The Board of the International Organization of Securities Commissions (IOSCO) has published on 4 December 2023 a report on Supervisory Practices to Address Greenwashing.

The Report provides an overview of initiatives undertaken in various jurisdictions to address greenwashing, in line with IOSCO recommendations published in November 2021¹,² and the subsequent Call for Action³ in November 2022. The Report presents the challenges hindering the implementation of these recommendations, including data gaps, transparency, quality, and reliability of ESG ratings, consistency in labelling and classification of sustainability-related products, evolving regulatory approaches, and capacity building needs. While some of these challenges are currently being addressed, greenwashing remains a fundamental market conduct concern that poses risks to both investor protection and market integrity.

Jean Paul Servais, IOSCO Board Chair said “In recent years, there has been a growing recognition of the economic and financial materiality of climate change and ESG considerations. But there is also a growing concern against misleading claims about ESG risks, opportunities, and impacts. Internationally, industry participants, investors, regulators, and policy makers have stepped up their efforts to address such risks of greenwashing. It is key to promote cultures that support good practices aimed at protecting investors and fostering market integrity. The Report supports regulators address greenwashing by outlining current regulatory best practices from around the world.”

Rodrigo Buenaventura, IOSCO Sustainability Task Force Chair and Chairman of CNMV Spain, said: “Greenwashing can occur throughout the investment value chain, and any market participant – from issuers to asset managers to ESG ratings and data products providers – can engage in this behaviour. Taken more broadly, greenwashing undermines the fundamental trust in sustainable finance. To ensure a healthy global sustainable finance market, there is a need for reliable, consistent, and comparable sustainability related information, while related ESG products should be marketed and managed in a way that does not undermine investors’ trust.”

The Report notes that most jurisdictions have in place supervisory mechanisms to address greenwashing in the area of asset management. Educational and capacity building activities are also used as proactive tools to prevent greenwashing. Furthermore, the Report refers to some enforcement measures which have been taken on a few greenwashing cases. The Report also notes that while the ESG ratings and data products market remains largely unregulated, some jurisdictions are currently developing policy frameworks for ESG ratings and data products providers. Finally, the Report refers to the cross-border nature of sustainability-related investments which requires adequate cooperation. Such cross-border cooperation, including sharing experiences and knowledge, as well as exchanging relevant information and data, is therefore necessary in ensuring market integrity and investor protection.

Grant Vingoe, CEO of the Ontario Securities Commission, Canada and STF Promoting Good Practices Co-Chair, said: “Whether intentional or not, greenwashing negatively impacts investor confidence. Supervisors have a key role to play by ensuring that there are responsible risk monitoring and management processes in place, and by promoting decision-useful information for investors. In doing so, supervisors can help foster a culture that will prevent harm and promote investor confidence in sustainable finance.”

Dr Mohamed Farid Saleh, Executive Chairman, Financial Regulatory Authority, Egypt and STF Promoting Good Practices Co-chair, said: “The ability to address greenwashing is also a matter of capacity. Jurisdictions, notably from emerging markets, will require assistance for both designing and executing their action plans towards any net zero commitment, and more concretely, for implementing new corporate sustainability requirements and new or enhanced supervisory practices. Greenwashing will remain to pose risks to the global sustainable finance markets until the quality and reliability of information available to investors improve. All stakeholders will therefore need to act in concert to combat greenwashing, building a more reliable ecosystem to ensure trust in sustainable finance markets.”

1. https://www.iosco.org/library/pubdocs/pdf/IOSCOPD688.pdf
2. https://www.iosco.org/library/pubdocs/pdf/IOSCOPD690.pdf
3. https://www.iosco.org/library/pubdocs/pdf/IOSCOPD717.pdf

The Johannesburg Stock Exchange (JSE) has seen listings halve in the past two decades, from 616 in 2000 to just below 300 in 2023. This is likely a result of reduced foreign investments in the country due to the unfavourable global macroeconomic climate. However, some analysts have noted that the JSE’s listing requirements are onerous and have arguably led to increased compliance costs and an unprecedented number of delistings in the past five years. While delistings are an ordinary part of capital markets, the scarcity of new listings is a cause for concern. 

