SOUTH AFRICA: THE LATEST ON ESG IN LISTED COMPANIES
There has been a swift global shift towards the inclusion of ESG reporting standards into the disclosure requirements of stock exchanges, with the SEC leading American exchanges in this direction and our dynamic JSE following suit.
The SEC has issued proposals, which are expected to come into force in 2023. These would mandatorily require detailed climate risk-related disclosures for SEC listed entities’ periodic reports and registration statements for future listers. The new rules require climate-related disclosures to be included in the footnotes of financial statements on the grounds they are fundamental to an investor’s understanding of the nature of an issuing company’s business and its operating prospects. The UK, EU and IFRS standards appear to be wider than the SEC’s proposed requirements since (a) the SEC will not only require disclosure of scope 1 and 2 emissions (and generally not scope 3 emissions) and (b) the SEC will not require forward-looking decarbonization analysis.
Having guidelines of this nature facilitates the production of consistent and comparable information from issuers of exchange platforms. This places a compliance burden on industry players due to the aspirational forward-looking elements required of companies in their reporting functions, but amounts to a win for stakeholder capitalism since it provides investors with useful decision-making information regarding climate-related risks.
On 14 June 2022, the JSE issued two documents providing (a) sustainability and (b) climate-related disclosure guidance for use on a voluntary basis. This takes the King IV Guidance Paper on Responsibilities of Governing Bodies in Responding to Climate Change and international best practice into account. The JSE does not provide granular detail on disclosure or reporting obligations for issuers, but does indicate the direction of travel. These disclosure rules are based, in part, on recommendations of the Task Force on Climate-Related Framework Disclosure (TCFD), which is widely adopted by companies globally and incorporated in IFRS standards (although these are expected to be superseded by IFRS2 proposals issued by International Sustainability Standards Board (ISSB) more recently in March 2022). These changes present notable differences to what South African issuers currently disclose as market practice.
A key characteristic of the new JSE rules is disclosure by JSE issuers of a transition plan setting out how climate/ESG-related targets will be achieved and describing how it will be integrated into the company’s business strategy. Many large companies are already fulfilling this role through oversight from audit committees and due to the fiscal incentives that some countries attach to sustainable capital investments.
See link to the JSE’s sustainability and climate disclosure guidance here.