Accelerating ESG: Focus on JSE Sustainability and Climate Disclosure Guidance

By Brondwyn Douglas and Brent Shone

Developments in the ESG space have accelerated in the past two years. What was once dealt with in various sub-committees, has now risen to the top of boardroom agendas. ESG has applicability across the globe to every organisation, industry, and sector, whether public or private. These matters should not be seen in isolation and companies have an obligation that goes beyond simply providing returns for shareholders. Companies should be mindful of, and responsive to, their impact on society and the environment.

Part of the acceleration has been the number of reporting frameworks and guidance documents that have surfaced requiring companies to disclose more and more ESG information in a number of different ways. This has led to confusion and in some instances reporting for the sake of reporting and that is not performance-related in any way. The essence of why companies report – to improve transparency and drive continuous improvement across the ESG landscape – can be lost.

As sustainability pressures continue their anticipated upward trend, an organisation’s sustainability policies, practices and performance will increasingly impact the organisation’s value. Its ability to communicate its sustainability performance more effectively – and investors’ ability to track this better – is increasingly impacting access to capital.

A local response

In light of this, the JSE recognised the need to provide guidance to South African entities regarding ESG reporting requirements. As such, on the 9th of December 2021, the JSE launched their own Sustainability Guidance document as well as a specific Climate Disclosure Guidance.

JSE Group CEO Leila Fourie says: “In response to the rapidly evolving landscape of sustainability standards and frameworks, this guidance provides JSE-listed issuers with guidelines specifically tailored to the South African context, whilst being fully cognisant of global best practice. It is intended that this Disclosure Guidance will serve as an umbrella for sub-topic guidance as needed, with the first such guidance on Climate Disclosure, to be released at the same time.”

The aim is for the guidance documents to create a transparent and comparable ESG reporting framework for locally listed companies as they deal with an abundance of disclosure and measurement methodologies that often differ between jurisdictions.

Shameela Soobramoney, JSE Group Chief Sustainability Officer says: “There is a growing expectation on business to play a role in the shift towards stakeholder capitalism, coupled with a growth of investor interest in ESG issues. This shift in expectations creates the opportunity for stock exchanges to play a role.”[1]

JSE Sustainability Disclosure Guidance

The JSE Sustainability Disclosure Guidance is aligned with and draws on, the most influential global initiatives on sustainability and climate change disclosure, including the GRI Sustainability Reporting Standards, the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations, and the IIRC’s International Framework. The JSE has confirmed that this guidance is not intended to replace any global initiatives but rather seeks to help companies navigate the landscape of reporting standards. It also provides for the South African context which can be very specific such as Broad-based Black Economic Empowerment (BBBEE).

The JSE states that the guidance is issued as a tool that may be used by issuers on a voluntary basis to:

Assist local companies to navigate the global sustainability and ESG landscape
Provide for South Africa’s specific sustainability challenges
Improve the quality of sustainability and ESG information available to enable more informed investment decisions
Drive improved sustainability performance, accountability, and business leadership.

The Guidance highlights emerging best practices for disclosure in line with international developments. It is intended to inform a reporting organisation’s sustainability materiality process with a view to enhancing business practice.

This Guidance avoids being prescriptive, and leaves responsibility for decision-making with the reporting organisation, particularly as regards the identification of material sustainability issues. ‘Sustainability’ takes a much broader focus and recognises the need to drive systemic change in achieving a more equitable society and economy that operates within ecological boundaries. This understanding of sustainability focuses on an organisation’s impacts on society, the environment, and the economy (on people, planet and prosperity) enabling an assessment of the organisation’s contribution toward global commitments such as the UN SDGs[2].

The JSE’s Sustainability Disclosure Guidance has adopted a double materiality approach and recommends that:

Those sustainability issues that could reasonably be foreseen to meaningfully affect a company’s operational and financial results, should be disclosed in an annual integrated report; and
More detailed sustainability information relating to the organisation’s management of its significant impacts on the economy, society, and the environment – including, but not limited to, where these impacts affect enterprise value.

The Sustainability Metrics presented in this Disclosure Guidance have been informed by a thorough review of current sustainability disclosure expectations and emerging best practices, with explicit provision for South Africa’s business context and developmental challenges. The Core (C) and Leadership (L) metrics seek to balance the desirability of a ‘simple list’ with an applied materiality principle. A response is required for each of the Core Metrics listed in the JSE Disclosure Guidance, or a description as to why these are not disclosed and/or not seen to be material, and what steps are being taken to start disclosing those that are material.

JSE Climate Disclosure Guidance

Leaning on the recommendations of the TCFD and the guidance published by the Sustainable Stock Exchange (SSE) initiative, the JSE has published their own Climate Disclosure Guidance Document. This guidance aims to provide listed organisations with the guidance they need to adequately disclose their climate-related risks and opportunities. The key difference between the TCFD recommendations and the JSE Climate Disclosure is that the JSE are promoting a double materiality approach as seen with the Sustainability Disclosure Guidance as well as the SSE model disclosure guidance.

The Climate Disclosure guidance promotes a three-stage process for organisations to integrate and communicate climate-related information in alignment with the current best practice. The 3 steps include:

Step 1 – disclosure diagnosis and context: Companies must acknowledge climate change and determine the current state of climate disclosure within their organisation.
Step 2 – integration of climate risks and opportunities: Once companies have determined their current state their next step must be to integrate climate related aspects into their risk assessment and management process.
Step 3: Disclosure of climate related policies and data: The final step is the communication, to investors and stakeholders, of climate related practices, strategy, and objectives.

One of the key aspects of forward-looking climate disclosure is the use of climate scenario analysis. Implementing climate scenario analysis is a key element of the TCFD recommendations, as well as the JSE Climate Disclosure Guidance. The TCFD recommendation to implement forward-looking scenarios has been one of the more challenging recommendations to implement due to the complexity around the selection of scenarios. The JSE Climate Disclosure Document provides support in this regard with guidance on the process of starting a climate scenario analysis as well as the respective climate scenarios that companies may wish to select.

In assisting organisations with disclosing climate-related information, the JSE Climate Disclosure Document provides a TCFD disclosure checklist – this aims to help companies assess their disclosure status and see the elements that they have yet to disclose on. The checklist refers to the fact that companies disclosing climate-related information should be aiming to do so with their mainstream financial filings, rather than in a standalone report. While the checklist can be used by a company to assess their own disclosure status, it may be seen as a useful tool for investors to assess their investees status, an important tool going forward.

What’s next in the South African context?

The publication of the Sustainability Disclosure Guidance and Climate Disclosure Guidance by the JSE represents a huge step forward by the JSE in their commitment to helping companies in South Africa make sense of the sustainability reporting landscape. That being said, South Africa still remains one of the most carbon-intensive countries worldwide, producing the twelfth highest GHG emissions globally, which puts the country at severe risk in the transition to a low carbon future. The question that remains is, given the socio-economic condition in South Africa and heavy reliance on coal-fired power, what are the correct actions that need to be taken to provide a just transition to a low carbon economy that will keep South Africa from becoming a stranded country?

[1] JSE Sustainability Guidance Document, 2021

[2] JSE Sustainability Guidance Document, 2021.