Why corporates and SMEs can no longer afford to ignore ESG
Sustainability is no longer a peripheral concern or a “nice-to-have” for South African businesses. In an era of rising operational costs, increasing regulatory scrutiny, and shifting consumer expectations, Environmental, Social, and Governance (ESG) practices have emerged as a powerful driver of financial performance and long-term value creation. For both JSE-listed corporates and the small and medium enterprises (SMEs) that form the backbone of our economy, understanding the return on investment (ROI) of sustainability has become a strategic necessity.
The Business Case: ESG Pays Dividends
The evidence linking strong ESG performance to financial success is now overwhelming. A landmark meta-analysis examining more than 2,200 empirical studies found that approximately 90% of studies report a non-negative relationship between ESG criteria and corporate financial performance, with the large majority reporting positive findings (Friede et al., 2015). This is not correlation mistaken for causation—the research demonstrates that ESG practices predict financial performance and company value.
The financial benefits manifest across several dimensions:
Cost Reduction and Operational Efficiency
Implementing sustainable practices can substantially reduce operating costs. Research indicates that resource-efficient companies achieve significantly better financial results, with reducing resource costs potentially improving operating profits by as much as 60% (McKinsey & Company, 2020). Energy-efficient technologies, waste reduction programmes, and optimised resource use translate directly into bottom-line savings.
For South African businesses grappling with load shedding and rising electricity costs, this is particularly relevant. Companies investing in renewable energy solutions not only reduce their carbon footprint but also hedge against volatile energy prices and achieve predictable operational costs.
Lower Cost of Capital
Perhaps one of the most compelling financial arguments for ESG investment is access to cheaper capital. Studies show that companies with strong ESG ratings enjoy a cost of capital roughly 10% lower than their peers (McKinsey & Company, 2020). Analysis by MSCI found that companies in the highest ESG-scored quintile had an average cost of capital of 6.16%, compared to 6.55% for the lowest-scored quintile—a meaningful differential that compounds over time (MSCI, 2020).
South African institutional investors—including the Public Investment Corporation, which manages over R2 trillion in assets—increasingly integrate ESG factors into investment decisions, so companies with poor sustainability credentials may find themselves at a competitive disadvantage when seeking funding (ICLG, 2024).
Revenue Growth and Market Access
Sustainability opens doors to new markets and revenue streams. Consumer preference for sustainable products is growing, with research suggesting that over 70% of consumers across multiple industries are willing to pay an additional 5% for a green product that meets the same performance standards as a non-green alternative (McKinsey & Company, 2020).
In business-to-business contexts, sustainability credentials are increasingly non-negotiable. Many large corporations now require suppliers to demonstrate commitment to ESG principles, meaning that companies without proper sustainability practices may find themselves excluded from procurement processes and valuable contracts.
Risk Mitigation
Strong ESG performance helps companies avoid costly regulatory interventions, legal actions, and reputational damage. With South Africa’s carbon tax having increased to R190 per tonne of CO₂ equivalent as of January 2024 and expected to rise to R462 per tonne by 2030, the financial risks of ignoring environmental performance are becoming increasingly tangible (National Treasury, 2024).
The South African Regulatory Landscape
Requirements for JSE-Listed Companies
South Africa has developed a sophisticated governance framework that increasingly incorporates ESG considerations. The King IV Code on Corporate Governance, released in 2016 and now being updated to King V, provides comprehensive guidance on sustainable business practices. JSE-listed companies are required under the Listings Requirements to apply King IV on an “apply and explain” basis and report their application in integrated annual reports (Institute of Directors in South Africa, 2016).
In June 2022, the JSE released its Sustainability and Climate Disclosure Guidance to help listed companies navigate the evolving sustainability disclosure landscape. While currently voluntary, this guidance draws on international best practices including the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB) frameworks (JSE, 2022).
Key disclosure expectations for listed companies include:
- Integrated reporting that communicates how strategy, governance, performance and prospects lead to value creation
- Climate-related disclosures covering governance, strategy, risk management, and metrics and targets
- Transition planning that sets out how climate and ESG-related targets will be achieved
- Scope 1 and Scope 2 emissions reporting, with increasing pressure to include Scope 3 emissions
The Companies and Intellectual Property Commission (CIPC) has also introduced sustainability reporting requirements aligned with ISSB standards (IFRS S1 and S2). While voluntary from 2023, mandatory reporting is anticipated for public and state-owned companies from 2025 onwards (XBRL, 2024).
Requirements for SMEs
Small and medium enterprises make up more than 98% of businesses in South Africa and contribute approximately 39% of GDP, employing nearly 60% of the workforce (SME South Africa, 2025). While the regulatory burden on SMEs is currently lighter than for corporates, the landscape is evolving.
Currently, private companies meeting certain criteria—including a high public interest score or fiduciary assets exceeding R5 million—may be required to submit financial statements using the XBRL system, which increasingly includes sustainability disclosures (Seneca ESG, 2024).
