The draft of South Africa’s new governance code, King V, is now out of the oven with far reaching implications for governance and the climate – and not everyone is pleased.
Ansie Ramalho, chair of the King committee, which drew up this draft, says there has already been criticism that the draft may be “out of step with international developments” when it comes to sustainability principles.
This would appear to be a reference to developments in the US where, under President Donald Trump, there has been a dramatic reversal in climate commitments, punctuated by his withdrawal from the Paris Accord on global warming.
This U-turn has been evident in the corporate sector too. A number of large banks, including Bank of America, Goldman Sachs, Wells Fargo and Citibank have in recent weeks quit the net-zero banking alliance, a coalition of banks in 44 countries that was launched in 2021. Similarly, asset managers including the world’s largest, BlackRock, quit the net-zero asset managers initiative.
But Ramalho says South Africa’s King committee – which has overseen the development of governance standards for the country since the first version in 1994 – has specifically chosen not to dilute the code’s environmental, social or governance (ESG) requirements.
“South Africa was one of the first governance codes, back in King II, to explicitly say that sustainability is part of corporate governance, which was unheard of at the time. And we are not going to back away from that simply because Trump’s administration might be,” she says.
Ramalho says the new code does not specifically introduce new requirements on ESG, but has rather changed the emphasis. “In King IV, the explanation of the approach to sustainability was provided separately from the code itself. This time, we included an executive summary of the underpinning philosophy as a preamble to the draft code, so it is simply more explicit and visible.”
Sustainability is “an integral part of all aspects of governance that the draft code addresses”, Ramalho adds.
In the draft code, King V says corporate strategy should aim for “fairness”, which includes “directing the organisation in such a way that it does not adversely affect the natural environment, society or future generations”.
The code says a governing body, such as a board of directors, must consider the environment – specifically climate change, pollution, waste, the “protection of biodiversity; as well as the sustainable use of water, energy and other natural resources”.
And, when it comes to remuneration, the board should “oversee financial performance but also social and environmental value creation”. In other words, directors’ pay should hinge on a company’s progress on sustainability.
The deadline for comments on this draft is April 4, and Ramalho says that aside from criticism around the ESG compliance – which she believes is off the mark – the committee has received little negative feedback as yet.
King V is a significant development when it comes to shaping corporate behaviour. The first version of the code has been revised three times since 1994, capturing new elements each time, such as disclosure of directors’ pay. The latest version, in 2016, toughened up proposals around cybersecurity.
Today, the investment zeitgeist is largely around sustainability – or it certainly was until the November election of Trump, who has described climate change as a “hoax”.
Though US asset managers have come under pressure to abandon ESG, Ramalho says doing so heightens the risk for any company.
“It is not sensible for investors to ignore the risk factors stemming from environmental, social and governance concerns. How would you ever assess the real risk to your investment portfolio if you don’t factor in what is happening in your wider environment,” she asks.
This illustrates the philosophical gap between the US, where climate considerations are seen only as a cost that detracts from investment returns, and the business sector of many other countries, which accentuate this as a risk-management tool.
“South African firms perhaps understand this more than companies in other parts of the world, since they tend to operate with a greater awareness of the consequence of their operations on society and the environment. Ignoring this, or underestimating the impact, could mean companies lose their social licence to operate,” she says.
Holes on verification
Experts believe the King V draft did the right thing by retaining its ESG focus.
Teboho Makhabane, head of ESG and impact at Sanlam Investments, says that while the King code has traditionally been strong on governance, this new version encompasses climate and society to a far greater extent.
“The new emphasis on ESG, which is clear even in the wording where it speaks explicitly about biodiversity and pollution, shows the committee has evolved with the investment landscape, so it’s very positive,” she says.
This isn’t to say it is exhaustive in its sweep.
For one thing, Makhabane says, King V could have been clearer on verification assurance for ESG claims. This is a notable lacuna, as there is no one uniform standard by which ESG claims are tested, which has opened the way for greenwashing.
“King V could have been more explicit on this front, since most ESG compliance is self-reported, so there is no agreed-upon mechanism by which this could be verified,” she says.
This remains a persistent, and growing, problem.
Data provider MainStreet Partners said this month that 23% of all European and UK funds that supposedly promote climate or social goals are at risk of greenwashing – that is, making misleading claims about environmental compliance.
In this context, Makhabane says it would have been valuable for King V to go beyond encouraging a diversity of general skills, and explicitly recommend that boards include at least one non-executive director with ESG expertise. This would help ensure sustainability-related claims are independently assessed and subject to informed oversight.
“While the code rightly emphasises collective competence and governance capability, it stops short of prescribing specific areas of expertise,” she says. “In my engagements with boards, I’ve consistently found that ESG expertise is notably lacking and often overlooked. A stronger push for ESG competence at board level would have been welcome and necessary.”
While Sanlam Investments is finalising its feedback on the King V code ahead of the April deadline, there has been little public criticism. This is partly because, as one asset manager tells Currency, “there is little new to this new code, even if it does seem to have simplified procedures”.
Law firm Michalsons Giles, for example, has said King V is “more of a refinement or update than an upgrade”.
Aside from the greater sustainability focus, the King code has slimmed down, shrinking from 17 core principles to 12. It also introduces new “disclosure templates”, which companies can use to standardise their reporting on the governance principles.
The new code, barring any substantial overhaul, will likely be in operation before the end of the year.
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