It is high time ZSE mandates ESG reports

By Percy Jinga analyst

IN response to a recent Zimbabwe Stock Exchange (ZSE) call for the public to comment on a first draft of the special purpose acquisition company (SPAC) listings requirements, this is a contribution on general listing requirements on the ZSE.

It is simply unacceptable that during these times, a listed milk company is still using non-recyclable and non-biodegradable packaging, that a listed mining company is accused of polluting a community water source, and that a listed manufacturing company has an all-male board of directors. These unsustainable practices can be traced partly to lack of ESG reporting and the subsequent absence of ESG ratings for listed companies.

In a world in which consumers and investors are increasingly becoming more environmentally and socially conscious, it is about time the ZSE plays a pioneering role in engendering good environmental, social and governance practices.

What is an ESG report? Also known in some context as a sustainability report, an ESG report details how a company is taking care of environmental, social and governance factors.Environmental factors are those that are concerned with a company’s use of natural resources and impacts of its direct activities and supply chains on the environment.

Biodiversity conservation, waste recycling, pollution control, and reduction of all three scopescarbon dioxide emissions are common environmental factors that pose risks and opportunities for companies.For instance, companies that violate waste disposal regulations are more likely to be prone to costly litigation and criminal prosecution while those implicated in biodiversity loss may experience negative publicity and customer backlash.

Social factors relate to how a company manages relationships with its workforce, suppliers, customers and communities it operates within. Human rights, community outreach, diversity policies, underpayment, child labour, working conditions, racial and gender disparities in remuneration are common social factors important to a company’s long-term performance and viability.

A company that provides safe and healthy working conditions, donates time, money or other resources to communities where it operates and has a fair gender policy is likely to be viable in the long term.Companies that treat employees well and have visible corporate social responsibility activities are judged as less risky, and they can benefit from higher productivity and attraction of top talent.

In contrast, a company with unsafe working conditions, one which experiences high work-related fatalities and injuries or one which disregards community land rights and customer concerns may attract grave financial risks.Governance factors are centered on the activities, morality, ethics, values and practices of the board of directors. Governance factors indicate the rules and procedures for companies, and allow investors, consumers and stakeholders to screen for appropriate governance practices as they would for environmental and social factors.

A corporation’s purpose, the role and makeup of the board of directors, shareholder rights and how corporate performance is measured are core elements of corporate governance structures.Gender diversity, age balance and equity are becoming important to investors who are increasingly demanding better representation of women on corporate boards and in executive ranks, as well as equal compensation and promotion prospects.

How do companies prepare ESG reports? Actually, it is not as scary as it sounds. There are a myriad of reporting frameworks that are used by companies internationally to prepare ESG reports, such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) and the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations.Literally, all the frameworks give companies leeway to adapt the standards to suit their industry. All what the ZSE needs to do is to analyse the reporting frameworks and decide the best for the Zimbabwean context. The ZSE can also modify the chosen reporting framework to perfectly suit their objectives.

What does the ZSE do with the filed ESG reports? Among many uses, the ZSE, in conjunction with university business schools or rating agencies, can use the reports to generate ESG scores. It would be thrilling to compare BinduraUniversity of Science Education, ChinhoyiUniversity of Technology, Midlands State University, National University of Science and Technology and University of Zimbabwe ESG scores derived from the filed ESG reports. Moody’s, S&P Global, MSCI and Bloomberg are common rating agencies with well sought-after ESG scores.

ESG scores are released periodically and they guidestakeholders, investors and consumers to make informed choices. Sustainability-conscious investors would prefer to buy shares of companies with high ESG scores. Similarly, some consumers wouldprefer to buy milk from a dairy company with the highest ESG score among its peers.By competing to beat peers on ESG scores to attract investors and consumers, companies create a better country for all. By not mandating ESG reports, the ZSE is stifling an entire ecosystem dedicated to sustainability reporting.

It is important to note that stock exchanges in almost all developed and emerging markets have now mandated ESG reports accompanying financials. The ZSE needs not reinvent the wheel but learn from its peers, such as the JSE in South Africa.In the next two or so instalments, I intent to describe commonly used international ESG reporting frameworks,generation of ESG ratings,how ESG reporting is increasingly becoming a tool to combat climate change, and addressing reader comments, among several issues.