The Climate Change Act, 2024 is signed into law but is yet to become operational. It provides a framework for South Africa’s climate change response in line with South Africa’s commitments under the Paris Agreement. The Act seeks to regulate the management of climate change impacts, greenhouse gas (GHG) emissions and a just transition towards a low-carbon, climate-resilient economy and society.

Cabinet recently approved the Just Energy Transition Implementation Plan (2023–2027) (JET IP). The JET IP commits around USD 9 billion of foreign catalytic funds towards short- and medium-term goals in six portfolios: Electricity, Mpumalanga Just Transition, New Energy Vehicles, Green Hydrogen, Skills, and Municipalities. 

National Treasury’s ongoing Sustainable Finance initiative, launched in 2020, seeks to “identify gaps in the existing regulatory framework and recommend actions required of regulators, financial institutions and industry associations” in dealing with environmental and social risks and opportunities. Its work is informed by engagement with international counterparts and relevant stakeholders and professional bodies in the financial sector. 

The Companies Act, 2008 was amended this year to require the disclosure of the pay gap between the highest-paid and the lowest-paid executives in a manner similar to that required by the U.S. Dodd-Frank Act.

The Prevention and Combating of Corrupt Activities Act, 2004 (PRECCA) was amended to introduce, in section 34A, a fairly broad offence of “failure to prevent corrupt activities”, which is informed by section 7 of the UK Bribery Act 2010. 

Consistent with international trends, there is a slow, gradual shift towards more standardised sustainability and ESG-related disclosures and reporting. The South African Institute of Chartered Accountants (SAICA) has adopted the International Sustainability Standards Board (ISSB) global standards, IFRS S1 pertaining to disclosure of sustainability-related financial information, and IFRS S2, pertaining to climate-related disclosures. These standards became effective in January 2024. 

Companies listed on the Johannesburg Stock Exchange (JSE) are two years into reporting with reference to the JSE’s Sustainability Disclosure Guidance and Climate Disclosure Guidance, voluntary guidance that draws on existing international frameworks while providing for a South African context.

The disclosure of nature-related financial risks continues to evolve following the finalisation of the Taskforce on Nature-related Financial Disclosures (TNFD). TNFD is intended to promote and support corporate reporting in line with the Kunming-Montreal Global Biodiversity Framework, and is reflected in the ISSB global standards.

The practice within JSE-listed companies of including ESG performance measures governing the vesting of short-term and long-term incentives, and claw-back provisions related to governance failures, continues to gain traction. 

The JSE launched its JSE Ventures Voluntary Carbon Market, which aims to advance carbon offset projects in South Africa and Africa. 

In the corporate/commercial context in South Africa, “ESG” is a term canvassing endogenous and exogenous environmental, social and governance issues relevant to a company or group’s business activities in the society, economy and environment (SEE) in which it operates. In that context, there are various stakeholders (referred to below) who exert some influence in so far as ESG matters are concerned, whether pertaining to investing, various risks, stewardship activities, corporate strategies, sustainability, SEE impact and so on.

Social

South Africa’s progressive Constitution contains a Bill of Rights, including the rights to equality, fair labour practices, privacy, freedom of expression, freedom of association, political rights, education, housing, health care, food, water and social security, freedom of religion, freedom from slavery, servitude and forced labour. These rights are justiciable and apply horizontally and vertically. 

Given South Africa’s history and high levels of unemployment and inequality, much emphasis is placed on social factors. Transformation and Broad-Based Black Economic Empowerment (BBBEE), which are aimed at redressing historical race-based inequalities, are important considerations when doing business in South Africa generally and in specific sectors. 

Environmental

The environmental right in the Bill of Rights prescribes that South Africans have the right: (i) to an environment that is not harmful to their health or well-being; and (ii) to have the environment protected, for the benefit of present and future generations, through reasonable legislative and other measures that prevent pollution and ecological degradation, promote conservation, and secure ecologically sustainable development and use of natural resources, while promoting justifiable economic and social development.

