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The JSE’s new ESG reporting standards. What you should know

Mili Soni, Knowledge and Learning Lawyer, Corporate, Bowmans South Africa.

THE Task Force for Climate-Related Financial Disclosures (TCFD) released recommendations around four focus areas that represent key operational elements of an organisation that can have climate-related impact: governance; strategy; risk management; and metrics, targets and performance.

In providing disclosure detail, issuers should ensure that they follow the JSE Sustainability Disclosure Guidance’s key principles to produce a useful ESG report with high-quality and clear disclosures that enable a decision-maker to understand the relevant organisation’s stance on climate change. 

The information provided must be in line with IFRS S2 Climate-Related Disclosures, as informed by TCFD recommendations and enhanced by the JSE.

Detailed disclosure is required about the following:

  • Governance – This refers to the board’s oversight of climate-related impacts, risks and opportunities, and the required process for integrating sustainability issues into the organisation’s governance approach around climate-relate risks and opportunities. 

This is informative in assessing the extent to which such matters are receiving an adequate level of board and management attention. Good governance should include climate-related governance. Boards should ensure that people with the relevant expertise and skills are employed for involvement with this function to competently oversee climate-related strategies. 

In doing so, the board should describe how it sets the direction and tone for considering climate-related impacts, risks and opportunities and it should set out the methods and how often the board and/ or committees consider climate-related reporting and how these considerations are integrated into the organisation’s strategic plans, funds allocation and remuneration policies and incentive programmes. 

  • Strategy – The disclosures must detail how climate-related issues play a role in an organisation’s business model, strategy and financial spend in the near future and in the long term. Such information is useful to apprise the reader about the future impact of the organisation. As a result, an organisation should describe its ‘impact materiality’ and ‘financial materiality’ on people, the environment and the economy. In particular, it should set out the organisation’s targets, bearing in mind that climate-related issues usually manifest at a much later point, if not sufficiently addressed upfront. In doing so, it should also detail the potential use of carbon offsets, as well as qualitative and quantitative information regarding the progress of plans disclosed in prior reporting periods. 

An organisation should also detail how its cash flows are impacted and if there is any risk of material adjustments expected in the next financial year.

  • Management approach – This refers to a description of how climate-related impacts, risks and opportunities are identified, and addressed by an organisation’s management. It is recommended that an organisation describes the way in which it considers the qualitative and quantitative thresholds applicable and indicates how it prioritises climate-related risks and opportunities against other types of risks and opportunities.
  • Metrics and targets – These disclosures depict the performance metrics and targets used by the organisation to measure and manage its sustainability impact and its success in performing against such metrics and targets. In this regard, it is useful to consider current information against historical information to identify trends.  Details around greenhouse gas emissions should be expressed, including detail of Scope 1 and Scope 2 emissions and greenhouse gas emissions intensity for Scope 1, 2 and 3. Detail should also be provided on capital expenditure and financing deployed towards climate-related risks and opportunities.

This is a developing field in which further guidance on disclosure can be expected in the short to medium-term.

JSE require companies to integrate ESG into their business strategies

The JSE Listing Requirements require listed companies to annually report, on an ‘apply and explain’ basis, the extent to which they have complied with King IV.  King IV emphasises the importance of considering other stakeholder interests and requires company directors to have regard to wide-ranging social, economic and environmental concerns to ensure that the company can ‘create value in a sustainable manner’. 

The JSE’s Sustainability Disclosure Guidance and Climate Disclosure Guidance were issued in 2022 to assist issuers on a voluntary basis. These have been prepared to guide South African companies navigating the global position applicable to sustainability and ESG. Although these papers have been issued by the JSE, they do not constitute mandatory reporting or disclosure obligations for JSE-listed companies.

While South African statutes impose a range of obligations regarding the environment which could extend a specific duty of care to directors of a company, there is no strict liability applicable to decisions impacting the environment. However, it is recommended that directors (and the relevant company) are able to demonstrate that in taking a decision they acted within the law and gave reasonable consideration to the relevant environmental issues, with due regard to globally or internationally recognised standards. 

South African companies face potential reputational risks for failing to follow appropriate environmental practices in terms of existing environmental legislation, if this leads to litigation. The last few years have seen the rise of climate change litigation, globally, especially cases involving greenwashing/ green claims; challenging governments or corporations (including financial institutions) for failure to take climate risks into account in decision-making; and challenging the flow of finance to projects and activities that are not aligned with global commitments to reduce carbon emissions.

Directors have a duty to act with due care, skill and diligence and in the best interests of the company, which includes incorporating ESG into the company’s strategic plans.

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