The JSE’s leading role in sustainability disclosures

The global landscape for sustainability standards and frameworks is evolving so rapidly that stock exchanges are becoming vital partners in helping companies navigate the complexities around disclosures on environmental, social and governance (ESG) issues. Shameela Soobramoney, chief sustainability officer at the Johannesburg Stock Exchange (JSE), explores how, as the pivot where investors and listed firms meet, securities exchanges can support the drive for more transparency, ensuring risks can be better priced – ultimately making for more efficient markets

Shameela Soobramoney, JSE

The surge in demand for sustainable investments has been met with increased scrutiny, as varying methodologies, ratings and indicators used to assess assets prompt calls for consistent, comparable and verifiable metrics and disclosures. To help South African companies through the dynamic and complex world of reporting standards, the JSE published its Sustainability disclosure guidance in June. The blueprint uses a basic set of industry-agnostic metrics aligned with best global practices tailored to domestic business conditions.

The voluntary guide aims to help businesses improve the quality and availability of information about sustainability-related risks and opportunities that affect their organisations’ financial performance and impact on people, the environment and the economy.

We have always believed that full and open communication builds trust between those raising capital (companies) and those providing it (investors). Growing evidence points to better financial performance from companies that perform well on ESG considerations. This can also lead to lower cost of capital.

Moving toward greater transparency in a world crying out for more visibility is inevitable.

According to the Global Sustainable Investment Alliance, sustainable assets under management jumped to $35.3 trillion in 2020 from $30.7 trillion in 2018. Bloomberg Intelligence estimates that ESG assets will surpass $53 trillion by 2025 – it one-third of global assets under management. As can be expected, regulators are beginning to look at the credibility of the ESG tagging of some instruments. At the same time, concerns are mounting over greenwashing, where an organisation spreads disinformation to present an environmentally friendly image.

Investors have found it challenging to find high-quality ESG data when evaluating investments because companies are often uncertain about what information to disclose and how to integrate sustainability considerations into their value creation pursuit. The JSE assists companies in this process, driving better disclosures and practices and help create investor certainty.

The JSE has long championed sustainability and strong governance. It was the first stock exchange to introduce a sustainability index in 2004. It is a signatory to the UN-backed Principles for responsible investment and a founding partner of the Sustainable Stock Exchanges Initiative. The JSE is home to the FTSE/JSE Responsible Investment Index. It launched the Green Bond Segment in 2017, which expanded into a fully fledged Sustainability Segment in 2020.

The JSE’s Sustainability disclosure guidance is umbrella guidance accompanied by sub-set thematic guidance – the first of which is the Climate disclosure guidance, also released in June. This guide lays out an approach for companies wanting to report on climate-related information and helps provide local and global context.

By developing our Sustainability disclosure guidance, the JSE hopes to encourage and improve business leadership, performance, accountability and transparency across the ecosystem.

The JSE’s guidance covers issues that many companies reporting on sustainability matters could be grappling with, such as what measures are key, how to approach disclosures, what information to include and which reporting formats to consider.

Furthermore, while the reporting process is useful, the JSE’s guidelines also point out that compiling that information can strengthen internal systems, inform strategic goals, shape the company’s business model, and assist in identifying risks and opportunities. Data needs to support the report and can be used to improve decision-making and performance.

With enhanced disclosures on sustainability issues in increasing demand from investors, analysts, capital market participants and other stakeholders, it is crucial the information enables users to make informed decisions. The JSE’s guidelines also recommend that reporting should cover an ‘outside in’ as well as ‘inside out’ view on impact and materiality.

As the guidance further suggests, information should be relevant and faithful to the reality it depicts. It should be complete, neutral, comparable over time, verifiable, easily understood, timely and not omit or misstate information.

Investors and stakeholders expect companies to report on their sustainability impacts, risks and opportunities with the same rigour as they do financial information.

When considering what sustainability information to reveal, the JSE’s guidelines propose that disclosures be appropriately integrated into governance, strategy and performance targets. By doing so, the company signals to all its stakeholders that it understands the impacts, risks and opportunities of running its business and how it creates value.

Some sustainability narratives could include the board’s process for incorporating sustainability issues into the overall governance approach, how sustainability risks and opportunities have influenced the organisation’s strategy and what impact this has had on the company’s overall performance. Metrics around disclosure could then dig deeper into each component of ESG.

Environmental metrics could disclose details on climate change, water security, pollution and waste, biodiversity and land use, and supply chain and materials.

Social metrics might give specifics on labour standards, human rights violations (such as allegations of discrimination and what actions were taken), community developments and health and safety.

Governance metrics can measure board diversity, independence, ethical behaviour such as training on anti-corruption measures, incidents of corruption and political contributions.

At the heart of the Sustainability disclosure guidance is the belief that sustainability issues are material to enterprise-value creation and commercial innovation. To transition to a more sustainable economy, organisations need to deepen understanding and disclosure of their most significant social, economic and environmental impacts.

While debates in some circles continue, there have been profound developments in the global sustainability reporting space, leading to greater convergence in disclosure frameworks among the world’s most influential and initiatives on reporting standards – and a move from a voluntary application regime toward more mandatory reporting.

Sustainability pressures will continue their upward trend as the imperative to achieve the aims of sustainable development becomes very clear. Stock markets such as the JSE are perfectly poised to help facilitate the transition for its issuers, to build confidence among investors and ensure capital markets operate smoothly.

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