The business case for environment, social and governance criteria

The Western Cape high court recently ruled in favour of West Coast fishing communities seeking an urgent interdict to a seismic survey by Searcher Seismic. Searcher Seismic is an Australian company providing seismic datasets for the oil and gas industry.

The court found that the seismic survey proposal had been designed in a way that would exclude the concerns of local communities in the area. Considering the climbing global oil price — and subsequent efforts to fast-track new oil and gas exploration and production to increase supply — environmental, social and governance (ESG) integration into the licensing and exploration process is increasingly important.

Even before the Russia-Ukraine crisis and the resultant oil price shock, Shell has been attempting — for some time in South Africa — to explore for oil off the Wild Coast using seismic blasting. The company, like Searcher Seismic, was taken to court by community groups calling for an interdict.

A Good Governance Africa analysis of the initial Shell court judgment also revealed the critical importance of ESG performance. The high court’s 2021 decision to reverse the initial judgment and interdict Shell from continuing with the seismic survey highlights the growing significance of integrating ESG performance into business decision-making processes. This is particularly the case in relation to the recent 26th Conference of the Parties (COP26) agreements that South Africa made in pursuit of the global transition towards a zero-carbon emissions future. 

What are environment, social and governance criteria?

ESG performance speaks to three factors that have historically been overlooked in measuring companies’ effects. Typically, a company’s effect on the environment and the communities in which it operates is not captured in its financial reports. Similarly, governance principles, such as thorough board-level oversight to ensure operational integrity, have been neglected. A growing global movement is allocating considerable effort towards ensuring that ESG performance becomes a key criterion through which companies in all industries attain access to responsible finance. 

ESG factors have affected a range of industries; the extractives industry in particular has deep and unique ESG risks that are proving challenging to address. However, the ruling to stop Shell from continuing with its seismic exploration survey off the Wild Coast has shown that ESG matters significantly, because it will increasingly form part of the external legal constraints to which companies are subject. For this reason, and because ESG makes inherent business sense, it should be taken seriously in companies’ decision-making processes. 

Shell judgment

The Shell judgment forms part of a series of significant decisions at home and abroad, such as the Xolobeni case in the Eastern Cape in South Africa and Okpabi case in the Niger Delta in Nigeria. In the Xolobeni case, an Australian mining company, Mineral Commodities Ltd, showed interest in mining titanium ore and other heavy minerals. The community of Xolobeni has resisted the proposed mining activities for almost 15 years and the Pretoria high court ruled in September 2020 that the communities have a right to see application licences and must be thoroughly consulted in the process. 

This judgment illustrated that the interests of both mining companies and communities must be properly weighed. More importantly, it ruled that all interested and affected parties should be included in the consultation process, which needs to be conducted in a transparent and just manner. It should be non-negotiable that information about mining projects that affect communities should be accessible and shared for public interest and knowledge. 

Okpabi case

In the Okpabi case, more than 40 000 Nigerian citizens of two affected areas in the Niger Delta brought a lawsuit against Royal Dutch Shell (RDS) and one of its Nigerian subsidiaries (Shell Petroleum Development Company of Nigeria) for oil spills and pollution from pipelines operated by the subsidiary. 

This case was brought to the UK supreme court to hold the parent company, RDS, directly responsible and accountable for the actions of its subsidiary in the Niger Delta. The effect of the oil spills and water pollution caused substantial environmental damage that resulted in unsafe water for drinking, fishing, agriculture and recreation. 

To this end, the UK supreme court ruled that RDS, as the parent company, owed duty of care to the Nigerian citizens in relation to environmental damage and human rights abuses by its Nigerian subsidiary. Due to the significance of the environmental damage, RDS was ordered to pay an undisclosed amount to the farmers who claimed that the oil spills ruined their livelihoods.

This highlights the real risk of financial loss because of inadequate policy implementation, procedures and due diligence that ought to be performed in their international operations. Therefore, companies require more active corporate governance and internal due diligence that is effectively controlled and reported. Through taking ESG performance seriously, these significant risks can be managed and mitigated.

