With the King III Code on Governance coming into effect last week, businesses will have to pay greater attention to sustainable strategies and climate change-related risks.
The code notes: “Sustainability is the primary moral and economic imperative of the 21st century. It is one of the most important sources of both opportunities and risks for businesses.
“Most importantly, current incremental changes towards sustainability are not sufficient - we need a fundamental shift in the way companies and directors act and organise themselves.”
Marie Parramon, sustainability consultant at Imbewu Sustainability Legal Specialists, says one of the main developments in the new code is the extension of its scope to all entities. “This makes sustainability a matter to be considered by all businesses.” She also notes the direct reference to climate change is a notable and progressive development.
“In King III, there's a very strong acknowledgment that proper corporate governance is essential from an environmental perspective.”
The code reflects the widely accepted definition of sustainability, by stating that boards should no longer make decisions based only on the needs of the present, as this may compromise the ability of future generations to meet their own needs.
It adds that a key challenge for business leaders is to make sustainability issues mainstream, as strategy, risk, performance and sustainability have become inseparable, leading to the phrase 'integrated reporting', which is used throughout the code.
King III requires that sustainability reporting and disclosure be integrated with the company's financial reporting, and that its general oversight be delegated by the board to the audit committee.
Integrate and elevate
However, according to the code, sustainability is about more than just reporting, and it is vital for companies to focus on integrated implementation. “The board's role is to set the tone at the top, so the company can achieve this integrated performance,” it states.
Parramon argues that the level of implementation of environmental requirements will depend on the board and directors. “It's also about the personality of the director, and how open-minded and progressive the company is.”
She adds that sustainability has to form part of the organisational structure. “It should be built into the job description of every employee, so there is a sustainability component to each employee profile, which is related to their performance and bonus.
“You can't just have one department doing everything; they can provide guidance and management, but everyone, from the project development to the engineering department, should have sustainability criteria, which has to be considered in every process,” adds Parramon.
Exposure from an international business perspective is also an influencing factor. “Some organisations in SA have realised that sustainability reporting is no longer a 'nice to have', but a necessity if they want to trade in the global marketplace.”
Bottom line thinking
For many smaller South African businesses, however, incorporating a sustainability strategy is sometimes regarded as a luxury they can't afford, notes Parramon. “It depends on the nature of the business; capital costs and seed investment to improve sustainability are often considered too high, even if it will pay off in the long-term.
“Some companies, especially small and medium-size businesses which are just surviving, can only focus on financial sustainability at this stage.”
According to Parramon, companies will mainly consider reduction measures which are cost-effective, as all strategic actions affect a company's bottom line. “Companies will only put in reduction measures to a point where it's not costing the company.”
She adds that most mitigation measures at present are undertaken on a voluntary basis, as companies don't want to lose their competitiveness. “We need more common regulation to level the playing field, so all companies have to do it and won't lose their competitive edge at national and international level.”
Parramon says the move from a reactive to a proactive approach among companies will become very important in the next five years, and that business and government need to collaborate on sustainability issues.
“I hope for a stronger business voice; that companies will start talking and working together, and not just stick to their own little corners. This will improve cost-efficiency while still maintaining competitiveness from an international point of view.”
According to the Institute of Directors, listed companies are obligated to apply King III, following the newly-released JSE listing requirements. Most amendments are effective from 1 April; meaning companies should apply the principles as far as possible and report on their progress.
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