Carbon disclosure in South Africa: Corporate green wash of genuine transition to low carbon

economy?

Alfred Bimha (Msc)Lecturer: Dept. Finance, Banking & Risk Management, UNISA

&Godwell Nhamo (PhD)

Programme Manager: Exxaro Chair in Business & CC, Unisa

Presentation for the 3rd ICAF, Skiathos Palace Hotel, Skiathos Islands, Greece (25-27 August 2010)

Objectives of the Presentation

This presentation addresses the following key questions:

1. Why must we be talking about carbon disclosure in South Africa?

2. What are the mechanics and vehicles being used to implement carbon disclosure in South Africa?

3. How many corporates are participating in Carbon Disclosure Project (CDP) in South Africa?

4. To what extent is carbon disclosure successful in SA?

2

4 pointers to take home

1. The concept of carbon disclosure borrows fundamentals from disclosure in accounting and finance and has a bearing on most South African corporate future profits.

2. Carbon disclosure is driven by self-regulation although command and control vehicles are emerging

3. The South African government is working towards a fine tuned carbon disclosure regulatory and fiscal regime that would make tracking and reporting of emissions mandatory.

4. Carbon disclosure in South Africa is genuinely addressing CC leading to a low South African carbon economy.

3

Overview of Presentation

1. Introduction2. The Disclosure Context3. Research Methodological Orientation4. Carbon Disclosure and Related Vehicles in South

Africa5. Corporate Engagements with the Vehicles6. Command and Control Carbon Disclosure Regimes7. Corporate Green Wash or Genuine Call?8. Conclusion

1. INTRODUCTION

5

I. Concern : Are carbon disclosure vehicles utilised by corporate South Africa effective in transition to a low carbon economy or are they just a face cover or mere tools of compliance?

II. Purpose : To find out if South African Corporates are genuinely reducing carbon emissions or just following reporting procedures

Introduction cont...(2)

6

What is Carbon Disclosure?

Defined by the Carbon Disclosure Project 2009 - Global 500 Report (McGill, Gledhill 2009) as:

The process of companies measuring and reporting their carbon emissions; integrating the long term value and cost of climate change into their assessments of the financial health and future prospects of their business

Introduction cont...(3)

7

• Why Carbon Disclosure?

Heightened euphoria about carbon emissions abating globally.

Request for accountability from companies about how they are abating carbon emissions in their activities

Issues of creative accounting surrounding carbon disclosure

2.DISCLOSURE CONTEXT

8

1. Disclosure is one of the commonly accepted principles of corporate governance and there is constant concern about quantity, quality and frequency of financial and managerial disclosure,

2. The degree and extent to which the board of Directors (BOD) exercise their trustee responsibilities (largely an ethical commitment), and the commitment to run a transparent organization

3. Carbon disclosure is part of a broader range of environmental, social and corporate governance (ESG) issues that greater numbers of investors have been seeking in recent years

4. The assurance of quality disclosure and transparency is dependant on the accounting and auditing standards and the financial reporting standards (FRS) in practice. Is the current FRS able to offer reputable carbon disclosure given the continuous hoodwinking in financial reporting and auditing scandals? This remains to be seen.

3. RESEARCH METHODOLOGICAL ORIENTATION

9

• Desktop research with data and information being obtained from current projects and, news articles and surveys that have been undertaken in South Africa since 2000.

• Two approaches of obtaining data– Government activities on Climate Change – South African companies’ participation in

voluntary carbon emissions reduction programs

4. CARBON DISCLOSURE VEHICLES IN SOUTH AFRICA

10

There are three major self-regulated carbon disclosure vehicles that are:

1. Carbon Disclosure Project (CDP)

2. Johannesburg Stock Exchange Socially Responsible Investment (JSE SRI) Index

3. Energy Efficiency Accord (EEA).

4. CARBON DISCLOSURE VEHICLES IN SOUTH AFRICA cont...(1)

11

Carbon Disclosure Project (CDP)

a. Underlying objective of the CDP (CDP Global 500:2009) is to review and assess the action and disclosure of companies and sectors against what is seen as a best practice response to the challenges of climate change

b. The JSE 100 sample for CDP 2009 was identified on the basis of market capitalization as at 30 December 2008.

4. CARBON DISCLOSURE VEHICLES IN SOUTH AFRICA cont...(2)

Figure 1: Analysis of CDP Questionnaire Responses for 2008 and 2009

13

Figure 2: CDP (SA) Response rates 2007 to 2009

4. CARBON DISCLOSURE VEHICLES IN SOUTH AFRICA cont...(3)

• JSE SRI Index

I. The Johannesburg Stock Exchange (JSE) came up with a Socially Responsible Investment (SRI) Index as a benchmark index facilitating investment in companies with good records of CSR.

II. The SRI Index (which draws a lot from the GRI SRG) is constituted from companies that form part of the FTSE/JSE All Share Index and that meet the selection criteria set out in the SRI Index Philosophy and Criteria (Johannesburg Stock Exchange, 2004)

14

4. CARBON DISCLOSURE VEHICLES IN SOUTH AFRICA cont...(4)

• In order to assess listed companies against the JSE SRI Index, the JSE circulated in October 2003 a 56-paged launch questionnaire probing for a number of major SRI issues.

