Environmental, social and governance (ESG) activity globally this year will likely be driven by the urgency to deliver on the climate policy action points coming out of COP26 and implementation of the Paris Agreement, an ‘ESG Insights South Africa’ report published by Nedbank Corporate and Investment Banking (CIB) finds.

For capital markets, this will be about setting universal ESG reporting standards and performance metrics and restoring data quality and reliability for better investment decision-making.

The report indicates that the newly established International Sustainability Standards Board (ISSB) is intended to improve the quality, transparency and reliability of corporate reporting on climate and other ESG-related matters.

Also, complementary efforts by the Securities and Exchange Commission in the US and the European Union’s Corporate Sustainability Reporting Directive (CSRD) will underpin an accelerated adoption of these disclosure standards, it points out.

Looking at South Africa, the report notes that the JSE has delivered draft climate and sustainability disclosure guidelines.

While these are voluntary guidelines currently, the report posits that investor demand for standardised and better-quality disclosures will drive moral suasion and compel faster adoption by listed firms on the local bourse.

Presenting the findings of the report on April 6, Nedbank CIB senior research analyst Jones Gondo pointed out that, while global capital markets are more driven by regulation, South Africa is more principles based.

Therefore, he said, South African corporates can be quite slow to adopt these, compared with other capital markets such as in Europe, which do so not out of a sense of moral obligation, but rather, because they are regulated to.   

The report also notes that the reliability, accuracy and comparability of ESG ratings and ESG data depend on the disclosure standards alluded to earlier.

It indicates that there remains far too much dissonance in ESG performance outcomes.

The International Organization of Securities Commissions has recommended harmonisation of core performance metrics and that ESG data providers fall under securities market regulation in the same standing as credit rating agencies, index providers and other financial data aggregators.

The report says that, overall, all these efforts on data and reporting are intended to enable the market to be better able to allocate capital towards climate and sustainability investments and maintain the integrity and commerciality of the asset class as it grows.

The report explores the potential shift away from “in-principle” voluntary ESG disclosure guidelines towards more prescriptive, mandatory directives as a key driver of growth in ESG assets.

The report also outlines the progress JSE-listed companies have made in terms of sustainability disclosures and how these have translated into ESG disclosure and performance scores.

Gondo indicates that materials (mining) companies perform the best in terms of disclosure, owing to them being well versed in this from mining licence regulations, while tech companies performed the worst.

He also noted that the country performs well in terms of governance disclosure, but is lagging in environmental disclosure.

The report also zeroes in on challenges the investor community faces in pursuing ESG-aligned investment mandates in the local market, especially in terms of passive index tracking and access to listed corporate debt.

It points out that both of these markets lack the size, scale and diversification required for thematic investing, as is the trend abroad.

Moreover, the report posits that “greenwashing” cynicism undermines the move towards explicit ESG benchmark adoption.

The report indicates that domestic investors are cognisant of the fact that South Africa is systemically exposed to carbon and climate change risks and, therefore, divestments or exclusionary screening in passive strategies, may not be effective measures to solve system-level challenges, without causing further harm to society and livelihoods.

Instead, the report posits that South African investors will remain invested and employ rigorous corporate engagement strategies to drive the transition towards a low-carbon economy and achieve more sustainable outcomes, using proxy votes as one effective tool.

Despite this, South Africa’s ESG corporate debt issuance grew robustly in 2021, with R10.3-billion issued (3.9x more than in 2019) and bringing the tally of notes outstanding to a little over R17-billion.

The report estimates that the loans market wrote between R20-billion and R30-billion in 2021 and will also experience robust growth as renewable energy deals are disbursed.

Over the longer term, it expects activity in the unlisted space to be more vigorous than in listed markets. This is underscored by the expected changes to Regulation 28 of the Pension Funds Act; which will provide asset owners with greater scope and scale to pursue infrastructure as an asset class.

As a result, the report posits that ESG approaches in South Africa will be best expressed through private debt and equity markets, chasing infrastructure deals in sectors such as clean energy and water and areas aligned with the country’s National Infrastructure Plan.