Most people glaze over at environmental jargon and acronyms like ESG. They shouldn’t — but they do.
So here’s a quick guide to how you can help the environment: understand ESG. It stands for environmental, social and governance.
Big pension funds, insurers and asset managers are obliged to account for ESG in their investment activities. In simple terms, they must consider any factor that may affect the sustainable, long-term performance of the assets they invest in.
South African law requires a pension fund to consider any factor that may affect the sustainable long-term performance of an asset. Investments should incorporate mechanisms that support the diligent discharge of stewardship duties as they relate to sustainable development.
The Financial Sector Conduct Authority, which regulates pension funds, clarifies this. Sustainability, it says, is “the ability of an entity to conduct its business in a manner that primarily meets existing needs without compromising the ability of future generations to meet theirs”.
The government’s Public Investment Corporation (which oversees more than R2 trillion) explicitly requires investments that “promote sustainable development”.
The Code for Responsible Investing in South Africa was formed to help guide institutional investors in implementing sustainable, responsible and long-term investment strategies.
The Institute of Directors in Southern Africa prepared the King corporate governance codes, which apply to public companies listed on the Johannesburg Stock Exchange. The codes recommend that institutional investors incorporate ESG into investment decision-making. JSE-listed companies must report annually on the extent to which they have complied with the codes and publish sustainability reports.
Regulation has also influenced ESG practices among other institutional investors and asset managers. Insurers, for example, must prepare policies that set out strategies for investing, including asset allocation and risk management, in ways that consider sustainability.
The Sustainable Returns for Pensions and Society project was launched to empower South African retirement funds to comply with the Pension Funds Act. The project involved extensive consultation with the retirement investment industry over two years, culminating in a guide for integrating ESG considerations into investment.
Several non-profit organisations are involved in advocacy, engagement, stewardship activities and shareholder activism to promote ESG and exert influence on institutional investors such as pension funds, insurers and mutual funds.
Activism at public companies’ annual general meetings — where firms report to shareholders — includes scrutiny of decisions affecting climate risk, greenhouse gas emissions, and lending to coal-fired power projects, coal mining, oil and gas, and other carbon-intensive fossil fuel activities.
These efforts have successfully pushed for climate-related policies, coal-lending restrictions and improved disclosures in the South African banking sector.
The Centre for Environmental Rights has a corporate accountability team that engages with companies, investors and industry associations, and promotes shareholder activism to compel compliance with environmental laws and regulations.
ESG-related litigation risks for corporations are also growing. Companies face significant legal exposure over inaccurate or misleading reporting and disclosures, including those related to climate change.
Screening out companies with questionable ESG practices can further reduce an already limited investment universe for investors and asset managers. That makes active ownership and engagement even more important.
Public companies are required to have social and ethics committees that deal with ESG matters. Shareholders therefore play a significant role in holding management accountable — which is why shareholder activism is rightly gaining prominence.
You can help drive meaningful change. Shareholders and citizens influence corporate behaviour by demanding transparency, accountability and genuine environmental action.
Each step — from supporting companies committed to sustainable practices to holding firms accountable for their ESG commitments — can shift the needle on climate action. Our choices influence markets, and our voices hold companies to a higher standard.
By Triple-P’s Andrew Roberts.
