Broadening our ESG focus: Successful integration of the “S” into ESG in the South African context.

Environmental, Social and Governance (ESG) is increasingly being adopted by businesses in South Africa as a framework to measure and report on sustainability. Globally, ESG is considered by some to have a bias towards the environmental, with frameworks and reporting prioritising the “E”. However, the need for a Just Transition puts the relationship between the “E” and the “S” starkly into focus in the South African context. Prioritising environmental concerns without meaningfully addressing social issues is inadequate in a country where many communities depend on industries like mining for their livelihoods.

Grappling with the “S” is especially critical in South Africa’s profoundly unequal society, and here – as in other developing countries – the sole prioritisation of the “E” in ESG measurement and reporting is insufficient. This is not to underplay the seriousness of climate change, but to contextualise social factors as fundamentally interconnected with the environment in ways that may be less visible in developed countries. For example, South Africa’s high levels of poverty and inequality cause many people to be especially vulnerable to the effects of climate change. In this context, however, addressing the environmental concerns in isolation is inadequate, and may even risk exacerbating socioeconomic challenges in the short term.

As the Sanlam 2023 ESG Barometer notes, “climate change is clearly a prominent international concern that affects people everywhere, but many social measures are focused within domestic environments and don’t easily translate into the decision frameworks of developed world investors.”

The importance of the “S” is being increasingly recognised. The Stanford Social Innovation and Review (SSIR) argues for social factors to be treated as seriously as environmental ones within
ESG, and a Intellidex survey of 21 JSE-listed companies found that one of the top reasons for having an ESG strategy was “to achieve a positive impact in society” and that “respondents generally
perceive social aspects of ESG to be the most relevant in their overall corporate ESG strategies.”

Despite its importance, however, defining and measuring the “S” is a global challenge. BNP Paribas found that 51% of respondents in its 2021 Global ESG Survey considered social factors to be the most challenging to analyse and integrate, highlighting that “data is more difficult to come by and there is an acute lack of standardisation around social metrics”, while also noting that the social component is increasingly important to investors. Locally, research by Accenture and Harambee in 2023 into perspectives on the “S” in South Africa found that corporates focus mainly on the internal aspects of the S, such as employment equity and employee wellness, and find it difficult to measure and quantify external elements like the impact of their CSI or SED initiatives . The study found that NGOs similarly find the “S” too “broad and elusive”, lacking clear metrics.

With this in mind, we see three key steps that must be taken for meaningful integration of the S in South Africa:

1. Standardisation and quantification of the S: Standardisation and clear metrics are needed for S reporting to be elevated within ESG to the same degree as environmental reporting. In many ways, South Africa is ahead of the game when it comes to the social aspects of ESG, as social investments in society have long been mandated through channels such as corporate social investment (CSI), socioeconomic development (SED), and broadbased benefit vehicles such as community trusts. This makes us well-positioned to influence global standards and play a leading role in creating and disseminating frameworks that are appropriate for our socio-economic context and that of other developing countries.

2. Data-sharing and collaboration: Systemic social challenges can be addressed only through strong partnerships among diverse stakeholders. At the same time, working towards full integration of the “S” through standardisation and improved measurement relies on a shared willingness to report on social impact data consistently, and work alongside other stakeholders to contribute to shared standards.

3. Taking a strategic approach to positive social impact: The traditional ESG paradigm is primarily focused on material risk, while the ESG additionality view also emphasise positive social and environmental impact. Investing in the “S” with a view to achieving positive impact requires clear strategy and investment in capacity for impact management and measurement (IMM). A strategic approach, coupled with the ability to measure and report on success effectively, supports individual corporate efforts while also contributing to the larger project of elevating the “S” within ESG.