In August 2022 86 CFOs from multinationals published an open letter to the International Sustainability Standards Board (ISSB), highlighting six areas where it believed the ISSB could improve upon its recent draft suitability standards. The standards intend to set a global baseline for sustainability disclosures. However, establishing that baseline is proving difficult.
“One of the themes of the CFO letter is that concept of convergence and global alignment and harmonisation,” says Paula-Ann Novotny, a senior associate at Webber and Wentzel. She refers to the current ESG regulatory environment as an “alphabet soup”, with different jurisdictions and bodies all publishing regulations that often simultaneously copy and diverge from each other.
The ISSB drafts face criticism for not including the concept of ‘double materiality’. A principle that requires businesses to not only disclose the impact of ESG factors such as climate change on their business but also how their business, in turn, impacts climate change. In contrast, EU disclosure rules have adopted the double materiality principle.
The jumble of different jurisdictions and standards makes it difficult for companies to know how to report ESG and for investors to evaluate these reports. A Nedbank study paper notes how different definitions used in ESG reports lead to vastly different rankings by various rating agencies. Experts say the lack of regulation around the methodology of rating agencies is also contributing to this ambiguity.
“This is what’s also caused confusion and frustration in the markets,” says Jayne Mammatt, an ESG partner at Deloitte. “A company will put out a good set of reports, and then the rating agencies will say, ‘we want more information, we want different information.”
Given the lack of standardisation, CFOs face difficulty deciding how to report on their companies’ ESG efforts. Novotny says companies should consider various factors, including which jurisdiction the company falls under, if any industry bodies in its sector set benchmarks, what peer companies are doing, and what stakeholders expect.
Experts believe whatever the outcome of the ISSB process, these standards and those in the EU and UK will seep into South African regulations. This influence is already seen in the JSE’s Sustainability and Climate Disclosure Guidance, which draws from various international frameworks.
A copy and paste approach to ESG guidelines or rules is an area of concern for some CFOs. “It’s not easy to cross-pollinate from developed markets,” says Novotny, who explains that one of the primary concerns of her firm’s ESG clients is the view that developed countries’ guidelines are not precisely applicable to the South African context.
The context faced by South Africa is both unique and double-edged. The country is by far the continent’s biggest carbon emitter and the 12th largest in the world. As a developing country, it is also less likely to be able to assist its population in coping with the destructive effects of climate change. On the other hand, many jobs in the country with one of the world’s highest unemployment rates are tied to carbon emissions.
This enigma is supposed to be addressed by the concept of a ‘just transition’ outlined in the Presidential Climate Commission’s recently published framework.
“I think the just transition is crucial,” says Mammatt. “If you transition too quickly away from coal, people will lose their jobs. The jobs will be replaced by new industries and renewables, but it’s not going to be the same people in the same jobs in the same area. So we’ve got a massive balancing act.
“Do we have the answers as a government and economy yet? Probably not. But I think it’s very high on everyone’s agenda.”
It’s not only Cop26 commitments and impending ESG reporting requirements that are driving low carbon thinking by South African corporates. Mammatt says that developing green energy capacity often makes business sense. “It’s almost a no-brainer for most businesses to look at doing their energy transition to renewables and doing that because you secure your own energy, given the country’s insecure electricity supply, and the cost of energy is going up.”
Additionally, many businesses will soon need to adhere to international standards regardless of local factors. “The EU is putting in a border tax so we can talk about our own challenges, but if you want to export it to the EU from a carbon-intensive economy, you’re going to get taxed, which makes our products more expensive, and then you become less competitive.”
