“We are the first generation to feel the impact of climate change and the last generation that can do something about it.” (Remarks by the former US President Barrack Obama at U.N. Climate Change Summit, 2014).
Introduction
What do we know about ESG? what does it mean? What do we need to know and do? Is Zambia and Africa at large ready to enforce ESG?
Well, in a nutshell ESG stands for Environmental, Social and Governance. It is basically a framework for measuring the sustainable and societal effects of a company’s operations and investments on the host environment (Sandra Mathis, 2022). These environmental factors refer to a company’s direct impact on the environment and how it manages its resources sustainably, this can include energy efficiency, waste management and carbon emissions. Whilst Social factors depict a company’s direct effect on society and how it manages its relationships with stakeholders. This can include labour practices, human rights and community engagement. Governance on the other hand postulates a company’s internal management and decision-making processes. This includes aspects such as board composition, executive compensation and transparency.
Why it is important
ESG is becoming increasingly important to investors, who are looking to invest in companies that are sustainable and socially ethical. As a result, many companies are adopting ESG practices and reporting on their ESG performance to meet the expectations of investors and other stakeholders. ESG has become increasingly important in recent years as investors and stakeholders are placing higher emphasis on sustainability and responsible business practices world over. There is an increasing awareness that ESG may become compulsory or mandatory. For companies to stay ahead of regulations, competition and unleash all the benefits of ESG, they must integrate this framework at the core of their DNA. In another perspective, organisations that fail to comply with environmental or social factors may end up struggling to deal with regulatory, legal or reputation issues at a later stage (Tara Bernoville, 2022).
What should companies do to stay up to date?
What does it mean for companies on the compliance aspect of things? to stay compliant with ESG, companies should consider implementing the following:
- Environmental: Reduce carbon footprint, minimize pollution, conserve natural resources, adopt eco-friendly practices and products and comply with environmental regulations.
- Social: Foster ethical and respectful relationships with employees, customers, communities and other stakeholders, support diversity and inclusion, provide a safe and healthy working environment and promote human rights.
- Governance: Establish strong corporate governance practices, ensure transparency and accountability, mitigate risks, uphold ethical standards and comply with laws and regulations.
Companies should integrate ESG considerations into their business strategies and operations and continuously measure and report their performance against ESG standards. This will not only help them stay compliant with ESG but also enhance their brand reputation, attract investors and customers as well as contribute to a sustainable future. By doing so, companies can disclose their ESG compliance in their financial statements by using various methods:
Firstly, companies can include a separate ESG section in their annual report, which can provide detailed information on the company’s ESG performance, including measurable targets, goals and progress made towards achieving them (How to Set ESG Goals That Drive Great Non-Financial Results – Euronext, 2022).
Secondly, companies can use integrated reporting frameworks such as the Global Reporting Initiative (GRI) or Sustainability Accounting Standards Board (SASB) to report on their ESG performance alongside their financial performance.
GRI: Established in 1997, the GRI is a pioneer in sustainability reporting and has played a significant role in defining the reporting landscape. The GRI Standards are a set of flexible and universally applicable guidelines that help organisations measure and report their economic, environmental and social impacts. The GRI is primarily aimed at a wide range of stakeholders including investors, employees, customers, regulators and the wider public. The GRI adopts a principle-based approach, which emphasises the importance of materiality, stakeholder inclusiveness, sustainability context and completeness. The framework offers three levels of reporting: Core, Comprehensive and Sector Disclosures. The Core level requires organisations to report on general disclosures and management approach, while the Comprehensive level mandates organisations to provide detailed information on all aspects of their ESG performance. Sector Disclosures are tailored for specific industries and address industry-specific risks and opportunities (Jackman, 2023).
SABS: Founded in 2011, the SASB is a relatively newer player in the ESG reporting space. The SASB Standards are designed to help companies identify, manage and report on the ESG factors that are most relevant to their industry and which have a material impact on their financial performance. The SASB is specifically targeted at investors with the goal of providing them with standardised, comparable and decision-useful information. The SASB adopts an industry-specific approach, with 77 unique standards covering 11 sectors and 93 sub-industries. The standards are based on the concept of materiality, which is defined as the likelihood of an ESG factor having a significant impact on a company’s financial condition or operating performance. The SASB’s materiality-focused approach helps companies prioritise the ESG issues that matter most to their business and investors (Jackman, 2023).
Thirdly, companies can include key ESG performance indicators in their financial statements such as energy consumption, greenhouse gas emissions and employee turnover rates (Donald Farmer, 2023).
Companies need to provide transparent and relevant ESG information to their stakeholders to demonstrate their commitment to sustainable and responsible business practice.
How can Zambia stay afloat with ESG
How can Zambia champion this? for Zambia to conform to and enforce ESG principles, the following are a few different types of legal reforms that could be undertaken. Potential areas of focus might include:
Environmental laws – Zambia could strengthen and update its environmental laws to ensure that they are in line with international ESG standards. This might involve introducing new regulations to reduce air and water pollution. They could incentivizing companies to adopt sustainable practices and creating mechanisms for monitoring and enforcing compliance.
