THE INTERNATIONAL COMPARATIVE LEGAL GUIDE: ENVIRONMENTAL, SOCIAL & GOVERNANCE LAW, 2022 – SOUTH AFRICA CHAPTER
Ezra Davids, chairman and senior partner of Bowmans, and partner Ryan Kitcat wrote the South African chapter In The International Comparative Legal Guide to Environmental, Social and Governance Law, 2022, available here.
Material trends related to ESG, that they identified are as follows.
ESG will become a core strategic concern for corporates, driven by exogenous and endogenous factors and pressures, including a shift towards a more stakeholder-inclusive capitalism.
Climate change is the key ESG challenge of the coming decades, which we expect will be a dominant theme as governments, investors, regulators and pressure groups increase engagements around climate change.
The trend of pressure on companies and institutional investors to tackle ESG issues is likely to continue. Stakeholders are becoming increasingly proactive in engaging with institutional investors and asset managers on the integration of ESG factors into their decision making and are facing increasing scrutiny of their investment activities and AGM voting records. They in turn are taking a more proactive stance on ESG and in holding management to account on ESG issues.
The EU is intending to launch a carbon border tax adjustment, which will see carbon import taxes imposed on carbon intensive goods. South Africa is particularly at risk of such import levies due to its heavy reliance on coal-generated power. South Africa can expect similar future exogenous pressures as countries attempt to meet their climate change goals. Investment firms will accordingly gravitate towards less-carbon-intensive investments.
ESG-related shareholder activism, which has picked up in recent years, is likely to become more prevalent and sophisticated. Economic activists will also leverage poor performance on ESG to bolster activist campaigns.
ESG and sustainability disclosures and reporting will continue to remain an area of focus, with a gradual shift towards more standardised reporting expected to take place. Linked to this, demand for ESG data, assurance and verification is likely to increase, with improved technology and AI enhancing our ability to interrogate and draw insights from data on ESG factors.
Banks and lenders will take ESG risk into account more than has historically been the case. The shift is already under way in the South African banking sector. There has been a significant growth in green bonds, green loans, SLLs and bonds. This is due to a number of factors, including the regulatory regime, investor-driven sentiment and the harmonising of market standards, with SLLs being particularly popular because of their flexible nature – we have therefore seen a significant increase of SLLs and SLBs since the start of 2021.
Recently, several of South Africa’s largest institutional investors have committed to using ESG metrics in screening potential investments. Ninety One, South Africa’s largest listed asset manager, has also recently become signatory to the Net Zero Asset Managers Initiative, which aligns institutional investing with the global goal of achieving net zero carbon emissions by 2050.
More ESG products are likely to be developed (for example, Old Mutual launched South Africa’s first ESG equity fund in June 2020), and more capital is expected to flow towards such products as demand for ESG-friendly assets grows, particularly as millennial investors begin to drive investment activity.
With ESG coming to the fore, executive compensation will be linked, at least partly, to ESG-related metrics.