On 7 September 2015, the Centre for Environmental Rights (the “CER”) published a report titled Full Disclosure – The Truth About Corporate Environmental Compliance in South Africa (the “CER Full Disclosure Report”), which has gained some traction in the South African media.
Standards & Legal has received a number of queries about the CER Full Disclosure Report from existing customers as well as from people who are aware of our work. This blog is our response to the CER Full Disclosure Report.
The CER Full Disclosure Report contains the findings of a baseline assessment of 20 listed South African companies with significant environmental impacts that have regularly appeared on the JSE’s Socially Responsible Investment Index (the “SRI”), conducted by the CER.
According to the CER website, “the purpose of the assessment was to ascertain the extent of compliance by the companies with environmental laws, as well as the extent to which non-compliance with environmental laws was disclosed, by these companies, to their shareholders, between 2008 and 2014.”
Summary of the CER Full Disclosure Report
In summary, the CER Full Disclosure Report concludes that:
- Most assessed companies were not accurately disclosing the extent of their non-compliance with environmental laws to their shareholders.
- Some assessed companies are actively misrepresenting their levels of compliance with environmental laws to their shareholders.
- The manner in which listed South African companies are rated as good targets for “socially responsible investment” is wholly inadequate.
- Investors, in particular South Africa’s large institutional investors, are failing to recognise red flags in company reports and are not asking nearly enough, or the right, questions about the environmental compliance of the companies that they invest in.
- South Africa’s environmental compliance monitoring and enforcement system is not effective enough.
Standards & Legal’s perspectives on the CER Full Disclosure Report
Standards & Legal’s perspectives on the findings of the CER Full Disclosure Report may be summarised as follows:
- If investors do not ask enough questions about the environmental legal compliance of the companies that they invest in, companies lack a significant incentive to comply with environmental law.
- There is a growing pressure, through both legislation and stakeholder activism, for companies to both manage their environmental, social and governance (“ESG”) impacts better, as well as disclose their ESG performance to all stakeholders, including shareholders.
- There is growing research evidence showing that good ESG performance is directly correlated to financial outperformance by companies (see for example the “From Stockholder to Stakeholder” report by the Smith School of Enterprise and the Environment, Oxford University). Thus, shareholders will increasingly care to understand the state of the ESG performance of their investments.
- It is very difficult for companies to know precisely what the law is for them. This is especially true for environmental law, which can differ substantially from location to location.
- In the Standards & Legal Platform, we have captured over 40,000 legal provisions and summarised over 6,000 provisions applicable to environmental and occupational health and safety. Depending on the location, activities, industry and other attributes of a given site (or plant or physical operation), any given site may be required to comply with between 3,500 and 5,000 of these legal provisions. Thus, in the first instance, the problem is that many companies are not even aware of all their environmental legal obligations at each given site/plant.
- Law is “binary,” meaning you either comply or you do not. So it is entirely unhelpful for a company to only be aware of some of provisions that apply to it. In the absence of not being aware of all of the applicable legal provisions, companies are unable to strategise and resource the strategies required to ensure compliance.
- The online, site-specific, legal registers delivered via the Standards & Legal Platform, and supporting live interpretation service and daily updating service, provide companies with the tools and processes to ensure that all applicable legal provisions are understood by employees at all levels of the company.
- By procuring a legal register on the Standards & Legal Platform, companies demonstrate, at very least, some corporate-will to discover what is required of them in order to comply, which is the first necessary step towards any company achieving full compliance.
- In the absence of a legal register on the Standards & Legal Platform (or a comprehensive strategy to deliver the same information to all levels of the company), a large company will never be able to achieve full compliance with its environmental legal obligations at all of its sites.
- It is not enough for companies to just be made aware of the legal provisions applicable, but they need to go further to also assess site-specific compliance levels, through self-assessment and third party legal compliance audits.
- Findings of non-compliance should be dealt with using a systematic process, such as through the employment of an Environmental Management System, to ensure that all findings are “closed-out” within a reasonable time frame.
Further comments by Peter Flynn, Managing Director of Standards & Legal:
“With the international drive from shareholders for better management of ESG, in future, large companies will simply have to ensure that they both comply with all applicable ESG legal provisions as well as report on their performance in a transparent way to their shareholders.”
“There will also be increasing pressure on sustainability ratings agencies to provide meaningful metrics about company’s sustainability performance. It soon won’t be good enough to perform better than the worst performers and thus appear to operate sustainably. Too many ratings show how a company is sustainable against peers, rather than against a future that is necessary for long term sustainability. This is why we feel that the definition of what it means to be a “socially responsible investor” is set to become far broader and more demanding.”