BRPs in South Africa should incorporate ESG considerations into their business plans to attract more investors and comply with the SA’s climate change commitments.
Environmental, Social and Governance (ESG) has evolved beyond CSI and sustainability agendas to companies taking holistic, strategic approaches to risks and opportunities in the E, S and G spheres, to ensure resilient operations that secure long-term, shared value for their various stakeholders. In the restructuring and insolvency (R&I) context, this shift triggers a move from considering what the business was historically, to what the business could sustainably be in the future.
Following the effects of Covid-19 and with many economies in recession, the importance of R&I regimes is growing. The result of this together with increased awareness of ESG principles, particularly in the global restructuring context, is that there will not only be a need to find new ways of attracting investment but may also be additional scrutiny (linked to various ESG considerations). Potential lenders, investors, and purchasers increasingly incorporate ESG factors into their investment decisions and consider sustainability and inclusion in their assessments of business plans and valuations during a restructuring. There is also an increase in lenders requiring more extensive climate change and sustainability linked clauses in their agreements. From a social perspective, companies with a greater focus on socially responsible practices can leverage this to attract better business and a larger customer base. Given these dynamics, the interplay between ESG and restructuring has been well documented in many academic and professional articles.
In South Africa, when considering business rescue proceedings, Business Rescue Practitioners (BRPs) also need to adopt ESG commitments in their business rescue plans (if they are not already doing so). Traditional business rescue plans follow a basic structure set out in the Companies Act, with many plans incorporating various standard provisions which are largely based on early templates produced at the start of the business rescue regime. However, beyond the basic requirements provided for in the Companies Act, the legislature has not been prescriptive about the contents of business rescue plans. But business rescue plans could include provisions which take advantage of the benefits of ESG, to include:
- an assessment of ESG effectiveness, through an analysis conducted by a scoring agency;
- consulting technical experts on ESG issues to identify possible opportunities and threats in relation to the restructure;
- reinventing a distressed asset to market it as an attractive ESG investment;
- increasing the pool of investors or buyers and possibly focusing on attracting interest from so-called "Green Funds"; and
- incorporating ESG-related clauses in agreements underpinning the restructuring process.
By evolving the content of business rescue plans in this way, a BRP can provide a unique and attractive proposition to affected persons and benefit from expanding the pool of lenders/investors to include those looking to invest more widely in ESG-aligned assets.
Beyond the benefits of incorporating ESG in R&I practice, there is also a broader compliance consideration. South Africa has set and submitted several climate change commitments and targets to the United Nations as a signatory to the Paris Agreement. To achieve these targets and meet these commitments, business will need to play its part. Proposed changes to the Companies Act could also result in directors of South African companies being required to consider the risks associated with their business because of climate change. As a matter of international best practice, directors' duties in common law have already been reframed to include a mandatory understanding and assessment of climate change impacts on the business. All these considerations will have an impact on the ability of a distressed company to change its fortunes and will impose new duties on BRPs (who assume the same responsibilities, duties and liabilities of a director in terms of section 140(3)(b) of the Companies Act, and who are therefore tasked with the duty to act in the best interests of the company and with the required care, skill and diligence).
International jurisprudence relating to ESG has already set the precedent for parent company liability to extend to harms and duties of care relating to ESG and sustainability. In Okpabi and Others v Royal Dutch Shell Plc and Another, the UK Supreme Court held that the parent company owed a duty of care to the claimant Nigerian citizens for alleged environmental damage and human rights abuses by Shell's Nigerian subsidiary. In Four Nigerian Farmers and Stichting Milieudefensie v Shell, the Dutch Court of Appeal found that, due to pipeline leaks, Shell's Nigerian subsidiary had caused damage to the livelihood of Nigerian farmers and Shell’s parent company had contravened its duty of care to the Nigerian farmers. Following this, emerging ESG-related litigation (with far-reaching consequences) provides a lens of added responsibility for BRPs to not only focus on the operations of the companies that they have been tasked with rescuing, but also their value chains, to curb future litigation risks. Similarly, liquidators of companies may also need to consider the impact of a move towards ESG integration in discharging their obligation in terms of the Insolvency Act and fulfilment of duties to creditors. For example, the responsibilities of liquidators of companies with unfulfilled mine rehabilitation duties are coming under increased scrutiny, and the long-accepted insolvency regime may be altered to cater for a more sustainable approach to environmental obligations of companies in liquidation. To the extent that this happens, it will mean a major shift in the way that liquidators have approached such matters and give them more to consider in the winding-up process.
The time is ripe for liquidators, BRPs and other restructuring professionals to dedicate more attention to ESG and consult experts to establish what opportunities could be created from a move towards long-term sustainability and resilience. They should also be aware of the possible (and likely) extended obligations that could be imposed on them in a shifting policy and regulatory landscapes.
This article was first published in Business Day.