop a prospective ESG strategy.
- Establish ESG governance mechanisms for implementation.
- Engage all stakeholders in order to gain an understanding of their expectations and concerns over ESG performance.
- Monitor and evaluate progress.
- Integrate ESG into decision-making.
Implementing ESG requires a comprehensive plan that integrates governance, strategy, reporting, and stakeholder involvement for the long term. Companies can increase long-term value and improve their brand and stakeholder trust by prioritising ESG.
Tumelo Makibelo
Manager: Risk Advisory Services, Johannesburg