However, even where not legally mandated, SMEs face growing pressure to demonstrate sustainability credentials:
- Supply chain requirements: Large corporates increasingly require ESG compliance from suppliers
- Access to finance: Banks and investors are integrating sustainability into lending decisions
- Consumer expectations: Customers increasingly prefer businesses with responsible practices
- Talent attraction: Employees, particularly younger workers, seek purpose-driven employers
A survey of 500 South African SMEs found that 41.6% reported improved customer relations after incorporating sustainability practices, while 37.8% achieved cost savings (Retail Capital, 2024).
Practical Steps for Implementation
For Corporates
1. Establish governance structures: Ensure board-level oversight of sustainability with clear accountability
2. Conduct materiality assessments: Identify the ESG factors most relevant to your industry and stakeholders
3. Set measurable targets: Develop science-based targets for emissions reduction and other key metrics
4. Integrate ESG into strategy: Embed sustainability considerations into capital allocation and strategic planning
5. Report transparently: Align disclosures with recognised frameworks (GRI, TCFD, ISSB)
6. Engage stakeholders: Maintain dialogue with investors, employees, communities, and regulators
For SMEs
1. Start with what matters: Focus on the sustainability issues most material to your business—whether energy efficiency, water conservation, or employee welfare
2. Build partnerships: Collaborate with non-profit organisations and industry associations for guidance and support
3. Educate employees: Create awareness and involve staff in sustainability initiatives
4. Track and measure: Establish basic systems to monitor resource consumption and waste
5. Communicate progress: Share your sustainability journey with customers and stakeholders
6. Leverage technology: Adopt digital solutions that improve efficiency and reduce environmental impact
The Cost of Inaction
The risks of ignoring sustainability extend beyond missed opportunities. South Africa’s carbon tax is set to increase substantially, with the basic tax-free allowances being phased down from 2026 (National Treasury, 2024). Companies exceeding their carbon budgets may face a higher tax rate of R640 per tonne once the Climate Change Act regulations come into effect.
Moreover, international regulations such as the European Union’s Corporate Sustainability Reporting Directive (CSRD) and Carbon Border Adjustment Mechanism (CBAM) will increasingly affect South African exporters, requiring demonstrated commitment to sustainability throughout value chains.
The question is no longer whether sustainability delivers ROI, but how quickly South African businesses can capture its benefits. The evidence is clear: companies that prioritise ESG outperform their peers financially, attract better talent, secure cheaper capital, and build resilience against regulatory and market shifts.
For corporates, the path forward involves sophisticated ESG integration, transparent reporting, and strategic sustainability investment. For SMEs, it means taking practical steps today—reducing energy consumption, improving resource efficiency, and building sustainable relationships with employees and communities.
As Professor Mervyn King has emphasised, sustainability is the primary moral and economic imperative of this century. South African businesses that embrace this imperative will not only contribute to a more sustainable future but will also position themselves for enduring commercial success.
References
- Friede, G., Busch, T., & Bassen, A. (2015). ESG and financial performance: Aggregated evidence from more than 2000 empirical studies. *Journal of Sustainable Finance & Investment, 5*(4), 210–233. https://doi.org/10.1080/20430795.2015.1118917
- Institute of Directors in South Africa. (2016). *King IV report on corporate governance for South Africa*. IoDSA. https://www.iodsa.co.za
- International Comparative Legal Guides. (2024). *Environmental, social & governance laws and regulations: South Africa*. ICLG. https://iclg.com/practice-areas/environmental-social-and-governance-law/south-africa
- Johannesburg Stock Exchange. (2022). *JSE sustainability and climate disclosure guidance*. JSE. https://www.jse.co.za/our-business/sustainability/jses-sustainability-and-climate-disclosure-guidance
- McKinsey & Company. (2020). Five ways that ESG creates value. *McKinsey Quarterly*. https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value
- MSCI. (2020). ESG and the cost of capital. *MSCI Blog*. https://www.msci.com/www/blog-posts/esg-and-the-cost-of-capital/01726513589
- National Treasury. (2024). *Carbon tax discussion paper: Phase two of the carbon tax*. Republic of South Africa. https://www.treasury.gov.za
- Retail Capital. (2024). Sustainability: A strategic necessity for SMEs in South Africa. *Retail Capital Insights*. https://www.retailcapital.co.za/sustainability-a-strategic-necessity-for-smes-in-south-africa/
- Seneca ESG. (2024). South Africa prepares for mandatory ESG and carbon neutral strategy reporting. *Seneca ESG Insights*. https://senecaesg.com/insights/south-africa-prepares-for-mandatory-esg-and-carbon-neutral-strategy-reporting/
- SME South Africa. (2025). Sustainable business practices for SMEs. *SME South Africa*. https://smesouthafrica.co.za/sustainable-business-practices-for-smes/
- XBRL. (2024). South Africa’s ESG reporting revolution. *XBRL News*. https://www.xbrl.org/news/south-africas-esg-reporting-revolution/