Business leaders need to keep up with rapidly evolving sustainability reporting requirements because there has been a growing expectation from various stakeholders for companies to report on their operations’ impact on the environment, people and financial performance. 

With the various standards that exist locally and globally, it is understandable if management feels overwhelmed and unsure where or how to start reporting. This is undoubtedly the case for many South African (SA) companies. Aware of this gap, the JSE decided to develop and release its Sustainability and Climate Change Disclosure Guidance.

What is the JSE’s Sustainability and Climate Change Disclosure Guidance?

The Sustainability Disclosure Guidance is an umbrella document that aims to guide both listed and unlisted companies in SA on how to approach sustainability reporting. It incorporates the global and local context to help companies understand how the various standards relate to one another. The guide also considers the Global Reporting Initiative (GRI), Task Force on Climate-Related Financial Disclosures (TCFD) and International Sustainability Standards Board (ISSB), to name a few. In addition to the Sustainability Guidance, the Climate Change Disclosure Guidance was also launched, which is more subject-specific and is the first of many thematic guides to be released. What must be emphasized is that these guides are voluntary “guidelines” and are not prescriptive. The JSE has made it clear that this is the first version of the principles, and that they will evolve in time.

Jonathan Hanks, Director of Insite (who was part of the team that developed the guidance), mentioned the guidance has three objectives: 

1. to assist organizations in navigating the challenging and dynamic landscape of disclosure reporting;
2. to improve the quality of data and information provided to investors to make more sound decisions; and finally
3. to assist in driving improved performance and accountability and to motivate leaders to address the many social and environmental challenges we are currently facing.

But why do companies need to report on these issues in the first place? 

Investors need access to credible data to make sound decisions. At Prescient, we have our own in-house systematic ESG scorecard process, which is entirely dependent on data companies reports regarding different Environmental, Social and Governance factors. With more consistent reporting among companies, we can feed better data into our models, ultimately leading to more sound investment decisions

Though we have seen reporting improve over time, providing investors with more transparency, there is still ample room for improvement. Thus, the disclosure guidance is a step in the right direction towards achieving this. Though voluntary, we hope companies will welcome the concept of disclosing better, more consistent and reliable information. This, in turn, will aid better investment decision-making on capital and enable investors to price the respective risks fairly. It also allows investors to hold organizations accountable for their actions and to track their operational improvements over time. Knowledge is power, after all.

From the companies’ perspective 

Reportable items force companies to reflect on their operational practices and policies. This could highlight their operational impact on society and the environment and any areas of improvement required. Thus, it allows companies to improve and ultimately become more sustainable in the long term.  

Reporting on sustainability also enhances access to capital. Companies that report transparently on these issues would be able to demonstrate their ability to manage risks effectively, making them appear more attractive and accountable and more likely to attract capital. Companies that choose not to report could be deemed unwilling to be transparent about their activities, which could impact their access to capital as the demand for full disclosure grows.

(More of these benefits are outlined in the guidance)

From guidance to standards

Since last year, many guidelines have already evolved into standards. The GRI’s guidelines launched in the early 2000s became standards, and the International Sustainability Standards Board and European Sustainability Reporting Standards were established. Therefore, before the JSE’s ESG guidance becomes a standard here, companies are encouraged to embrace the guidance as it reinforces learning, assists in deciding on what is helpful for them, and allows them to provide feedback on what does not apply to them.

A pivotal point made by Olano Makhubela, the Divisional Executive for Retirement Funds Supervision of the FSCA, is that we shouldn’t always wait for laws and regulations to do the right thing, as there are downsides to excessively regulated economies as they cannot think for themselves.

The JSE’s Sustainability and Climate Change Disclosure Guidance provides a baseline for sustainability reporting in South Africa. While it is a great start, the real value in the guidelines will only be evident once companies embrace them, reflect on them, and implement them. DM/BM

Author:  Shriya Roy – Quantitative Analyst at Prescient Investment Management

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