Siphosihle Nongogo, Technical Manager

Introduction

ESG – short for Environmental, Social, and Governance – represents a framework of criteria used to assess a company’s performance and conduct across sustainability, ethical responsibility, and corporate oversight. ESG serves as a framework that enables businesses to evaluate their wider responsibilities, extending beyond traditional financial metrics. The environmental aspect measures how companies safeguard and act as stewards for the environment. The social aspect concerns how the company relates to employees, customers, suppliers and the community it operates in through sustainable business practices. Finally, governance is about leadership, internal controls and shareholder and stakeholder rights.

The term ESG was first introduced in the landmark 2004 report Who Cares Wins.[1] This report emerged from a collaborative initiative among leading financial institutions, invited by then United Nations Secretary-General Kofi Annan, to formulate principles and recommendations for integrating ESG considerations into asset management, securities brokerage, and related research activities.[2] In the last 20 years, ESG has gone from being a niche idea to a key expectation from investors, customers, and regulators. People now want companies to show how they build long-term value in a responsible and sustainable way. While many companies have historically viewed ESG as a box-ticking exercise, it is becoming more evident that ESG integration has its competitive advantages.

Investor-Led ESG Frameworks: Are We Missing the Substance?

ESG reporting comes from investor-driven frameworks such as the Sustainability Accounting Standards, the Task Force on Climate-related Financial Disclosures, and the more recent IFRS ISSB standards. These disclosures are tailored for integration into annual reports but lack a deep delve into the realties underneath the numbers. ESG audits frequently focus on verifying the presence of documentation—such as carbon emissions data, Lost Time Injury Frequency Rate metrics, and diversity statistics—without critically assessing whether these figures represent meaningful initiatives or accurately capture underlying risks. Effective ESG implementation demands more than ticking boxes — it calls for embedding sustainability and governance principles into the core of strategic decision-making and operational practice. [3]

Navigating Economic Headwinds Through ESG

The urgency of robust ESG implementation is particularly evident in South Africa, where several key industries have faced sustained underperformance. Construction has been hampered by criminal disruptions, rising global tariffs on imported materials, and a shortage of skilled labour. Manufacturing continues to struggle under inadequate governmental policy support, while mining grapples with slow government processes and day-to-day operational problems.[4] Further, agriculture faces mounting pressure from climate variability and the proliferation of diseases such as the foot and mouth disease. Moreover, many organisations are affected by the water crisis in South Africa, which is the result of failing infrastructure and lapse of governance mechanisms in water boards and local municipalities. These challenges underscore the need for ESG-driven strategies that promote resilience, ethical governance, and long-term sustainability across sectors.

ESG compliance is also weakened by the United States of America’s (“USA”) current stance on ESG initiatives. Most notably the USA formally rejected the UN Sustainable Development Goals on March 2025. The current US administration does not recognise climate change and supports the fossil fuel industry. And Trump most recently set up the Board of Peace which many see as a direct opponent of the UN. These developments may be seen as deterrents to the integration of ESG incentives in organisations.

Profit Meets Purpose: The Business Case for ESG

Despite the various challenges enumerated above, research indicates a strong link between ESG performance and financial success.  Research indicates that companies with stronger ESG ratings tend to be more profitable than those with lower scores. Similarly, Deloitte found that a 10-point increase in ESG score was associated with a 1.2 times boost in enterprise value relative to EBITDA. Additionally, ESG enables companies to access preferential financing, such as lower interest rates on green loans, and to benefit from tax incentives tied to sustainability-focused investments.[5]

Companies’ ESG implementation is buttressed by legislative incentives. South Africa is moving towards compulsory sustainability reporting. This comes after the Companies and Intellectual Property Commission published Notice 6 of 2025, stating that it has conducted public consultations on implementing mandatory sustainability reporting.[6] And has joined the steering committee with the Department of Trade, Industry and Competition, which was tasked with evaluating the adoption of the ISSB Sustainability Disclosure Standards in South Africa.[7] Companies that adopt ESG principles frequently build investor trust, enhance their access to capital, and strengthen their reputation in the market.

Furthermore, the IoDSA King V™ Report on Corporate Governance for South Africa[8] encourages ESG integration through its underpinning philosophies, such as  integrated thinking by requiring organisations to consider the capitals or resources and relationships that they use or affect as well as how their operations affect the outputs on these resources and relationships.[9] The relationships and resources that the organisation uses, relies upon  can be distilled into the “six capitals.” These six capitals include: financial, manufactured, human, intellectual, social and relationship as well as the natural capitals. This stance underpins the importance of ESG integration into organisations’ operations and how this creates a competitive advantage above mere consideration of financial incentives.

Conclusion

The preceding analysis underscores that integrating ESG principles is no longer optional — it has become a strategic imperative for companies aiming to secure and sustain a competitive edge. Once regarded merely as a compliance exercise to satisfy investor-driven disclosure frameworks, ESG has since evolved into a strategic tool for driving long-term value and accountability. Not only does it improve the financial performance of a company in the market, enables the acquisition of preferential funding but it also increases investor trust in the business.

[1] United Nations Global Compact. (2004) Who Cares Wins: Connecting Financial Markets to a Changing World. New York, NY: United Nations.

[2] Byrne, D. (no date) A brief history of ESG: From pioneer to mainstream Available at: https://www.thecorporategovernanceinstitute.com/insights/guides/a-brief-history-of-esg-from-pioneer-to-mainstream/ (Accessed: 28 October 2025).

[3] Dermanin, G.S. (2025) Is ESG Becoming a Box-Ticking Exercise? Or Are We Missing the Point?.  Available at: Is ESG Becoming a Box-Ticking Exercise? Or Are We Missing the Point? (Accessed: 28 October 2025).

[4] Waglet, R. (2026) ‘Why South Africa’s Mining Sector is Stuck, and What Needs to Change,’ Eyewitness News, 9 February. Available at: Why South Africa’s mining sector is stuck, and what needs to change (Accessed: 20 February 2026).

[5] Forest Stewardship Council (2025) What is ESG and why does it matter for businesses? Available at: What is ESG and why does it matter for businesses? | fsc.org (Accessed: 28 October 2025).

[6] Scott, N., Smit, J., (2025) ESG, the key to sustaining the construction sector? Available at:  https://werksmans.com/esg-the-key-to-sustaining-the-construction-sector/ (Accessed: 28 October 2025).

[7] Ibid.

[8]  Institute of Directors in South Africa. (2025). King V™ Report on Corporate Governance for South Africa. Johannesburg: Institute of Directors in South Africa.

[9] Copyright and trademarks are owned by the Institute of Directors in South Africa NPC and all its rights are reserved.