Key environmental matters include climate change, energy generation, water use and scarcity, habitat destruction and biodiversity loss, air quality, pollution and waste management. South Africa is a water scarce country that is regarded as vulnerable to climate change impacts, and is the largest emitter of GHG on the African continent and in the top 20 emitters globally. Additionally, estimates suggest that 80% of South Africa’s GDP is moderately or highly dependent on nature.

Governance

Under the Companies Act, the board of directors is the corporate organ with primary responsibility for considering and managing ESG issues relevant to a company or group and its ability to create value in a sustainable manner over time. The consideration, oversight and management of ESG factors, risks and opportunities which may materially impact a company and its ability to sustainably create value over time is an important aspect of directors’ fiduciary duties. 

Public companies and private companies with a high degree of public interest, calculated with reference to their debt, employee headcount and turnover, are required to have a social and ethics committee (“S&E Committee”). The S&E Committee is obliged to monitor a company’s activities and report to the board on a range of issues, a number of which fall under the ESG umbrella: good corporate citizenship, consumer relations, the environment, health and safety, employment equity, BBBEE, and labour relations. The S&E Committee also reports to shareholders at the annual general meeting.

The King IV Report on Corporate Governance™ for South Africa, 2016 (“King IV”) sets out principles that an organisation must or should apply to substantiate a claim that it is practising good governance. JSE-listed companies are obliged under the JSE Listings Requirements to apply King IV, and report on their application of King IV principles and recommendations in their annual integrated reports. King IV regards sustainable development as “a primary ethical and economic imperative”, and views ESG factors as relevant to the value-creation process and sustainability of an organisation over the short, medium and long term. 

Investments

Regulation 28 of the Pension Funds Act, 1956 obliges pension funds to consider any factor which may materially affect the sustainable long-term performance of the asset, including ESG factors. The provision has been influential among institutional investors in South Africa. Similarly, Prudential Standard GOI 3 requires an insurer’s investment policy to take into account any factor that may materially affect the sustainable long-term performance of assets, including ESG factors.

Environmental

The National Environmental Management Act, 1998 (NEMA) provides the framework for environmental governance and management in South Africa. It emphasises sustainable development and the protection of the environment. Further specific legislation promulgated under NEMA addresses air quality, biodiversity, coastal management, waste and protected areas.

Social

The Broad-Based Black Economic Empowerment Act, 2023 aims to redress historical inequalities by promoting economic participation and ownership by historically disadvantaged South Africans. Sector-specific codes apply to the agriculture, accountancy, defence, financial, forestry, marketing, ICT, property, transport and tourism sectors.

The Employment Equity Act, 1998 promotes equal opportunity and fair treatment in employment through the elimination of unfair discrimination. Private companies with 50 or more employees are required to adopt an employee equity plan.

The Labour Relations Act, 1995 protects workers’ rights, promotes collective bargaining, and provides mechanisms for resolving labour disputes.

The National Minimum Wage Act, 2018 sets the minimum wage for workers in South Africa.

Governance

The Companies Act, the Pension Funds Act (for pension funds) and specific legislation, such as the Government Employees Pension Law, 1996, establish the frameworks for the governance of companies and pension funds. Sector-specific legislation spells out requirements on governance arrangements in certain sectors, for example banking and insurance.

Among other laws:

The Carbon Tax Act, 2019 aims to reduce GHG emissions by imposing a tax on carbon emissions. This applies to various sectors, including energy, manufacturing, and transportation. Companies are required to report their emissions and pay a tax based on the amount of carbon dioxide equivalent they emit.

The National Water Act, 1998 seeks to ensure sustainable and equitable use of water resources. This regulates water use, promotes water conservation, and protects water quality and requires companies to obtain water use licences for certain activities. This legislation, among others, such as NEMA and the National Environmental Management: Waste Act, provide for a statutory environmental duty of care.

The amendments to PRECCA — introduced following the damning findings of the Judicial Commission of Inquiry into Allegations of State Capture, Corruption and Fraud in the Public Sector — have elevated anti-bribery and corruption risks for firms doing business in South Africa. There is now a requirement to put in place “adequate procedures” designed to prevent corrupt acts.

