Assessing the business case for environmental, social and corporate governance practices in South Africa

Solomons, Ruth (2018-04)

Thesis (MCom)--Stellenbosch University, 2018.

Thesis

ENGLISH SUMMARY : Firms, their stakeholders and society at large are increasingly confronted with sustainability-related challenges, such as climate change, the depletion of natural resources, and energy security. In the wake of these challenges, investors have shown increased interest and consideration of pertinent non-financial information during their investment analyses. Responsible investors in particular incorporate environmental (E), social (S) and corporate governance (G) (ESG) aspects in their investment analyses and ownership practices. These investors realise the potential positive and long-term impact of sound ESG risk management on corporate financial performance (CFP). Despite the growing interest in sustainable corporate practices, limited ESG-related research has been conducted in South Africa, with most existing studies focusing specifically on responsible investment practices and corporate governance. Against this background, the primary objective of this study was to assess the business case for ESG practices of selected Johannesburg Stock Exchange (JSE) listed firms over a six-year period, from 2011 to 2016. A combination of convenience and judgement sampling was utilised to draw a sample of 66 companies from six JSE sectors. The study adopted a positivistic research approach. Selected accounting-based (return on assets [ROA] and earnings per share (EPS]) and market-based (earnings yield [EY] and total shareholder return [TSR]) CFP measures were employed. While accounting-based measures are typically used to reflect on short-term CFP, market-based measures provide an indication of investors’ perceptions regarding past performance and the future financial prospects of a firm. The study expanded on the work of previous researchers in the emerging market context by including value-based CFP measures (return on invested capital [ROIC], market value added [MVA], the spread, and cash return on invested capital [CROIC]). The required data were sourced from the Bloomberg and IRESS databases. The resulting panel dataset was analysed by means of descriptive and inferential statistics. The descriptive statistics revealed a growing trend in the overall ESG disclosure by the considered firms. When the individual ESG aspects were examined, it was evident that the E- and S-disclosure scores contributed mostly to the overall increase in ESG disclosure. Although an increase in E-disclosure was observed over the study period, it was at a slow pace. The disclosure of social considerations, however, revealed a more notable increase. Corporate governance disclosure remained relatively consistent over the study period. The panel regression analyses conducted between the individual ESG disclosure scores and CFP revealed significant associations for EPS and TSR. A significant negative relationship was found between E-disclosure and EPS. In contrast, a significant positive association was observed between S-disclosure and EPS. When S-disclosure scores were lagged for one-year, the significant relationship persisted. A statistically significant negative relationship emerged between S-disclosure and TSR. Significant relationships were also noted at the sector level between the individual E-, S- and G-disclosure scores and various accounting-based, market-based and value-based CFP measures. Based on the results of this study, the researcher recommends that corporate managers, directors and investors should not only focus on the traditional financial-performance approach, but also incorporate pertinent ESG aspects in their decision-making and investment analyses. Furthermore, corporate managers should acknowledge that ESG risk management forms part of the core business function of firms. Since ESG risks and sustainability concerns often differ among sectors, the JSE could set sector-specific E- and S-targets. Finally, given their ownership rights and responsibilities, more shareholders should engage with companies on ESG concerns, be it in public or in private.