One of the main reasons companies list on the main board of the JSE is to raise capital. However, issuers have been less optimistic about the prospects of raising capital on the JSE, as many have been trading at double-digit discounts to their net asset values. This has significantly reduced the attractiveness of the JSE to private companies, hence its current efforts to encourage listings. The JSE has announced numerous changes to its listing requirements to encourage new entrants and prevent delistings, with the most recent of these changes becoming effective as of 17 July 2023.

The changes to its listing requirements include (i) the introduction of dual-class share structures; (ii) the reduction of free float for new listings; (iii) changes to free float assessments for institutional investors; (iv) changes to the listing requirements for special purpose acquisition companies (SPACs); and (v) making financial reporting disclosures less onerous. Although the changes have been well received by market participants as a means to encourage new listings, they appear to be more geared towards attracting IPOs rather than adding significant value for existing issuers. Finally, in September 2023, the JSE announced its intention to completely overhaul the JSE Listings Requirements (Requirements) in an attempt at simplifying the Requirements and cutting red tape, which is welcomed. 

Dual-class shares

In essence, dual-class share structures exist where a shareholder’s voting control over a company is disproportionate to their economic interest in that company. A dual-class share structure typically involves a company having two classes of shares that are identical in every respect except for voting rights. One class of shares is a “low vote” share, carrying one vote per share (typically Class A shares), while the other class of shares is a “high vote” share, typically carrying 10 or 20 votes per share (typically Class B shares). Prior to the current amendments, the JSE did not allow companies with dual-class shares to list on the exchange. It also prohibited existing listed companies from issuing dual-class shares. An exemption applies to companies with dual-class shares that were listed before 1999. These exempted companies were allowed to issue additional shares of that class. The amendments relating to dual-class shares are forward-looking and apply to new listings. They do not affect companies that are already listed.

A major concern associated with dual-class share structures is the concentration of power in the hands of management with little to no shareholder oversight. This could lead to dubious corporate governance practices, which makes it important for shareholders to maintain a watchful eye over these companies.

The JSE’s introduction of dual-class shares as “weighted voting shares” has been widely accepted, subject to guardrails to mitigate the abovementioned risks. These include (i) requiring a maximum weighted ratio of 20:1; (ii) requiring that dual class shares be held only by directors of the company; and (iii) capping all shares to one vote regardless of the class for certain matters, such as changes to independent directors and auditors, variation of rights attaching to any class of shares, a reverse takeover, liquidation, or delisting. Dual-class share structures are commonplace on stock exchanges globally, as seen on the New York Stock Exchange, the Nasdaq, and the Toronto Stock Exchange. What remains to be seen is whether there is investment appetite for companies with dual-class share structures on the JSE.

Free float and new listings

Free float refers to a company’s issued share capital that is held by public investors. Prior to the amendment, the JSE required main board issuers to have a free float of 20%. To keep abreast of international developments in Europe and to encourage new listings, the JSE has reduced the free float requirement to 10%. Making a large portion of the company’s shares freely tradeable can be unsettling, particularly for large companies where there are few shareholders willing to sell their shares. Therefore, this is great news for high-growth companies and those with private equity and venture capital investors, which consider free-float requirements a strong deterrent when considering where to list.

Reducing the free float requirement to 10% will allow new issuers flexibility to structure their IPOs and open markets to issuers wishing to initially raise smaller amounts of equity. The requirement to float 10% is in line with other local exchanges, such as the Cape Town Stock Exchange, thereby making the JSE competitive in the local market. The fact that the free float requirement has been largely unchanged for over 20 years has been detrimental for Africa’s largest exchange. It has impacted the JSE’s competitiveness as a primary and secondary listing jurisdiction. For instance, it is strange that companies that were compliant on premier international exchanges would fall short of qualifying for a secondary listing on the JSE for failing to float 20% of their shares. Therefore, this change is a move in the right direction as it reduces the burden of shareholder dilution.

