Environmental, social and governance (ESG) principles have become essential to modern business operations, marking a significant shift in the corporate responsibility landscape. In South Africa, this transition brings with it unique challenges and opportunities, particularly for corporations that are listed on the Johannesburg Stock Exchange (JSE).
Prof Neels Kilian from the Finance, Trade and Innovation (FTI) research group at the Faculty of Law has dedicated his work to understanding and addressing the legal challenges surrounding the application of ESG principles.
An inconclusive structure
At the core of South Africa’s ESG issues lies a fundamental legal gap, Prof Kilian explains. “South Africa does not have comprehensive legislation that fully addresses all aspects of ESG matters. As a result of this absence, businesses have to negotiate a complicated web of conflicting standards and expectations.”
The JSE has tried to close this gap by creating its own set of ESG criteria, which businesses are required to include in their integrated reporting. According to Prof Kilian, this approach has brought about new issues of its own.
"The JSE's ESG metrics are not aligned with those of other global stock exchanges," he says. “When we look at overseas comparisons, like the CAC 40 ESG Index of the Paris Stock Exchange, which employs completely different ESG parameters for its top 40 listed companies, this misalignment becomes problematic.”
This inconsistency causes confusion for investors and companies, and Prof Kilian says, “This could be addressed by introducing legislation in South Africa that standardises ESG metrics across the JSE, asset managers and ESG rating agencies.”
Area of focus
Prof Kilian's research focuses on greenhouse gas (GHG) emissions, one of the most controversial topics on ESG reporting. His work compares reporting practices in the United States, the European Union and South Africa and it identifies gaps in the calculation and publication of emissions data. Companies report their emissions in accordance with the GHG Protocol, which divides emissions into three categories – Scope 1 (direct), Scope 2 (indirect from purchased electricity), and Scope 3 (indirect from supply chains and other external activities).
“Theoretically, businesses that utilise financial or internet services ought to be able to figure out the number of emissions they produce.” Prof Kilian cites the King reports and the Companies Act of 2008 as the legal framework that oversees corporate governance and ESG.
Further, stakeholders must put policies in place that confirm the accuracy of ESG disclosures and make sure they go beyond simple PR campaigns. “If the data is inaccurate, it can lead to regulatory breaches and mislead investors,” says Prof Kilian.
Action against greenwashing
In support of structural reforms in corporate governance, Prof Kilian recommends that businesses establish at least a green or environmental committee, separate from their current audit and ethics committees.
"A committee of this kind would be more equipped to interact with ESG rating agencies to ensure transparency.” He warns that rating agencies can manipulate the weighting of ESG factors to make a business appear more compliant than it actually is. He states that a specialised committee would reveal the precise environmental considerations involved and highlight any suspicious greenwashing in financial statements.
The challenge of implementing international ESG standards in the South African context requires careful consideration of local economic realities. "A company considered ESG-compliant in one country by complying with the relevant rules or legislation that country may be deemed non-compliant when assessed against the standards of another country," says Prof Kilian.
In an effort to bridge this gap, the JSE is drawing inspiration from other UN accords, such as the UN Global Compact, which outlaw’s child and slave labour. "It may be unrealistic to expect South African companies to fully comply with international minimum emission thresholds across all three scopes, given the country's unique economic challenges," states Prof Kilian.
A way forward
Prof Kilian’s research highlights a thorough comprehension of ESG concepts that goes beyond simple compliance. He urges investors and businesses to adopt a holistic approach to understanding ESG.
“ESG is still highly complicated, especially because of the impact of UN instruments that support international consistency and add to ESG factors.”
Prof Neels Kilian