South Africa was ‘grey-listed’ by the Financial Action Task Force (FATF) in 2023. To address deficiencies identified by FATF pertaining to money laundering and financial crimes it has promulgated the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act, 2022 and the Protection of Constitutional Democracy Against Terrorism and Related Activities Amendment Act, 2022.

The Protection of Personal Information Act, 2013 is key data protection and e-privacy legislation, which is supported by regulations and enforced by the Information Regulator.

On the governance front, former senior executives of a large listed group have been prosecuted in connection with their role in a EUR 6.5 billion fraud perpetrated a few years ago.

The National Prosecuting Authority continues to investigate a number of cases pertaining to corruption arising out of the State Capture Commission.

The BBBEE Commission has been active in investigating entities alleged to have violated the BBBEE Act, though its interpretation of the relevant legislation has been challenged on occasion.

The 2023 National Environmental Compliance and Enforcement Report published by the Department of Forestry, Fisheries and the Environment points to fairly consistent environmental enforcement over the past three years. Environmental enforcement tends to be reactive, given funding constraints at national and provincial levels.

Environmental litigation tends to be driven by non-governmental organisations (NGOs) and environmental and social justice groups. It is often aimed at intervening in proposed projects, seeking administrative justice in respect of decisions or procedural irregularities, and/or protecting communities or environmentally sensitive areas.

Greenwashing is a concern that currently is addressed through consumer protection and competition laws, and under the Code of Advertising Practice administered by the Advertising Regulatory Board (ARB). A 2022 amendment to the Code permits “environmental claims”, defined as “any direct or indirect claim, representation, reference or indication in an advertisement relating to the immediate or future impact or influence on the environment of a product or its packaging or a service”. Following that, a major energy player was recently the subject of the first successful greenwashing claim before the ARB by Fossil Free South Africa, an advocacy group. The company is appealing the ARB’s decision against it.

King IV, mentioned above, has been influential on the governance and reporting front, particularly in the context of JSE-listed groups.

The UN Sustainable Development Goals, UN Principles of Responsible Investment (PRI), and various sector-specific initiatives, are given attention by banks, asset managers and other institutional investors in their business and investment strategies. There are over 60 South African-headquartered signatories to the PRI.

The Second Code for Responsible Investing in South Africa (CRISA 2) commenced in 2023, and applies to asset owners, asset managers and service providers in the investment value chain. It contains five principles for stewardship and responsible investment, with recommended practices to be implemented on an “apply and explain” basis. Principle 1 recommends that “investment arrangements and activities should reflect a systematic approach to integrating material ESG factors”.

Stakeholders

King IV adopts the Integrated Reporting Council’s description of stakeholders, namely “those groups or individuals that can reasonably be expected to be significantly affected by an organisation's business activities, outputs or outcomes, or whose actions can reasonably be expected to significantly affect the ability of the organisation to create value over time”.

Internal stakeholders include an organisation’s board, management, shareholders (individual and institutional) and employees.

The Companies Act enables shareholder activism. Institutional investors regularly engage with the boards of investee companies and can exert considerable influence in driving change on ESG issues. Active ownership and stewardship is encouraged by King IV and CRISA 2, with the latter recommending that responsibly discharging ownership responsibilities and stewardship duties should be a consideration when integrating material ESG factors into investment activities.

External stakeholders include customers/clients (public and private), consumers, government (local, provincial and national), regulators, NGOs and civil society, and trade unions (organised labour is influential in South Africa).

The laws listed in Question 3 do not primarily relate to corporate disclosure.

Under the current disclosure regime in South Africa, there is no explicit duty to provide disclosures on ESG matters. However, JSE-listed companies are subject to general continuing disclosure obligations under the JSE Listings Requirements.

The JSE’s Sustainability Disclosure Guidance and Climate Disclosure Guidance adopts a “double materiality” approach that recommends the disclosure of financial materiality and impact materiality. Materiality should be assessed with reference to the reporting entity’s risks and opportunities, its value, and its ability to create value, over time.

JSE-listed companies report annually on an “apply and explain” basis the extent to which they have complied with King IV. This is in an integrated report, which should communicate “how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term”. ESG and/or sustainability reports are published annually.