AFRIKAANSE OPSOMMING : Maatskappye, hul belangroepe en die breë samelewing staar toenemend volhoubaarheidsuitdagings soos klimaatsverandering, energievoorsiening en die uitputting van natuurlike hulpbronne in die gesig. In die lig hiervan, toon beleggers verhoogde belangstelling in nie-finansiële inligting wanneer hulle beleggings ontleed. Sosiaal verantwoordelike beleggers in die besonder neem veral omgewings- (E), sosiale(S)-, en korporatiewe bestuursfaktore (G) (ESG aspekte) in ag tydens hulle investeringsbesluite en eienaarspraktyke. Verantwoordelike beleggers besef toenemend watter positiewe langtermyn uitwerking doeltreffende ESG-risikobestuur kan hê op ‘n maatskappy se finansiële prestasie. Nieteenstaande die groeiende belangstelling in volhoubare sakepraktyke, is beperkte ESG-verwante navorsing in Suid-Afrika gedoen. Navorsers het hoofsaaklik gekonsentreer op verantwoordelike investeringspraktyke en korporatiewe bestuur. Gegewe hierdie agtergrond, was die hoofdoel van hierdie studie om die sakemotivering van ESG-praktyke van gekose genoteerde maatskappye op die Johannesburgse Effektebeurs (JSE) oor ‘n periode van ses jaar (2011 tot 2016) te ondersoek. ‘n Kombinasie van oordeel- en geriefsteekproefneming is ingespan om ‘n steekproef van 66 maatskappye uit ses sektore op die JSE saam te stel. ‘n Positivistiese navorsingsbenadering is gevolg. Die maatstawwe wat gebruik is sluit in rekeningkundige gebaseerde maatstawwe (verdienste per aandeel [VPA] en ondernemingsrentabiliteit), asook mark gebaseerde maatstawwe (verdienste-opbrengs en die totale opbrengs van aandeelhouerskapitaal [TOA]). Rekeningkundige gebaseerde maatstawwe word gewoonlik gebruik om ‘n oorsig te verkry oor ‘n maatskappy se korttermyn finansiële prestasie, terwyl markgebaseerde maatstawwe beleggers se sienings aandui oor ‘n maatskappy se geskiedkundige prestasie en sy toekomstige finansiële vooruitsigte. In hierdie studie is daar voortgebou op werk van vorige navorsers in ontluikende markte deurdat waardegebaseerde maatstawwe ook ingesluit is, naamlik die rentabiliteit van aangewende kapitaal, kontantrentabiliteit van die aangewende kapitaal, die verspreiding en markwaarde toegevoeg. Die data is verkry van die Bloomberg en IRESS databasisse. Die gevolglike paneeldata is ontleed deur middel van beskrywende en inferensiële statistiek. Die beskrywende statistiek het ‘n stygende tendens aangetoon in die algehele ESG-openbaarmakingbepunting van die maatskappye gedurende die studietydperk. Met die ontleding van die individuele ESG-faktore, is vasgestel dat die omgewings- (E) en sosiale (S) openbaarmakingbepunting die meeste bygedra het tot hierdie styging. Hoewel ‘n toename in die E-openbaarmaking waargeneem is, was dit slegs ‘n geleidelike styging. Die openbaarmaking van sosiale faktore het egter ‘n beduidende toename getoon. Maatskappye se openbaarmakingbepunting t.o.v. korporatiewe bestuurspraktyke het relatief standhoudend gebly gedurende die studietydperk. Die paneel regressie-ontledings wat uitgevoer is op die individuele ESG-openbaarmakingbepunting en die korporatiewe finansiële maatstawwe het beduidende verwantskappe uitgewys t.o.v. die VPA en die TOA. ‘n Beduidend negatiewe verwantskap is gevind tussen E-openbaarmaking en die VPA. In teenstelling hiermee, is ‘n beduidend positiewe verwantskap waargeneem tussen S-openbaarmaking en die VPA. Selfs met die vertraging van die S- openbaarmakingsbepunting oor een jaar, het die beduidende verwantskap voortgeduur. ‘n Statisties beduidende negatiewe verwantskap is tussen S-openbaarmaking en die TOA gevind. Beduidende verwantskappe is ook waargeneem op die sektorvlak tussen die individuele E-, S- en G-openbaarmakings telling en verskeie rekeningkundige baseerde, markgebaseerde en waardegebaseerde maatstawwe. In die lig van die bevindinge word aanbeveel dat korporatiewe bestuurders, direkteure en beleggers nie net fokus op die tradisionele finansiële prestasie benadering nie, maar dat hulle ook belangrike ESG-faktore in hulle besluitnemings en beleggingsontledings insluit. Korporatiewe bestuurders moet voorts aanvaar dat ESG-risikobestuur ‘n belangrike deel van die kernfunksies van maatskappye uitmaak. Aangesien ESG risiko’s en volhoubaarheidskwessies dikwels verskil in die onderskeie sektore, kan die JSE E- en S-teikens vir maatskappye stel wat toepaslik is op ‘n spesifieke sektor. Laastens, gegewe hulle eienaarskapregte en -verantwoordelikhede, behoort meer aandeelhouers maatskappye oor ESG-kwessies te pols, ongeag of dit in die openbaar of agter geslote deure plaasvind.

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