ISSUES to do with Environmental Social Governance (ESG) and Sustainability have lately been receiving increased attention from the local corporate world and several industry players.
They have undoubtedly grown to be a dominant boardroom talk for institutions, fast becoming a determinant factor in procurement guidelines and investors’ choice of destinations.
ESG also referred to as circular economy, is now topical for companies as they strive to enhance their visibility to the investor community – prompting compliance.
Actually, sustainability reports are slowly becoming a requirement to be incorporated in companies’ financial evaluations.
This effort is directed at developing environmentally friendly investments.
According to one expert in the field of sustainability, the ESG concept is in a big way linked to the United Nations (UN) set Sustainable Development Goals pillars which seek to improve the approach to environmental, social and governance matters in institutions across the world.
Sustainability issues are now informing market conditions and as well becoming a significant trade barrier for producing entities that do not adhere to set guidelines.
A number of procurers now even qualify product pricing after weighing environmental, governance and social input, prompting businesses to employ sustainability matters as part and parcel of their operations.
ESG also takes into account issues against money laundering, child labour for risk management within the supply chain and this practice (ESG) has been prevalent in the mining sector where minerals are certified whether they are “bloody” or not.
It has become a known fact that “bloody diamonds” do not easily find markets or they are bought at a less significant price.
Standard-setting in the field of sustainability related financial disclosures, is a relatively new discipline in many jurisdictions, especially in South America, Southern Asia, and Africa including Zimbabwe where they intend to speak on corruption, anti-competitive behaviour, and tax evasion issues.
Another facet of ESG deals with economic empowerment, which calls for women led companies, inclusive supply chains where corporates should support small companies within their value chains, and encourages procurement from marginalised segments of the population.
However, in a related development just a week ago, IFRS lauded Zimbabwe for making early strides towards the adoption of ESG and sustainability in their reporting.
In a wide ranging interview with Business Weekly, Institute for Sustainability Africa, chief executive officer, Rodney Ndamba, said local companies should take sustainability matters seriously.
“If you are supplying your produce to the global North they now want to see how you are managing the environment, how you are managing the social issues relating to your employees, human rights within your operations and how you are governed.
“In terms of anti-money laundering, they now look into your directors profiles, and if they find something that does not meet their benchmarks, your products are red flagged and do not enter their markets,” said Ndamba.
He said non-compliance to sustainability issues has failed exporting companies to ship their minerals and raw materials to profitable markets in Europe or the United States where strict sustainability laws are now in place.
According to Ndamba, Zimbabwe has been slow on ESG and sustainability reporting implementation considering disclosures in the past 10 years but the drive has been gaining momentum.
He highlighted that numbers remain low considering that out of 61 companies listed on Zimbabwe Stock Exchange (ZSE) only 18 to 20 companies have been able to produce sustainability reports.
“We have seen an increase in the direction of sustainability reporting. In the past four to five years, there has been a notable increase of companies that are implementing sustainability reporting in Zimbabwe.
“However, those that are doing it in a very genuine way could be less than five percent, some are just doing it for compliance with the Statutory Instrument,” he said.
In terms of implementation, Zimbabwe has made a couple of milestones following behind some of the leading countries like South Africa, Egypt, Morocco, Kenya, a bit of Nigeria, making Zimbabwe qualify within the top five African countries on sustainability.
Benefits of ESG
Overall, ESG reporting is an important tool for companies to manage their environmental and social impact.
According to research done by Oxford Business School, countries with a big proportion of companies implementing ESG or sustainability are much more economically competitive than those that do not.
ESG reporting has several benefits including the ability to identify and manage risks and opportunities related to environmental and social impact, build trust and transparency with investors and stakeholders, and it as well attract sustainable investors.
Operationally, sustainability or ESG issues help to build a competitive advantage and also informs business strategy and vision.
It should be noted that sustainability reporting also help companies to manage costs particularly borrowing costs.
International lenders are fast becoming critical of borrowers that do not adhere to demands of sustainability, non-compliance has in some cases led to increased interest rates, when borrowing.
