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Service Issue 78

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Service magazine addresses key issues related to government leadership and service delivery in South Africa. In this, Issue 78, November / December / January 2021/22, a range of topics are discussed that are highly relevant to all public and private sector stakeholders in the country.

S sustainability Value

S sustainability Value creation through ESG Using the business case for ESG engagement to motivate the civil case for more socially and environmentally responsible behaviour. By Carl Reynolds In the absence of any standardised way of assessing “sustainability”, across civil, commercial and governmental spheres, the UN’s Sustainable Development Goals (SDGs) are slowly emerging as a convenient lens for multi-stakeholders to understand their responsibilities in terms of the growing needs of our society and the planet. Achieving these 17 goals is arguably the single biggest challenge of our generation and our success or failure to do so will, ultimately, determine the course of history. Various stakeholders will inevitably be motivated by different means to engage with these goals. Governments have different needs than businesses, as do individuals, and so it becomes important to frame the urgency for change effectively for each sector. People are more motivated by a moral or ethical [1] [2] case for sustainability than by an economic one. According to research, for individuals the moral case is significantly more likely to yield results. Companies, however, have an altogether different set of drivers. In the case of Africa, SMEs represent approximately 80% of the economic activity on the continent. Indeed, without harnessing their potential, achieving the SDGs is not even remotely a likelihood. Similarly, municipalities, government departments, public health, public roads and policing all have a significant role to play in how our generation addresses the very urgent needs of our modern society and environment. With infinitely fewer resources at their disposal, if we were able to successfully make a case for small business to address these planetary urgencies, surely the case for our public sector would be exponentially easier to motivate? Let’s try: Most of us will know the difficulties associated with running a small business. The daily pressures leave little time to spend on any activity not associated with profitability. However, if we were to conclusively show that there are financial benefits to more responsible business practice and at the same time remove the combined obstacles of admin and time constraints, the opportunity to grow an entire economy with sustainability in its DNA is too big to pass up. The evidence is unavoidable, companies that score [3] [4] [5] [6] high on ESG criteria are better performers. Neilson reported US companies with a demonstrated commitment to sustainability were growing at a rate of 4% over the past year. This is compared to a growth rate of less than 1% for companies without demonstrated commitments to sustainability. Unilever reports that their sustainable brands are growing 50% faster than their traditional brands. The University of Oxford conducted a literature review of over 200 studies where they looked at the relationship between sustainability performance and financial performance. The findings of their review included: • 90% of the studies indicate that sustainability leadership leads to a lower cost of capital • 88% of the studies indicate sustainability leadership leads to increased operational performance • 80% of the studies show that sustainability leadership leads to better stock performance. It has become clear that sustainability must be an important component to any business strategy in the coming years and decades to ensure long-term health and success. As the information and research on this topic continues to come out, the business case for sustainability will only become stronger. So, how do we harness the power of active ESG management to grow value in companies and investment portfolios? How can we learn from this strategy to ensure better service delivery and more responsible municipalities across Africa? Although many approaches exist, they can broadly be divided into the following three categories: Risk reduction and management. Aside from the obvious climate-related risks, supply chain disruptions, A company labelled as a sustainability leader is 400 times more likely to also be labelled an innovation leader. ___ __ Sustainability is all about eliminating waste and maximising efficiency, which of course leads to cost savings. 14 | Service magazine

sustainability S water shortages and all the environmental risks, consider too the public relations risks. A proactive approach to sustainability is going to help companies avoid those PR-related risks in a world of rapid transparency where information is shared in an instant across the world. Sustainability also helps mitigate regulatory risks. Across Africa, municipalities, cities, provinces and governments are developing climate action plans and developing new policies and regulations to reduce greenhouse gas emissions. Risk reduction has long been one of the main drivers for integrating ESG issues into the investment process. However, investors are in the business of creating value, not just avoiding risks, and a compliance mindset anchors the engagement with investee companies in a risk management frame, with an emphasis on preinvestment due diligence and post-investment monitoring. These are often perceived more as burdens and costs to a business, which leaves much value unrealised during the life of an investment. Operational efficiencies. The most straightforward benefit of sustainability, and the easiest to quantify, is the reduced operating costs. When a business is reducing waste, reducing energy, reducing water use, reducing greenhouse gas emissions and operating more efficiently, obviously they will be saving money. William McDonough is a sustainability thought leader and author of the books Cradle to Cradle and The Upcycle. McDonough points out that when we look at nature, there is absolutely no waste. Everything has value and everything has a purpose. Waste is just the result of design flaw. We need to rethink and redesign the way we make our products; rethink the way we operate our facilities and rethink the way we operate as a society. Sustainability is all about eliminating waste and maximising efficiency, which of course leads to cost savings. This approach to resource efficiencies also extends to supply chains. Not only is risk within a supply chain your own risk, it is also an opportunity to grow and secure your suppliers (and therefore supplies). Growing this network of stakeholders makes absolute economic sense and ultimately builds a flourishing and networked economy. Waste is just the result of design flaw. Likewise, evidence is clear that a happy and engaged workforce leads directly to increased performance. Involving the workforce in the bigger picture of a business, particularly one with a vision and mission, is the surest way to drive both productivity and innovation. Opportunity identification. Using sustainability as a lens to look at your business can lead to innovatively creating new ways to get things done. A focus on sustainability in all aspects of a business can lead to process changes, new products or services, the use of new technology, the creation of new technology, new management techniques and other innovations. A Deloitte report entitled Sustainability Driven Innovation, studied hundreds of companies, and labelled them as sustainability leaders and innovation leaders based on several criteria. The study found that a company labelled as a sustainability leader is 400 times more likely to also be labelled an innovation leader. The case is self-evident but what happens next? How do we scale these learnings into practical and winning strategies? Fortunately, there is an array of methodologies to choose from and a growing field of experts who are keen to show the way. The thing to keep in mind is that your needs are unique. A framework is helpful but real engagement with the issues and a targeted approach are imperative. AN ORGANISING FRAMEWORK The creation of value in portfolios from ESG is significant. The main themes in value creation within portfolios are: Avoidance of eroding of capital and cost by improved risk management improvements • Reducing potential for business interruptions from significant incidents (health and safety) • Enhancing supply chain management • Protecting social licence to operate The United Nations’ Sustainable Development Goals. Service magazine | 15

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