By Wildu du Plessis, Head of Africa, Baker McKenzie
As African businesses begin to recover and build the necessary resilience to successfully navigate COVID-19 disruption, a focus on Environmental Social and Governance (ESG) strategies is proving essential for long-term success. In order to stay competitive, organisations based in Africa are engaging meaningfully with ESG to build robust sustainability strategies that comply with global and local mandatory and voluntary ESG standards and codes, and which fit in with their overall strategic priorities.
The definition of Environmental, Social and Governance (ESG) encompasses a broad range of issues across the spectrum of Environmental (climate change, biodiversity, waste, water and resource use, pollution), Social (human rights, labour practices, HSE, diversity); and Governance (corporate governance, ethics, compliance) matters.
Post-COVID-19, the discussions around ESG are resulting in an added emphasis on the Social aspect – which focuses on protecting the health of an organisation’s workers and the wider local populations in which these businesses are based. Organisations are looking at ways to build better social programmes that are more resilient to future pandemics and ensure good business practice. A focus on issues such as enhancing considerations around the health and safety of employees and communities, implementing diverse and inclusive workplace cultures, and building good management teams that are able to pull employees together in virtual settings, will put companies in a strong position to move forward.
As climate change impacts become clearer and nearer, there is also an added emphasis on the Environment aspect of ESG. There is a major role for ESG policies to play in mitigating some of the effects of climate change, through planning and building for hotter temperatures, higher sea levels and more extreme weather conditions, for example. Organisations are adopting new strategies that address climate change risk and identify the sustainable opportunities that arise from addressing climate concerns. To regulate this, there are likely to be developments from African regulators in the near future that address climate risk disclosure requirements for businesses operating in the continent.
The Governance aspect has also been emphasized by the pandemic, with an increased focus on due diligence around compliance with regards to anti-bribery and corruption, data privacy and cyber security legislation, for example. ESG risk management is expected to become a mainstream component of corporate due diligence programmes, and corporate boards are being held accountable for their ESG practices by their shareholders, stakeholders and management teams.
We already have some of the larger African jurisdictions with mandatory ESG and sustainability reporting frameworks and, going forward, we are expecting more and more African regulatorsto replace current voluntary frameworks with mandatory ones or to adopt new mandatory frameworks. In turn, organisations operating in Africa will seek guidance and more detail from corporate regulators on how they want to see ESG reported and the practices behind the reporting process.
In South Africa, there are a number of laws that govern ESG factors, including business and financial sector conduct, economic and social empowerment and environmental protection. Voluntary codes such as the King IV Code on corporate governance and the Code for Responsible Investing in South Africa also serve as a guide to businesses on ESG considerations. Other examples include Kenya, where the Capital Markets Authority introduced Stewardship and Corporate Governance Codes in 2017 and Nigeria, where the Nigerian Code of Corporate Governance was introduced in 2019. Globally, in addition to numerous country-specific laws, there are a plethora of voluntary sustainability focused codes and standards, including the UN Guiding Principles on Business and the Human Rights and UN Guiding Principles Reporting Framework.
Risks for non-compliance with the multitude of global and local laws, voluntary codes and best practices governing ESG factors range from criminal prosecution and hefty fines, to reputational risk and business failure as a result of not fulfilling ESG commitments. Alongside these developments, actual and perceived non-compliance with ESG regulations and best practices have engendered activist shareholder protests and action against the parent companies of global groups.
For African organisations, maintaining a long-term, sustainable strategy will ensure sound financial performance, full compliance with local and global laws and frameworks, and substantially increased resilience in a challenging post-pandemic environment.