ESG can help tackle social inequality

With a Gini coefficient of 0.63, SA is one of the most unequal societies in the world today.

The Gini index measures the distribution of income across a population where a score of 0 corresponds with perfect income equality and a score of one with perfect income inequality.

Any score around 0.5 indicates severe income disparity.

The very high levels of inequality in SA are driven by SA’s stubbornly high unemployment rate, currently at about 33%, pay disparities, and high levels of poverty that affect more than half of the population. Exacerbating this are levels of youth unemployment that are amongst the world’s highest.

This social inequality has emerged as a major risk for firms in SA as it functions as a driver of crime and instability.

It is no surprise then that, in an effort to address this risk, companies in SA place much focus on the social aspects of their overall environmental, social and governance (ESG) strategies.

Companies surveyed in the recently launched Sanlam ESG Barometer, a report compiled in partnership with Intellidex and Business Day which assesses how SA companies are changing their businesses to deliver improved ESG outcomes, perceive social aspects of ESG to be the most relevant in their overall corporate ESG strategies.

However, companies appear to be more inward-looking when it comes to addressing social issues. In the survey, which includes responses from 21 of the top 40 companies on the JSE, respondents identified social aspects of ESG such as maintaining good employee relations, occupational health and safety compliance, and finding ethical suppliers to be the most relevant in their overall corporate ESG strategies.

This makes a lot of sense considering that the aspect over which corporates have the biggest control is their employees. “Corporates can influence the broader landscape of inequality by improving the lives of their employees ” said Tracey Davies, the executive director of shareholder activism organisation Just Share.

According to Davies, there is an “extraordinary situation in SA” where from a labour market point of view it is one of the most unequal countries on earth, and yet there is still no requirement in SA to disclose wage gaps, including the earnings of companies’ lowest paid workers.

There is, she said, a Companies Amendment Bill in the works that would require companies to disclose information about the vertical and other wage gaps, making that information transparent.

“Paying all employees a living wage – which is very different to the minimum wage - is the most effective way that SA corporates can tackle inequality, but what we often hear from business leaders when this issues comes up is that the focus should rather be on tackling unemployment.

“Tackling unemployment is crucial, but the focus on unemployment at the corporate level is a distraction: decades of careful research demonstrates that the biggest driver of overall inequality in SA is labour market inequality, and the persistence of the so-called ‘apartheid wage gap’.”

Davies said that for as long as corporates are unwilling to disclose their pay gaps, no ESG strategy would have a significant impact on inequality.

Another crucial way in which SA’s corporate sector could make a difference is by being braver in speaking up in relation to government policies.

It all starts with transparency – something that could be better regulated once the Companies Amendment Act get enacted.

But, said Davies, legislating these important issues has been delayed for years, in large part due to corporate lobbying against the transparency sought in the bill for issues such as pay gaps.

Despite high levels of unemployment and inequality, the performance of SA companies in social metrics does offer a compelling investment case, according

to David Aserkoff, JP Morgan’s equity strategist for the Central and Eastern Europe, Middle East and Africa region.

Speaking at the recent launch of the Sanlam ESG Barometer,

he said investors had largely “got past the hurdle” of looking at ESG scores in isolation when judging investment opportunities in emerging markets.

“Nothing draws investors [more strongly] than good returns. If emerging markets offer good returns, money will come,” he said.

In addition, according to Aserkoff, investors are realising the value of not necessarily investing in “good ESG companies”, but rather in “improving ESG companies.

“When you invest in ESG improvement, you outperform the market and ultimately that will be very favourable for emerging markets,” he said.

A selling point for SA, compared with other emerging markets, was that SA companies have been thinking about ESG for a long time through the implementation of employment equity policies, for example.

This, said Aserkoff, was part of the progress made in the country in the 1990s when SA became a democracy. “Companies have already gone a long way toward adopting social goals and no one takes the social element of ESG more seriously than SA-based companies. SA should do a better job of shouting that from the rooftops.”

WITH A GINI COEFFICIENT OF 0.63, SA IS ONE OF THE MOST UNEQUAL SOCIETIES IN THE WORLD TODAY