Ndamba said sustainability drive had created business opportunities for companies like Econet Wireless Zimbabwe (EWZ) as it moved to create an energy company.
“Econet is one company that has taken sustainability seriously, they realised that there were risks and opportunities and they looked at the opportunities from sustainability and from energy they created a business unit to address the energy issue, through Distribution Power Africa (DPA). EWZ has benefited from a sustainability drive.”
Ndamba said Zimbabwe is one of the leading countries on the continent in terms of legal framework that govern the ESG disclosures.
Locally, Statutory Instrument 134 of 2019 section 399 to 404 of the Zimbabwe Stock Exchange, obliges listed companies to publish sustainability reports.
The second legal instrument is the Public Entities Corporate Governance Act section 315 to section 322, which requires all parastatals, state owned enterprises and government departments to publish sustainability reports and the section places responsibility on the board and the audit committee to ensure implementation.
There is also the Companies and Other Business Entities Act of 2019 where section 220 requires companies to comply with section 5 of the national code of corporate governance that requires companies to produce sustainability reports.
Indirectly, all companies registered under the Companies and Other Business Entities Act are required to produce sustainability reports.
“From a legal requirement perspective Zimbabwe is possibly the only country across the continent which has specific law sections on sustainability. I think Zimbabwe is actually one of, if not the only African country that actually has legal instruments on sustainability.
Some of the countries actively pursuing the ESG path include Nigeria, Egypt, Morocco, Botswana and Mauritius.
There are, however, sticking points particularly with regards to the use of thermal energy, where developed countries are blocking the goods with higher threshold of thermal power.
One of the world’s luxury car producers, Porsche in 2021 warned its suppliers to produce parts with a sustainable energy mix or risk being removed from the suppliers list.
Coal remains a crucial source of power in the Africa energy mix, making it hard for African countries to meet sustainability requirements in that regard.
Ndamba indicated that government should come up with mechanisms to increase sources of renewable energy and advocated for establishment of solar farms in each city or major town in the country to cut on thermal energy.
“Either Government or ZESA needs to make sure that we have solar farms in Bulawayo, Gweru and I hear Victoria Falls has begun the construction of a solar farm that will soon be pumping 5MW from their 100MW solar farm and that need to happen in each and every city and town.”
He highlighted that green energy should be embraced broadly and take advantage of buildings which should carry solar panels on top.
He gave example of Israel were households now feed into the national grid and get paid at the end of each month.
Tanganda Tea Company announced on Tuesday that it saved at least US$700 000 in power costs last year by replacing diesel generators with green energy.
This comes as power outages continue to increase operational costs for many companies, which are now relying on generators.
The company built and finished installing a 1,8MW solar plant at Ratelshoek Estate, a 1,2MW solar plant at Tingamira Estate, and a 1,4MW solar plant at Jersey Estate.
According to Ndamba Zimbabwe is one of the jurisdictions with massive government support on sustainability since the topic topped discussions in 2010 pointing that they first worked with the Ministry of Environment, Climate, Tourism and Hospitality Industry and the number of ministries has been growing.
“I am quite happy that we have started to see strong and good support from Ministry of Finance and Economic Development and the Reserve Bank of Zimbabwe (RBZ), they have been quite supportive we still need to make some inroads, particularly to the Ministry of Industry and Commerce and the Ministry of Agriculture,” he said.
ESG issues were first mentioned in the 2006 United Nation’s Principles for Responsible Investment (PRI) report consisting of the Freshfield Report and “Who Cares Wins”.
ESG criteria was, for the first time, required to be incorporated in the financial evaluations of companies.
This effort was focused on further developing sustainable investments.
At the time, 63 investment companies composed of asset owners, asset managers and service providers signed with $6,5 trillion in assets under management (AUM) incorporating ESG issues.
As of June 2019, there are 2 450 signatories representing over $80 trillion in AUM.
The emphasis on ESG is increasingly growing as major institutional investors are making it clear they expect the companies they hold to commit strongly to ESG criteria.
During the 2017 proxy season, State Street Global Advisors (SSGA) voted against the re-election of directors at 400 companies that SSGA said failed to make any significant effort to appoint women to their all-male boards.