Institutional investors and free float assessment

There are limited security holdings that qualify as free float. One type of holding that previously did not qualify was a shareholding of 10% or more. This was not ideal given that it is common for institutional investors, such as fund managers and portfolio managers, to hold more than 10% of an applicant issuer on listing. As an exception, the JSE allowed institutional investor holdings of more than 10% to qualify as free float. The exemption applied where the interest held was in more than one fund and each fund held less than 10% of the shares in the applicant issuer. This exemption was not the saving grace that it set out to be, as it was rather limited and complex to apply. Therefore, the JSE has resolved to change the rules to recognize institutional investors for free float purposes, provided they have no relationship whatsoever with the directors and family of the applicant issuer.

The JSE has widened the scope for free-float assessments in two major ways. Firstly, the JSE has removed the 10% exclusion altogether, provided there is a minimum number of shareholders. Requiring a minimum number of shareholders will ensure that the floated shares are not held by only one shareholder and will encourage a competitive share price. The JSE’s second amendment is to exclude shareholders who exercise control (>35%) from the free float assessment. Given that 90% of monthly trades on the JSE are driven by institutional investors, they will benefit significantly from this amendment.

Additional amendments: SPACS and Financial Reporting Disclosures

In its efforts to retain and attract listings, the JSE has amended its requirements relating to financial reporting disclosures and SPACS, respectively.

The JSE introduced SPACS in 2013. This type of company is primarily incorporated to raise capital to acquire viable assets with the aim of listing on an exchange. Viable assets are those that qualify for a listing on an exchange. SPACS are a viable investment vehicle and become more attractive in a volatile economic environment when traditional listings become riskier. We witnessed this SPAC boom in 2020 and 2021, when the markets became volatile during the COVID-19 pandemic. Global interest in SPACS has since dwindled. Despite the reduced interest, the JSE has amended its requirements to make SPACS more attractive for listings, should the demand for SPACS increase.

To retain listings, the JSE has reduced the compliance burden for issuers. Issuers will no longer have to produce an abridged version of their financial results along with their audited annual financial statements. Furthermore, issuers’ interim results will no longer have to include an auditor’s opinion, where the previous set of annual results were accompanied by a modified opinion. The JSE has admitted that the previously mandated financial reporting disclosures added no regulatory value or benefit to investors. As such, these amendments have received overwhelming support.

Simplification project

The JSE has announced its intention to simplify the Requirements. Essentially, the JSE plans to rewrite the Requirements using plain language for the benefit of all stakeholders. This process will include a substantial reduction in the volume of the Requirements and cutting red tape to ensure that only rules that are fit for purpose survive the purge. The JSE has created a dedicated portal for this project, which will run in stages over 18 months, including public participation throughout the process. We look forward to reviewing the suggested amendments.

Final thoughts

The JSE certainly has its work cut out for it, particularly given the rise of other exchanges locally and the success of private equity and venture capital financing in South Africa. With less stringent compliance burdens, competitor exchanges and alternative forms of financing have become more attractive methods of raising capital, thus posing a challenge for the JSE.

In its efforts to encourage new listings and curb delistings, the JSE, through its initiatives to cut red tape, must find a balance between reducing compliance burdens and protecting investors. The previous listing requirements had been in place for over 20 years. Therefore, the recent changes are testament to the JSE’s commitment to self-assessment and improvement to encourage capital market reform.

Coupled with the recent amendments to the Requirements, the complete overhaul of the Requirements presents an opportunity for the JSE to reform and regulate listings in a manner that accommodates potential issuers, listed companies, sponsors, shareholders and investors. Balancing these interests is no small feat, but by engaging market participants, the JSE can allay such challenges and pave the path for a renewed JSE that can withstand the cyclical nature of global economic conditions.

A Dispute Resolution team from Baker McKenzie in Johannesburg, including Darryl Bernstein, Kylie Slambert, Cameron Jeffrey and Landise Banzana, successfully represented the Rosebank Rotary Club (RRC) on a pro bono basis in a precedent-setting case relating to the conduct of financial service providers (FSPs) and their duty of care to safeguard their clients’ finances and protect them against cybercrime. The case involved an ongoing dispute involving the RRC and a financial investment firm, Brough Capital (Brough), and its director, Chris Botha (Botha). The decision, which was delivered in the Commercial Court, has implications for all accountable financial institutions.

