The Zambian Chapter of CFA Society South Africa held its Charter Recognition event in Lusaka, Zambia on the 2nd of August 2023. The event, which also serves as an opportunity for charter holders to get insights into trending topics, this time around had an in-depth presentation organized by the CFA Society of South Africa (of which Zambia is affiliated with).
The presentation was on ESG which has fast become a topical issue that is impacting everything from business governance to capital raising.
Kyle Durham who is Head of Sustainability at FNB in South Africa was the lead presenter on the topic and he shared some interesting insights into where the world is heading as regards to the ESG agenda.
His presentation provided a classification and definition of what ESG currently encompasses. Under environment, factors such as climate risk, GHG emissions, Renewable resources, Energy efficiency, water management and recycling are currently key focus areas.
For Social related issues, factors such as human capital, Health and Safety, Working conditions, Diversity, Impact on local communities and Stakeholders are among the key issues.
Lastly Governance focuses on aspects that include Policies, Internal Controls, Board diversity & structure, Stakeholder engagement, Executive pay, and Shareholder rights.
One critical aspect that Kyle’s presentation focused on was sustainability. It is all well and good to have the aforementioned set of criteria used to assess a company’s environmental, social, and governance impact. But in contrast, In contrast, sustainability is the capacity to maintain or endure, focusing on the interplay of environmental, social, and economic factors. While both terms overlap, they have different scopes and focuses.
Understanding the stakeholders involved is a key area that impacts sustainability. Different stakeholders have different needs and focus on aspects that directly impact them. For example, on the one hand, Asset Managers are currently focusing on decreasing risk whilst increasing returns whilst on the other hand regulators are keenly focused on implementation of aspects of the EU Green Deal, Paris Agreement and other global pacts that ensure compliance with Global commitments and Ratings agencies.
With Climate change causing both physical risk and transition risk for businesses, this has an impact on how companies implement their ESG agenda.
Some of the key impact areas for business such as agriculture are focuses areas of the EU green deal. Another key impact area focuses on confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production, and that the EU’s climate objectives are not undermined.
ESG has also impacted on reporting standards through IFRS S1 and S2. IFRS S1 and IFRS S2 are designed to provide additional information regarding an organization’s sustainability related risks and opportunities, which are relevant to primary users of their general purpose financial statements in their decision making as to whether to allocate resources to the entity.
Energy Performance Certificates (EPCs) are an example of guidelines that have been put in place to aid pricing. An EPC provides an indication of how much it will cost to heat and power a property, as well as how much CO2 it emits. It also includes recommendations of energy-efficient improvements, the cost of carrying them out, and the potential savings in pounds and pence that each one could generate. Ratings range from A to G
Reporting as also extending to the supply chain management. Supply chain ESG accounts for the entire footprint of your operations, end-to-end. Environmental aspects include operational footprint and sustainability practices, like carbon emissions, sourcing and production of materials, and waste.
Going forward critical for business survival is having a clear understanding of some of the factors that will impact capital allocation. At present, according to CDP Financial Services Disclosure Report 2020, 50% of Financial Institutions indicate that they have a low carbon transition plan. The report further states that $5.2T was committed towards sustainable finance by 2023 by major US Banks.
Businesses therefore must understand the regulatory Reporting requirements that will address regulatory and stakeholder pressures. According to 2020 EY Parthenon Sustainability Consumer Survey, 50% of Consumers think Sustainability is important when making a purchasing decision. They further need to assist customers in the transition to green to meet their demands. With $3 trillion in business opportunities versus $1 trillion in risks, this presents an interesting financial opportunity for investors across the world.