Published Date: 2021-10-14 | Source: INCE|Community | Author: Cuma Velile Dube | The ESG Guy
KPMG South Africa and Business Leadership South Africa released their 2021 CEO Outlook report this week. The report extends on its global survey of CEOs across ten industries, reflecting on their strategies and outlook over the next three years. It was encouraging to see that 70% of CEOs are optimistic about the local economy's prospects over the next three years. I wasn't expecting that. We've heard very little about our government making progress on their promises for reform and a more enabling environment for growth and development. Unemployment is at an all-time high, and business confidence took a hit in September.
It is not surprising, however, that our local CEOs are under pressure for increased ESG transparency. 70% of our CEOs reported that stakeholders want more reporting and transparency on ESG issues, while only 50% reported the same amongst global CEOs. What was interesting was that 90% of our CEOs reported that their digital and ESG strategic investments were "inextricably linked". Again, this was higher than the 76% of global CEOs who could say the same.
As early as 2019, key sources of risk for investors were identified (particularly for the bond variation of an investor), as being climate change, unemployment, and political stability. An analysis by Sustainalytics was very specific in its recommendation that these issues be prioritised when monitoring South Africa. ESG risk ratings have a strong positive correlation to sovereign credit ratings (coefficient = 0.83), according to Sustainalytics.
I imagine, by stakeholders, our CEOs meant "investors" more than any other stakeholder group they may have been engaged by on these issues. Other than bond investors being concerned by the strong relationship between ESG ratings and the likelihood of default; equity investors are concerned with the risks facing physical assets and supply chains because of underperformance on five of the nine indicators of natural and produced capital. What does it mean for their businesses when they operate in an environment that is vulnerable to water stress, natural disaster, and low energy intensity (and energy produced with coal, when it is available)? Similarly, a country that is lagging in its management of pressing human capital risks. We saw the results of that not too long ago, and I suspect "political/civil unrest" will become a favourite material topic in sustainability reports to come. Second only to COVID-19.
Most importantly, our country has not improved its performance on measures of institutional capital. What these include are; measures of political stability, rule of law, control of corruption, regulatory quality, government effectiveness, voice and accountability. These are key governance issues that would certainly be top of mind for investors and the broader stakeholder group. Stakeholders want to know how CEOs are dealing with these risks. They want to know how they are tracking their exposure to these risks and what management approaches have they put in place. The other side of that coin is that these issues may also present opportunities, and stakeholders want to know how those opportunities are being exploited. While energy intensity is a risk, it is also an opportunity to transition to cheaper, renewable energy sources, for example.
It is because of this demand for better reporting and increased transparency that I believe that 90% of our CEOs are also linking their digital and ESG investment strategies. Digital technologies have come a long way in improving the quality of ESG performance data, and they have helped companies incorporate stewardship insights into how they run their businesses. This is what stakeholders also want.
Quality ESG data and reporting are important to stakeholders seeking to mitigate risk, identify drivers of long-term performance and read decision-useful ESG reports.