Reporting is informed by various frameworks and standards, including the Global Reporting Initiative (GRI), the International Integrated Reporting Committee (IIRC), the ISSB Integrated Reporting Framework, the Task Force on Climate-related Financial Disclosures (TCFD), and the UN Sustainable Development Goals.

Financial sector

ESG is firmly on the agenda for banks, insurers and institutional investors, influenced by international developments, particularly those in the European Union (EU).

Among other things, South Africa’s banks are required to assess and manage for climate-related financial risks, with nature-related financial risks to follow (influenced by the TNFD). They are regularly the target of shareholder activism on issues under the ESG umbrella, particularly on climate change transition plans and lending policies.

Social unrest and climate change both pose significant threat to insurers and reinsurers in South Africa. Insured losses caused by unrest in 2021 exceed ZAR 30 billion. Extreme weather events and natural disasters, such as the record-breaking floods in KwaZulu-Natal in April 2022 and regular wildfires in the Western Cape, have caused billions of rands of losses.

ESG investment in South Africa is relatively well-advanced by African standards, though by global standards the amounts involved are a relatively small portion of ESG investments globally.

Mining

Mining firms, given their contribution to the South African economy, and the nature and impact of their operations, are affected by a host of ESG factors, including BBBEE, social and labour, and environmental. Among other things, the Mineral and Petroleum Resources Development Act, 2002 (MPRDA) requires the development of social and labour plans (SLPs), and mining rights holders to consult with affected stakeholders (communities, municipalities, traditional authorities) in developing SLPs.

Energy

Given that 80–85% of South Africa’s electricity is generated from coal, and Eskom, the vertically integrated state-owned electricity supplier, is in dire financial straits, efforts are underway to restructure Eskom and change South Africa’s energy mix. The transition away from coal to renewables and other sources raises significant ESG issues, as evidenced by the job losses and other social issues caused by the repurposing of the Komati Power Station in Mpumalanga.

Private equity

Many private equity firms now consider ESG factors as an integral part of their due diligence, with particular emphasis on risks related to corruption, cybersecurity and data protection, climate change, and employment practices. They have also embedded ESG considerations within their valuation and investment processes, tailored as appropriate to the specific sectors in which they invest.

Construction industry

The so-called “construction mafia”, groups involved in the systemic extortion of developers and contractors in the construction sector, are currently a major problem. Government has, since the recent elections, pledged to take more decisive action against criminal elements within the construction mafia.

Tourism and hospitality

Contractual arrangements increasingly require hotel owners and tour operators to consider ESG factors. The recently launched ESG Framework for Tourism Businesses may have an impact going forward.

ESG issues have gained prominence since the COVID-19 pandemic and are firmly on board agendas. Among JSE-listed companies, it is now common to adopt an ESG strategy (80% of listed companies responding to the 2024 Sanlam ESG Barometer, published in partnership with Business Day, reported having adopted an ESG strategy), and to publish annual ESG and/or sustainability reports.

Generally, listed corporates recognise the importance of having dedicated leadership to oversee and implement their ESG or sustainability strategies, and the appointment of chief sustainability officers (CSOs) has increased.

We expect the consideration and management of ESG factors will become more sophisticated over time due to, among other factors: more and more reliable data, a regulated push to act on climate, convergence and standardisation of disclosure and reporting, shareholder and stakeholder activism, and enhanced public scrutiny of action or inaction by large organisations and regulators alike.

ESG rating agencies

ESG ratings are relied upon, with companies tending to rely on international ESG ratings, such as FTSE Russell ESG, ISS ESG, S&P Global, and MSCI ESG Ratings and Sustainalytics. The JSE has adopted the FTSE ESG Ratings methodology and aligned with FTSE Russell’s ESG criteria and assessment process.

ESG benchmarks

ESG benchmarks are used but sparingly, given questions over data reliability and comparability. Comparisons with peers tend to be based on ESG ratings.