Labour laws – Another key area to focus on would be labour laws. Zambia could work on strengthening its labour laws to ensure that workers are treated fairly, paid a living wage, not just a “wage” and ensure they are not subjected to exploitation or abuse. This might involve introducing new regulations around monitoring of worker safety, collective and consultative bargaining as well as intensifying transparency in the local supply chains.
Corporate governance – Here, Zambia could focus on reforms to its corporate governance framework. This might involve introducing new regulations around board diversity, executive compensation and stakeholder representation, among other things.
To enforce ESG reporting in Zambia, one approach could be implementing a regulatory framework that requires mandatory ESG reporting for companies operating in the country. The following is an outline of the steps that can be adopted:
- Establish a regulatory body: Create or designate a regulatory body responsible for overseeing ESG reporting compliance. This could be an existing regulatory authority or a specialized ESG reporting agency.
- Develop ESG reporting guidelines: Collaborate with stakeholders including industry experts, investors, civil society organizations and government agencies to develop comprehensive ESG reporting guidelines tailored to Zambia’s context. These guidelines should specify the ESG metrics, indicators and reporting formats that companies are required to follow.
- Set reporting thresholds: Define the criteria for which companies are required to report on ESG factors. This could include criteria based on company size, industry sector, market capitalization or specific thresholds related to environmental or social impact.
- Mandate ESG reporting: Enact legislation or regulatory measures that make ESG reporting mandatory for qualifying companies. This could include introducing amendments to existing company law or issuing new regulations that explicitly state the reporting requirements, timelines and penalties for non-compliance.
- Provide capacity building and support: Offer training programs, workshops and resources to educate companies on ESG reporting requirements and best practices. Collaborate with industry associations, educational institutions and professional bodies to build capacity and promote awareness about the importance of ESG reporting.
- Establish reporting and verification mechanisms: Develop mechanisms for companies to submit their ESG reports to the regulatory body. Consider establishing a centralized platform or portal where companies can upload their reports for easy access and review. Additionally, explore options for independent verification or assurance of reported ESG information to enhance credibility.
- Monitor and enforce compliance: Implement a robust monitoring and enforcement mechanism to ensure companies comply with the ESG reporting requirements. This may involve conducting regular audits, inspections or reviews of the submitted reports and imposing penalties for non-compliance.
- Provide incentives and recognition: Consider offering incentives or recognition programs to encourage companies to go beyond minimum reporting requirements and demonstrate exceptional ESG performance. This could include awards, certifications, tax benefits or access to funding or investment opportunities.
- Periodic review and improvement: Continuously evaluate the effectiveness of the ESG reporting framework, monitor global best practices and engage stakeholders for feedback. Regularly review and update the reporting guidelines to align with emerging ESG standards and address any gaps or challenges identified during the implementation process.
By implementing a regulatory framework that enforces mandatory ESG reporting, Zambia can enhance transparency, accountability and sustainability practices among companies operating within its jurisdiction. Overall, there are many different legal reforms that Zambia could undertake to conform and enforce ESG principles. The key will be to take a comprehensive and integrated approach, focusing on all three pillars of ESG: environmental, social and governance.
Conclusion
Conclusively, the overall objective of ESG is to create a better world for both people and the planet. This means that companies are not only focused on generating profits but also on being responsible and sustainable in their operations. By considering the impact of their actions on the environment, their employees and society, companies can help to address important global issues such as climate change, social inequality and corruption. Ultimately, the goal of ESG is to create a more equitable and sustainable future for everyone.
References
Donald Farmer (31 March 2023). ESG metrics: Tips and examples for measuring ESG performance. https://www.techtarget.com/sustainability/feature/ESG-metrics-Tips-and-examples-for-measuring-ESG-performance
How To Set ESG Goals That Drive Great Non-Financial Results – Euronext. (2022, September 1). How to Set ESG Goals That Drive Great Non-Financial Results – Euronext. https://www.corporateservices.euronext.com/blog/esg/how-to-set-esg-goals
Jackman, H. (2023, April 21). ESG Reporting Frameworks – Comparing the GRI and the SASB – ESG PRO Ltd. ESG PRO Ltd. https://esgpro.co.uk/esg-reporting-frameworks-comparing-the-gri-and-the-sasb/
Remarks by the President at U.N. Climate Change Summit. (2014, September 23). whitehouse gov. https://obamawhitehouse.archives.gov/the-press-office/2014/09/23/remarks-president-un-climate-change-summit
Sandra Mathis (2023). Definition Of ESG. ESG strategy and management: Complete guide for businesses. https://www.techtarget.com/whatis/definition/environmental-social-and-governance-ESG
Tara Bernoville (2022). Why is ESG important for companies and investors? https://plana.earth/academy/why-esg-important-companies-investors