• From the questionnaire, the following pillars of the triple bottom line reporting were identified:– Environmental sustainability – Social sustainability – Economic sustainability

15

Figure 3: SRI index criteria 2003-2005

16

70

12

2218

78

16

2521

78

16

2521

0

10

20

30

40

50

60

70

80

90

Overal score(including

environmentalsustainability)

Corporategovernance

Socialsustainability

Economicsustainability

poin

ts

2003

2004

2005

Figure 4: Environmental Sustainability Criteria for 2003-2005

20

22

22

14

16

16

8

9

9

0 5 10 15 20 25

2003

2004

2005

Points

Environmental sustainability -Low impact companies

Environmental sustainability -Medium impact companies

Environmental sustainability - Higimpact companies

Figure 5: Company participation and responses to JSE SRI (2004-2009)

Table 1:SRI Index and outstanding performers for 2005 and 2006

Status of companies on SRI Index 2005 Status of companies on SRI Index 2006No. Outperforming No. Outperforming companies

High

impac

t

22AngloAmerican Platinum Corp LtdAngloAmerican plcBHP Billiton plcGold Fields LtdSasol Ltd

30Anglo American plc AngloAmerican Platinum Corp Ltd Impala Platinum Holdings Limited Oceana Group Limited Sasol Limited The Tongaat-Hulett Group Limited

Medium impac

t

12Edgars Consolidated Stores LtdTelkom SAWoolworths Holdings Ltd

13Edgars Consolidated Stores Limited Medi-Clinic Corporation LimitedTelkom SA Ltd Woolworths Holdings Limited

Low

impac

t

14African Bank Investments LtdAlexander Fordes LtdNedcor Ltd

15Liberty Group Limited Nedbank Group Limited Remgro Limited

New JSE-SRI Index Requirements – Starting 2010

20

•Board Practice and Ethics•Indirect Impacts•Business Value & Risk Management

•Broader Economic Issues

• Managing & Reporting on efforts to reduce carbon emissions and deal with the anticipated effects of climate change

• Training & Development• Employee Relations• Health & Safety• Equal Opportunities• BEE etc

• Addressing all key issues in sustainability

Environment

Society

Governance & Related

Sustainability ConcernsClimate

Change (New 2010 Criterion)

Source: Authors, based on JSE 2010: 5

JSE SRI Index minimum requirements & Best Performer in the CC category

Companies must demonstrate evidence in relation to the following two indicators:

• Senior responsibility for climate change related issues• CC commitment

Recognition of Best Performers• Providing evidence in relation to all relevant indicators in

relation to climate change.

21

New JSE-SRI Index CC Indicators*

22

Policy

/ governance

Senior responsibility for climate change related issues Climate change commitment Product related climate change commitment (where relevant)

Management / strategy

Any targets/goals linked to GHG emissions reductions (long/short term)

Disclosure

Emissions disclosure (Absolute or normalised) Scope of data Methodology applied

Source: JSE 201: 14

4. CARBON DISCLOSURE VEHICLES IN SOUTH AFRICA cont...(4)

Energy Efficiency Accord (EEA)

1. Was finalised on 1st August 2006 (DME 2006) following the conclusion of the EEA Strategy of the Republic of South Africa in 2005

2. EE Strategy spelt out a target of a national final energy demand reduction of 12% by 2015

3. Agreement between Industry and Government that the EE Strategy should be reviewed regularly in three-year cycles.

4. Industry signatories agree that the National Business Initiative (NBI) would act as the focal point in the implementation of the Accord.

5. Business Unity SA (BUSA) is given mandated to deal with formal legislative and policy negotiations

4. CARBON DISCLOSURE VEHICLES IN SOUTH AFRICA cont...(4)

Energy Efficiency Accord (EEA)

6. As of December 2008, 43 industries had signed the Accord since its inception in 2006 including Eskom.

7. Measures will be set out in a Policy White Paper on Climate Change to be released by government in 2010 (DEAT 2010), with the translation of this policy into a legislative, regulatory and fiscal package by 2012.

6.COMMAND AND CONTROL REGIMES

• Draft Taxation Laws Amendment Bill– The sale of certified emission reductions (also

known as carbon emission reductions credits) will be exempt from income tax

– businesses will obtain notional deductions for income tax purposes for energy efficiency savings from certified baselines based on energy efficiency certificates issued by the National Energy Efficiency Agency

25

7.CORPORATE GREEN WASH OR GENUINE CALL?

• Stricter regulatory framework taking shape globally and in SA making corporates accountable

• The CDP has witnessed significant growth in SA and has taken a developmental approach

• JSE SRI has also taken a developmental approach to disclosure

• The EEA has also witnessed growth in signatories and energy has been saved in SA

• Companies have moved towards green investments in energy

26

8. CONCLUSION

• The continuing focus of policymakers, businesses, NGOs and consumers on CC has turned the heat up on corporate reporting and disclosure around climate change and carbon.

• A number of leading institutional investors standing alongside environmental NGOs to call for mandatory reporting of CC risks.

• Definite increase in companies coming to terms with their base carbon footprints in SA

• It will be proper that companies acquire a bit more time, next 5-10 yrs, understanding their actual inventories and then setting targets based on their economic growth paths.

27

Thank you !

28