The Xolobeni and Okpabi cases show the prominence that ESG factors are beginning to gain in the regulatory and risk space. The growing convergence between ESG criteria and legal frameworks shows that there is a substantive business case for ESG integration. This view, naturally, is subject to challenge.

Corporate greenwashing?

Robert Armstrong of the Financial Times, a long standing ESG sceptic, has warned that ESG will merely become a new kind of corporate greenwashing in which companies are rewarded for intention rather than action, and even become subverted as a way to avoid regulation. For ESG to align with legislation, then, clear regulations regarding disclosures on ESG-related risks must be built. These should ensure transparency and good corporate governance and set the rules of the game clearly for all players. 

Tariq Fancy has, similarly, criticised the idea of ESG performance and ESG investing. He essentially argues that ESG without legislation that creates clear boundaries for what can be accepted as ESG performance is a dangerous distraction from the real issues and a major risk to the present economic system. 

The current economic and global accounting system has, however, inadvertently permitted companies  to offload negative externalities — the divergence between private returns and social costs — onto communities and ecosystems that can least afford it. It has also, in the process, caused significant levels of inequality and driven climate change. ESG requirements — correctly legislated — afford the opportunity to internalise these costs and manage the risks, an essential target if we are to maintain system stability. 

The outcome of the Shell case and its antecedents expose some of the tensions between oil and mineral exploration companies, environmental groups, communities, and policy-makers. Some also argue that the prevention of mineral exploration results in a major economic cost that developing countries cannot afford. 

This dovetails with recent comments from South African Minister of Minerals and Energy Gwede Mantashe, who suggested that the protests by environmental groups is akin to apartheid and colonialism. Similarly, Nigerian Vice-President Yemi Osinbajo has argued that fossil fuel divestment campaigns are delusionary. Nnimmo Bassey and Anabela Lemos have responded with a significant critique of Osinbajo’s arguments that have much to say to Mantashe too.

Negative externalities

In developing countries, access to cheap and consistent fuel sources is considered essential for economic growth. Accordingly, it can appear unfair for these countries to be forced to halt their development to solve a climate crisis to which they are only minor contributors. Potential oil exploration off the Wild Coast could potentially remove the country’s reliance on fuel imports and boost the struggling economy, if said oil were available at a sufficiently low marginal cost of production and South Africa could adequately transform it into refined fuel. 

Similarly, the exploration of the mineral sands in Xolobeni could potentially boost both the local and national economy, all of which is much needed in South Africa, a country suffering from severe unemployment and poverty. However, the negative externalities of exploration and production must be considered — from pollution and damage to ecosystems, to the healthcare consequences for mineworkers and their communities. Moreover, the opportunity costs of such investment decisions must be fully weighted against their tourism-related alternatives, which may prove both environmentally and socially less costly.

Communities, as stakeholders that will bear both the negative externalities (and positive spillovers in the cases they exist) of natural resource extraction, must form part of the decision-making process. If a community such as Xolobeni has agreed that the value of ecotourism to the region is greater and more sustainable than the mining of the sands and is not in violation of any of the laws of the land, they should be able to stand firm in their convictions, without fear of intimidation, co-optation and coercion.

 ESG performance presents an opportunity for such consultation and integration of these communities into decision-making processes as well as reducing the potential costs that might emerge down the line from litigation and fines. 

These cases have shown that companies will need to take above-ground risks at least as seriously as below-ground risks and genuinely consider all stakeholders as they attempt to do business. Equally, legislation will need to be increasingly clear in terms of how ESG risks are to be managed and reported.

Busisipho Siyobi is the lead researcher in the natural resource governance programme at Good Governance Africa and Vincent Obisie-Orlu is a researcher in the same programme.

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Busisipho Siyobi
Busisipho Siyobi is the lead researcher in the natural resource governance programme at Good Governance Africa.
Vincent Obisie-Orlu
Vincent Obisie-Orlu is a researcher in the natural resource governance programme at Good Governance Africa.

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