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Environmental, social and governance (ESG)
This is an approach to evaluating and operating businesses that goes beyond the sole
focus of shareholder return. ESG has three main focus points:
An environmental aspect: the focus is on preserving the natural world, such as climate
change, greenhouse gas emissions, biodiversity loss, deforestation, pollution, energy
efficiency and water management. Section 76(3) of the Companies Act places an
obligation on directors to exercise their functions in the best interests of the company
and with the requisite degree of care, skill and diligence. Although these are general
director duties, if a director fails to ensure that a company complies with the specific
environmental law obligations, the director may be held liable for a breach of these
general director duties.
A social aspect: the focus is on people and relationships including working to
support gender and diversity, equity, and inclusion, enhancing customer satisfaction
and employee engagement. Section 72 of the Companies Act requires state-owned
companies, listed companies and every other company that has had a public interest
score of at least 500 points in the past 2 years to appoint a social and ethics committee.
The social and ethics committee is required to monitor a company’s activities with regard
to: Social and economic development, Good corporate citizenship, The environment,
health and public safety, Consumer relations and Labour and employment matters.
A governance aspect: the focus is on moving beyond how organisations have been
typically governed in the past. Examples of specific topics include board composition,
cybersecurity practices, management structure, executive compensation, and the
prevention of bribery and corruption. The corporate governance practices which are
expected of directors are set out in the Companies Act and King IV ™. Duties and
responsibilities of directors are derived from both the Companies Act and common law.
Good corporate governance dictates that directors act in the utmost good faith and
in the best interests of their companies, including the need to exercise care, skill and
diligence in the performance of their duties. ESG has become a necessary component
in many proposed deals with enhanced ESG due diligence and disclosure requirements.
Numerous regulations and taxonomies have been released globally in this space,
including the South African Green Finance Taxonomy, 1st EDITION, which was released in
March 2022. When compiling an integrated report, listed entities usually report on their
compliance with ESG matters as required by King IV ™.

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