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A Boom in Environmental, Social and Governance (ESG) is Proliferating Globally

Globally there is a growing awareness and move towards implementing Environmental, Social and Governance (ESG) strategies and policies by both multinational and local organisations and countries looking to protect their assets and resources. Athi Jara, director at Werksmans, spoke on this interesting subject at LEX Africa’s mining webinar earlier this year. Below we unpack this discussion and gain insight into why these organisations align themselves with ESG.

Understanding ESG

To understand the importance of ESG and why we are seeing such a significant acceleration in this, we need to understand what ESG is. In simple terms, ESG stands for Environmental, Social and Governance investing and is a standard for a company’s behaviour that socially conscious investors use to screen for potential investments. Each of the categories is broken down as follows:

  • Environmental – this covers issues that include corporate climate change policies, energy use, waste, natural resource conservation, as well as the treatment of animals. This helps evaluate the environmental risks a company might face and how they manage those risks.
  • Social – this looks at the relationships between the company and their internal and external stakeholders. This examines how the company handles socially responsible investment (SRI). If the company promotes ethical and socially conscious themes, how they treat their employees, if they provide a safe working environment etc.
  • Governance – refers to the standards a company uses to ensure accurate and transparent accounting, integrity, diversity and accountability across all aspects of the business.

From the above, it is clear that organisations and countries alike would need ESG standards, regulations and policies to ensure that both parties prioritise integrity, transparency and the protection of resources and assets. It is important to note that investors are increasingly placing importance on these non-financial factors as part of their analysis which aims to identify material risks and growth opportunities. 

ESG Across Africa

From the LEX Africa webinar held earlier this year and the discussions, it emerged that African countries are following suit with the move towards ESG and putting these laws in place.

During this discussion, Jara noted that during the African Mining Indaba in Cape Town, the South African Minister of Mineral Resources and Energy said there is a renewed focus on ESG and sustainability by the global investment community, and it is estimated that USD$50 trillion will be invested in ESG assets globally. This is a third of the worldwide estimate of assets under management, which is $145 trillion.

Noteworthy ESG Related Cases

With a renewed focus on ESG, several cases have caused quite a stir across the continent. The first case is the Shell Eastern Cape High Court judgement, which stopped the seismic survey along the Wild Coast in January. This specific case deals more with the social aspects of ESG, although the rights, which were extended twice between 2014 and 2021, also impacted the local environment.  

In this case, the Eastern Cape High Court ruled that the exploration rights, which had been granted by the Minister of Mineral Resources and Energy Affairs, were unlawful. The judges said that there was “no meaningful consultation” with interested and affected parties prior to being awarded the rights.

“What was central to the judgement was the lack of consultation with the local communities about the potential impact of the intended mining activities,” said Jara. “The court found that Shell had not adequately consulted with this particular community, and the project has now been halted.”

This ruling has been evident in previous judgements in 2018, including the Baleni and Others v Minister of Mineral Resources case and the Maledu v Itereleng Bakgatla Mineral Resources case, says Jara.

In the latter case, the Constitutional Court ruled against the lawfulness of granting a prospecting right to a company on a community’s land in terms of the Mineral and Petroleum Resources Development Act due to a lack of consultation with the local communities affected by the mining activity. The project was still at the prospecting stage in that case.

In the Maledu case, the court ruled that the Mineral and Petroleum Resources Development Act (MPRDA) could not trump the constitutional rights of millions of South Africans living in former homeland areas. According to the court, the surrounding communities should have been informed of the intended mining project.

“In essence, you must put the communities in a position where they are fully aware of exactly what will be done. The communities close to the mining activities are often the ones who feel the most impact of mining projects,” says Jara. For example, local houses could develop cracks in them due to the blasting activities, and local communities will need to bear with excessive noise from the daily mining activities and the dust that comes with these mining activities.

In this case, the mining company should consult with the surrounding communities and make them aware of the full impact of the mining project. Any reports produced on the intended mining activities must also be shared with the community.

In addition, as seen in the Maledu case, the court ruled that if surrounding communities have informal land rights, under the Interim Land Protection of Land Rights Act (IPILRA), the mining companies must then get the consent and approval of those communities of the proposed mining activities before they start with the mining operations.

This ruling in 2018 resulted in a significant change in the law because it gave meaning to the informal land rights protected under the IPILRA in a mining context. Previously this always sat with the State, which had the sole discretion on granting mining rights and applications.

ESG Challenges Facing Mining Companies

One of the biggest challenges within this context of ESG is the ability to answer the question, “Who is the community?”. This is because communities are diverse. Some communities will form companies, others will form trusts or communal property associations, and there are also traditional authorities, councils and traditional leaders. In the Shell judgement, the court added a new element. It said that not only will the company need to consult with communities, but they will need to recognise that communities have spiritual and religious rights.

Another significant challenge is the fractions of communities, where a portion of the community will support the project while others will not. For example, in the Baleni case, those that were closer to the proposed mining activity were the ones that were against it, with good reason, because they were the ones that would feel the full impact of the mining activities. In the Shell case, local communities would be adversely affected by the device Shell would place in the sea as part of its seismic surveys. In the Baleni case, the solution, for example, was that cars were bought for the traditional leadership and jobs were offered to community members.

 ESG Politics and The Way Forward

It must be noted that the Minister of Mineral Resources has been highly critical of these court rulings because they have taken the discretion to grant mining titles away from the Department of Mineral Resources and Energy and, effectively, given this discretion to the communities with informal land rights.

According to Jara, South Africa has a concept of the separation of power that underpins our democracy. It recognises that there are three arms of government – the legislator, which makes the laws, the executive, which is tasked with implementing the laws and the courts, which have the oversight role to ensure that no one steps out of line.

The courts have constantly done that, even to the extent of chastising the executive or the department, to ensure that everything that underpins our society’s constitutional values are consistently recognised. For example, the Shell judgement is a constitutional case because it speaks of the rights enshrined in the Bill of Rights, such as the right to spirituality, belief, and religion. In this case, in terms of the constitution, the communities’ practices and spiritual beliefs must be respected, and where conduct offends those practices and beliefs and negatively impacts the environment, the court must step in and protect those affected and the environment.

On whether this could set a precedent for other African countries, Jara believes it may even go beyond the continent because there is a global move to recognise peoples’ indigenous rights. We’ve seen this in New Zealand and some South American countries.

Global organisations have a dubious track record globally regarding environmental issues and contamination of scarce water resources. There is this challenge to maintain the balance between growing the economy, which the multinationals bring to us in addressing the issues that the country faces as a developing nation, and obligations to protect the environment. While mining and agriculture are two of the most significant contributors to South Africa’s GDP, they are also some of the main contributors to our environmental degradation. So this balance is vital.

In the US, for example, certain parts of the corporate world are backing away from ESG, and some Republicans have rallied against ESG and referred to it as “a cancer within our capital markets.” They are rejecting some more radical voices that want to “use or exploit ESG to discriminate against American energy companies.” Furthermore, there is a move afoot to “tighten the screws around asset management firms focused on their outsized power in allocating resources.”

Conclusion

There is no doubt that globally ESG is a crucial trending topic. In South Africa specifically, we have seen a swift move by the courts to protect  ESG assets, as mentioned in the landmark cases above. With the move towards ESG come several significant challenges that need to be examined and defined to ensure the success of ESG law and regulation implementation. This is an essential topic of discussion and one that is set to impact the African content dramatically, especially where mining and agriculture foreign investment is concerned.

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