BUSINESS: Sustainable Development and the Law – What’s the Verdict?
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As consumers’ demand for sustainable business practice gains momentum, the global focus on sustainable development is rapidly increasing.
While issues such as climate change and emission reduction dominate the local and international media, it is becoming more obvious that corporate leaders need to understand the increasing importance of adapting to the pressure to ensure their entities’ sustainability and profitability. In these changing times, sustainability reporting is rapidly gaining credence. Equally important, however, is understanding the legislation around it.
According to Etienne Swanepoel, corporate and commercial law specialist and partner at Webber Wentzel Attorneys, determining the legal requirements applicable to sustainability reporting is a mechanical process. The first question to ask is whether the company in question is listed. Different provisions apply to listed companies and unlisted companies.
“Legislation around sustainability reporting is relatively intricate and complex,” says Swanepoel. “Broadly speaking, there are three sets of legal requirements. These are: the JSE Listings Requirements, the Companies Act, and the King III Report. The latter will replace the current King Report on 1 March 2010.”
Swanepoel adds: “The JSE Listings Requirements stipulate that, in order for a company to become listed, amongst other things it needs to comply with the Companies Act. In turn, the Companies Act requires that companies prepare annual financial statements in compliance with generally accepted accounting practices. The JSE Listings Requirements further state that, in order to be listed, companies must be aligned with the current King Report, until the third version takes effect.”
From Swanepoel’s explanation it is clear that compliance requires an integrated approach to all three sets of requirements. In addition, the King Report is supported by additional guidelines, such as the Global Reporting Initiative (GRI) and the Institute of Directors Practice Notes.
Graham Terry, SAICA’s Senior Executive of Strategy and Thought Leadership, and author of the recently published book Green, why corporate leaders need to embrace sustainability to ensure future profitability, says the King III Report is specifically aimed at corporate governance and highlights the concepts of integrated sustainability as well as social transformation.
“This leads to a strong focus on the effects that businesses have on society and the environment. There is also a strong emphasis on sustainability reporting. South African companies are starting to realise its importance, but it’s a slow process. When it comes to legislation around sustainability reporting, it is becoming abundantly clear that the King III Report may have a substantial impact on the way businesses are managed and a clear understanding of the Code is a necessity.”
According to Swanepoel, there are two models for corporate governance. “The first model is a ‘Comply or Else’ approach to legislation, as followed in the United States. With this model, non-compliance may have legal consequences. In South Africa, and most other countries, a ‘Comply or Explain’ model is applied. This means that, while guidelines such as King III exist, it is not law and if businesses can give a valid explanation for not complying, they cannot be held legally responsible. He notes, however, that the JSE Listings Requirements are currently under review.
Swanepoel also notes that we generally don’t impose legal requirements relating to sustainability issues in our jurisdiction. There are, however, two broad exceptions to this rule, namely the Employment Equity Act and Black Economic Empowerment Act. Developments akin to those in the National Environmental Management Act are also to be closely watched.
Swanepoel says that non-compliance (apart from possible breaches of the JSE Listings Requirements in the case of listed companies) does hold its fair share of risk as companies might very well end up with egg on their faces if they choose to ignore these guidelines – not only from their peers, but from the consumer as well. He concludes that legal regulation in this area is certain to increase in the future apart from the obvious moral and business imperatives to do so sooner.
According to Terry, no market leader who wants to ensure profitability in their business can ignore the demands of their customers, as sustainable business practise is at the top of many consumers’ minds. “A public that is increasingly well-informed on ‘green’ issues will increasingly demand businesses to make more responsible choices, and those who comply will be rewarded with their patronage. More and more businesses of all sizes are finding ways to make their operations more sustainable and environmentally friendly,” he says.
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