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South Africa and the ESG paradox

The eyes of the world have been on South Africa again, after the somewhat enforced resignation of former president Jacob Zuma and the swearing in of Cyril Ramaphosa as his successor.

Corruption

While it is early days for him as a new president and the criticism of the African National Congress, the anti-apartheid party that has ruled since the election of Nelson Mandela in 1994, continues, some are hopeful that he can turn things around in a country embroiled in widespread bribery and corruption.

One of the latest incidents has involved the Indian-born Gupta family and its links to governments. It led to UK PR company Bell Pottinger going into administration after it was accused of inflaming racial tensions. The South African Companies and Intellectual Property Commission meanwhile has filed criminal complaints against professional services firms McKinsey and KPMG South Africa, as well as German software company SAP, accusing them of criminal conduct resulting from collusion with companies and individuals associated with the Gupta family.

KMPG South Africa is the external auditor of many companies in the country. As part of our engagements, we have therefore been discussing the allegations of misconduct with representatives of its UK and South Africa business. We pressed for a plan to effectively identify and address the governance and cultural issues in the South African unit and for a review of the processes in place to ensure that all affiliates are implementing the values which KPMG International promotes.

drought

However, bribery and corruption is not the only environmental, social and governance (ESG) issue facing South Africa. A three-year long drought has led to a lack of water in the Western Cape region and could lead to Cape Town becoming the first modern city in the world to run dry. Measures such as restricting the use of water per person to 50 litres a day has led to the dreaded Day Zero being pushed back to 9 July 2018, but the threat remains real.

We have been engaging with companies in the mining, utilities, consumer goods and retail sector in particular on their water risk management, including the risks they are indirectly exposed to through their suppliers. We have pushed for the development of best practice water management systems, which implies the introduction of controls and targets at existing and future water-stressed sites. We completed our engagement objectives on water stress with South African energy company Sasol a few years ago, and the company continues to disclose the CDP initiative.

Head start

However, despite all these problems now and the complexities of the aftermath of the apartheid era, South Africa made a bold start into stewardship.

The country became the first to follow in the footsteps of the UK Stewardship Code when it published the Code for Responsible Investing by Institutional Investors in South Africa (CRISA) in 2011. The code, which works on an apply-or-explain basis, has been hailed by many commentators as a great example of a code that goes beyond governance to include the full set of ESG principles. In addition, in its King Code of Governance Principles, South Africa has a decent set of governance standards. And not to forget, the first PRI1 in Person conference in Africa was held in Cape Town in 2013 which stood out for its diverse attendance and the passionate discussions, particularly involving the mining sector.

Stewardship

But even the best codes and principles will struggle for impact in a country plagued by bribery and corruption at the highest levels of politics.

It is therefore imperative that institutional investors keep up their stewardship efforts with companies in one of the continent’s biggest economies even if the man at the top now – who in the apartheid era was a key resource for the Investor Responsibility Research Center Institute and has experience in shareholder activism and corporate governance – vows to clamp down on corruption.

We are continuing our engagement with South African-based companies on all of the above and other issues, as set out in our Corporate Governance Principles for the country.

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  1. 1Principles for Responsible Investment

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EOS Client Service and Business Development

Amy D’Eugenio,
Head of Client Service and Business Development, Hermes EOS