As concerns about climate change and biodiversity loss rise, we are collectively rethinking our future and that of subsequent generations. Individuals, governments and companies are aware of the need to adjust behaviour to lessen environmental impact, achieve environmental aims and meet sustainability goals. If we don’t do this, we risk our shared future prosperity.

However things are not happening fast enough and policymakers around the world are looking at ways to accelerate this change. As momentum starts building, governing bodies of companies, in particular, must consider their risks and opportunities as global economies shift around them. 

What is the responsibility of a board in South Africa in this context?

Companies do not operate in isolation; they are part of society and they both impact and are impacted by their surroundings. In South Africa, directors of companies need to ensure their companies comply with laws addressing social issues, good governance, and environmental concerns. However, in addition to compliance with the law, should directors not also ensure that the companies they serve are actively contributing to environmental objectives, such as combating climate change or aiding in the protection or restoration of biodiversity? 

The Companies Act, 2008 (Companies Act) partially codifies the common law fiduciary duties, requiring a director to act in good faith, with an appropriate purpose, in the company’s best interests, demonstrating the care, skill, and diligence that one could reasonably expect from someone in their role, possessing similar knowledge, skills, and experience.

The Supreme Court of Appeal (“SCA”) acknowledged in Volvo (Southern Africa) (Pty) Ltd v Yssel that there is no “closed list” of fiduciary duties; there is always room for development of the law outside of the established categories. 

Directors have a responsibility to act in the best interests of a company and its stakeholders. The King IV Report on Corporate Governance for South Africa (King IV) is voluntary, with listed companies expected by the JSE to report annually, but represents best practice principles to guide the behaviour of companies in South Africa.

The first principle is that “the governing body should lead ethically and effectively” and that “members of the governing body should direct the organisation in such a way that it does not adversely affect the natural environment, society or future generations.” 

It suggests that members of a governing body of a company “should ensure that the [company] is and is seen to be a responsible corporate citizen.” 

King IV requires a responsible corporate citizen to comply with the law, leading standards, and its own codes of conduct and policies. It is called to monitor its outputs against measures and targets, including environmental impact. Risks and changes in the external environment in which the company operates must be considered by the governing body.

As such, directors of companies in South Africa are required to consider the impact that their companies have on the environment, and as international regulations develop to require mandatory reporting on sustainability-related risks and opportunities of the economic activities of a company, pressure will only increase. In addition to applicable law and King IV, the Green Finance Taxonomy published by National Treasury suggests a future obligation to disclose against that taxonomy, which policy direction is further complemented by the JSE Sustainability Disclosure Guidance, published as a voluntary indication of the reporting that will in future be required of companies. 

The past few years have been dominated by the prevention of climate change. Most governing bodies will now be well versed in understanding their company’s carbon footprint and the steps necessary to reduce this toward net zero. Biodiversity, however, has received less attention, notwithstanding that it poses an immediate and equally threatening risk. 

Biodiversity, the diversity within species, between species and of ecosystems is under severe threat. The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services has warned in their report titled The Global Assessment Report On Biodiversity and Ecosystem Services that biodiversity is declining faster than at any time in history.  Given that the global economy relies on rich biodiversity, this rate of degradation is alarming. The Commonwealth, Climate and Law Initiative report “Biodiversity Risk: Legal Implications for Companies and their Directors” puts the total value of services supplied by healthy ecosystems at between USD125-140 trillion a year, with economic value generation of USD44 trillion dependent on ecosystem services. The loss of biodiversity will significantly threaten economic activities and financial assets. A risk that governing bodies should be considering.

The Kunming-Montreal Global Biodiversity Framework, adopted at the 15th Conference of Parties to the Convention on Biological Diversity, COP15, in December 2022 in Montreal, reflects a global commitment to reverse biodiversity loss by 2030 and enable co-existence with nature by 2050. South Africa supports the GBF and each South African company will need to consider the impact of their own operations on nature. Directors must drive this. A failure to do so is arguably in South Africa, and as posited by The Fiduciary Duty in the 21st Century, 2015 report by the United Nations, a failure to act within the best interests of a company and to act with care, skill and diligence. It is paramount that directors recognise the impact of their companies on biodiversity and act in accordance with their fiduciary duties to halt biodiversity loss and contribute to restoration and regeneration. In so doing they will not only mitigate the risk to their companies of possible penalties and litigation, but will address the imminent threat to their profitability and even economic existence. DM/BM/OBP

Authors: Jessica Blumenthal, Executive | Banking and Finance and Kamvelihle Mangqishi, Associate | Banking and Finance at ENSafrica.