Public companies

Many JSE-listed groups are embedding ESG considerations into their corporate strategies and have appointed CSOs. They also report annually on ESG matters in ESG or Sustainability Reports. These groups are subject to private and public shareholder and other activism on a range of ESG matters, driven by institutional investors, asset managers, NGOs and other interested stakeholders, which continues to drive ESG developments in South Africa. The financial sector is also undergoing a gradual “greening”, which affects access to and the cost of capital and insurance, driving change at company and group level and within sectors.

Private companies

Among private companies, asset managers, consultancies and service providers are playing different roles in driving ESG developments in South Africa: advising on investments, strategy development, legal and regulatory developments, and so on.

Professional bodies (e.g., Asset Owners Forum South Africa) currently play a role in the development of ESG-related guidance and in formulating specific initiatives relevant to ESG, for example, through involvement in the National Treasury’s Sustainable Finance Initiative.

Non-profit organisations

A number of non-profit and public benefit organisations (e.g., Just Share, Centre for Environmental Rights) are involved in advocacy, activism, engagement, and strategic litigation with a view to promoting corporate accountability, transparency and action on ESG-related issues.

ESG agenda

South Africa’s financial regulators, banks, insurers and certain institutional investors pay close attention to international developments in the ESG space. They have been instrumental in developing ESG-related guidance and good practice standards, and shaping regulation.

Key challenges in terms of compliance are:

• expense associated with formulating and implementing an ESG strategy in the context of a challenging economic environment;
• access to and measurement of quality data;
• lack of skills and expertise to perform various roles, analyses, and run scenarios and models;
• the wide array of different disclosure and reporting guidelines;
• differing and sometimes problematic approaches to regulatory guidance and supervisory expectations on ESG issues among different regulators;
• difficulties associated with the long problem of climate change and climate-related risks;
• increasing activism and scrutiny from shareholders and stakeholders; and
• increasing reputational and litigation risk.

Information sources relevant to ESG in South Africa are:

• Corporate ESG/sustainability reports, and annual integrated reports, and announcements made under ongoing disclosure obligations.
• ESG ratings and data providers.
• Regulatory filings and reports by regulators.
• Reports, research, investor briefings and opinions on questions relevant to ESG issues, published by NGOs, private organisations, working groups.
• Research published by academics, universities and think tanks. Surveys, such as the Sanlam ESG Barometer, referred to above.

National Treasury published the first edition of the South African Green Finance Taxonomy in March 2022, as part of South Africa’s Sustainable Finance Initiative. It is a classification system that defines a minimum set of assets, projects, and sectors that are eligible to be defined as “green” or environmentally friendly. It is similar in some respects to the EU Green Taxonomy, with some divergence to cater for South Africa’s context.

In the near term, we do not expect to see the sort of anti-ESG push back that has taken place in the United States. Generally speaking, large corporates, financial institutions, asset managers and institutional investors in South Africa recognise and appreciate the importance of considering ESG factors to the sustainability of their businesses or investments.

In the medium term, we anticipate more regulation in respect of material ESG factors, particularly around disclosure and reporting.

ESG will form an important element of efforts to “green” the South African economy over time, in line with the imperative of sustainable development. BBBEE policy may be further refined in the context of ongoing efforts by Government to re-engage with business and attract foreign direct investment (FDI).

Shareholder and stakeholder activism linked to specific ESG issues is likely to be influenced by international trends, with NGOs and special interest groups focusing particularly on climate-related agendas. The scrutiny and public pressure that companies in the banking, energy and mining sectors have faced in recent years will likely extend to other sectors.

We expect litigation, including class actions and strategic litigation, related to ESG matters and greenwashing to increase in frequency and sophistication.

Generally, ESG factors will continue to be relevant for institutional investors and companies, regardless of the (somewhat polarising) term “ESG” and its use. They are an important aspect of society, the economy and environment in which investors and companies operate. Boards and management will continue to have to pay close attention to those ESG factors that are financially material and/or material in so far as their SEE impact is concerned. Those that do so carefully, proactively and in line with considered strategies will be able to better anticipate and mitigate risk and take advantage of opportunities. Over time, that can be a source of significant competitive advantage and be a differentiator for key stakeholders.