The Sanlam ESG Barometer: From risk management to additionality

The first study of its kind in South Africa, the Sanlam ESG Barometer evaluates the state of environmental, social and governance (ESG) management in companies listed on the Johannesburg Stock Exchange (JSE) and assesses how they are changing their businesses to deliver improved ESG outcomes. The report, produced by independent research house Krutham (formerly Intellidex) in partnership with Business Day, was published in March 2023.

The ESG focus globally has increasingly been divided between a risk approach, which assesses companies on whether they manage ESG risks optimally to reduce negative financial outcomes for the company, and an additionality approach that seeks to understand whether companies have a positive effect on environmental and social goals.

The study is aimed at assessing the ESG practice in South Africa and whether companies are implementing ESG processes to mitigate risk or enhance positive outcomes.

Definition: ESG additionality
The concept of realising additional ESG benefits as an outcome of an organisation’s additional investment or operating activities that would not have occurred otherwise.

Methodology

The research took the form of an online survey, conducted between November 2022 and January 2023, with 41 JSE-listed companies participating. The survey covered four areas: descriptive data about the company, motivations for implementing an ESG strategy, overall ESG objectives and an exploration of ESG additionality.

On the issue of ESG additionality, the survey questioned whether companies specifically identify products, projects or sectors for investment to enhance their ESG performance with the aim to measure the adoption of an active, additionality-oriented ESG strategy. The insights from this section formed the basis for the case studies.

An active approach to ESG investing

97%

of respondents confirmed that their company had identified particular products, projects or sectors in which to invest to improve their ESG performance

90%

measure the social and environmental outcomes of their ESG initiatives

Measuring ESG impact

90%

of the respondents not only track social and environmental outcomes, but also conduct comparative before-and-after analyses

90%

firmly believe in their ESG strategies achieving the desired additionality in environmental and social outcomes

70%

believe they also attain financial additionality as they commit new funds to people and planet-centred projects

The benefits of ESG investing for operations and reputation 

• By considering a variety of longer-term factors affecting company value instead of only focusing on short-term profit and loss, companies can alter their operational strategies, leading to greater efficiencies. 
• ESG strategies can boost staff motivation, further enhancing productivity. 

Since implementation of Company ESG strategy…

% respondents Stayed the same | Improved

… reputation among the general public has n=35

29% Stayed the same

21% Improved

… operational performance has n=34

41% Stayed the same

59% Improved

… the cost of capital has n=31

71% Stayed the same

29% Improved

ESG strategy alignment with Sustainable Development Goals  

• The United Nations (UN) Sustainable Development Goals (SDGs) play a crucial role in shaping the ESG strategies of the companies surveyed.  
• There is strong alignment of respondents’ ESG strategies with SDG 8: Economic growth, a finding that is reflective of the pressing need to address South Africa’s current economic challenges. 
• SDG 13: Climate action is another significant SDG that companies have integrated into their ESG strategic planning, followed by SDG 12: Responsible consumption and production. 
• Despite unequalled levels of inequality, SDG 10: Reduced inequalities only ranks fifth on local company SDG engagement.  
• The prioritisation of development needs does not always offer a true reflection of the most pressing development issues. This risks misalignment between allocating resources for development purposes and actually addressing urgent country-specific development goals. 

1: No Poverty

South Africa = 36%

International = 22%

Corporate SDG engagement

% respondents South Africa | International

2: Zero Hunger

South Africa = 22%

International = 20%

3: Good health and well-being

South Africa = 64%

International = 50%

4: Quality Education

South Africa = 61%

International = 43%

5: Gender Equality

South Africa = 56%

International = 49%

6: Clean water and sanitation

South Africa = 47%

International = 42%

7: Affordable and clean energy

South Africa = 50%

International = 47%

8: Decent work and economic growth

South Africa = 92%

International = 52%

9: Industry innovation and infrastructure

South Africa = 58%

International = 49%

10: Reduced inequalities

South Africa = 59%

International = 28%

11: Sustainable cities and communities

South Africa = 36%

International = 46%

12: Responsible consumption and production

South Africa = 72%

International = 51%

13: Climate action

South Africa = 78%

International = 63%

14: Life below water

South Africa = 11%

International = 16%

15: Life on Land

South Africa = 25%

International = 22%

16: Peace, justice and strong institutions

South Africa = 31%

International = 23%

17: Partnerships for the goals

South Africa = 56%

International = 46%

CASE STUDY

Conclusion

The findings suggest that South African companies are interpreting the ESG imperative as proactively improving social and environmental outcomes rather than simply managing risks. In the global context, this approach would appeal to investors who are concerned with driving improved environmental and social outcomes instead of only managing risks of adverse events.

This is an important finding because as South Africa confronts challenges such as transitioning its energy supply to sustainable sources, it will require considerable investment. If global investors are focused on risk other than on proactively allocating capital towards transition and other forms of additionality, then South African firms will find it difficult to attract the investment needed to deliver improved outcomes.

Source: The original version of this article was published in the Trialogue Business in Society Handbook 2023 (26th edition).