Botha is a director, Representative and Key Individual of Broughas defined by the Financial Advisory and Intermediary Services Act (FAIS). According to the FAIS Act, Key Individuals have a fiduciary responsibility to ensure that they perform their duties with the necessary care, skill and diligence. FAIS, as well as the General Code of Conduct for Authorised FSPs, requires that FSPs have appropriate technological systems in place that eliminate, as far as reasonably possible, the risk that clients and other FSPs will suffer through, amongst other things, fraud, negligence, or professional misconduct.

The dispute arose out of the misappropriation of funds, totalling ZAR 3.1 million, invested by the RRC via Brough and Botha. The funds were misappropriated as a result of a business email compromise in the form of fraudulent emails sent by unknown hackers purporting to be withdrawal instructions from RRC, to Brough. The Court, in considering the matter, found that Brough did not take adequate measures to prevent the misappropriation from occurring, nor did Botha, both being bound by the legislation and guidelines governing the conduct of intermediary service providers. It was decided that the defendants failed to comply with the duties of an FSP and were guilty of gross negligence, flowing from the manner in which they dealt with the withdrawal instructions from the unknown hackers. Of particular relevance was the fact that the defendants:

• Ignored errors on the change of bank account letters, including that RRC’s name was not written in full and that the logo of the respective bank was missing from the letter; and
• Ignored the unusual nature of the withdrawals, which were large sums of money drawn in short succession and without notice.

The Court considered the fact that had Botha paid careful attention to the purported letter from the bank, it would have revealed that it was not the plaintiff’s bank account but that of a “Rotary Club” with no name. Further, the Court noted that Botha should have considered the history of the withdrawals from his client and taken time to understand their business insofar as enquiring what the funds were for. The judgment noted that the defendants had failed to exercise the necessary skills, care and diligence, as well as their contractual obligation to be vigilant. The Court found that they had been grossly negligent.

The defendants were found jointly liable to pay the plaintiff ZAR 3.1 million at 10.5% interest per annum, plus costs.

Darryl Bernstein, Partner and Head of the Dispute Resolution Practice in Johannesburg, noted, “This judgment highlights the importance of the responsibility placed on FSPs, as well as those individuals under the supervision of the respective FSPs, to be extra vigilant in an era where cybercrime is rife. It further places great importance on functioning internal controls, such as two-step verification processes, to avoid, as far as possible, the promulgation of cybercrimes and to prevent gross negligence. The judgment is also a reminder to intermediary service providers that, even in instances where the funds are administered by a third party, the proverbial buck stops with the FSP with whom the client has a contractual relationship.”

The 2023 banking turmoil, which commenced in March 2023, stands as a significant system-wide banking crisis, unparalleled since the Great Financial Crisis (GFC), both in terms of its scale and scope. The crisis led to the failure of several banks and triggered a widespread loss of confidence in the resilience of banks, banking systems, and financial markets across multiple jurisdictions. Consequently, a range of public support measures was implemented in certain jurisdictions to mitigate the crisis’s impact. The report published by the Bank for International Settlements (BIS) on 5 October 2023 presents a comprehensive assessment of the causes of the banking turmoil, the regulatory and supervisory responses, and the preliminary lessons that have been learned from this crisis.

Dear Stakeholder,

We refer to your comments to the Financial Sector Conduct Authority (Authority) on the Revised Draft Conduct Standard – Requirements relating to the provision of a benchmark, as published for public consultation in November 2022.

This serves as notification that the Authority on 02 November 2023 published the following documents on the Authority’s website:

–              FSCA Communication 28 of 2023 (FM) – Publication of a Discussion Document on financial benchmarks and industry questionnaire – for public comment

–              Discussion Document – Development of a framework for the regulation and supervision of financial benchmarks – Request for input

–              Annexure A – Questionnaire – Discussion Document – Provision of a benchmark

The documents are available on the Authority’s website www.fsca.co.za under Home > Regulatory Framework > Documents for Consultation > Capital Markets > 2023 or by clicking on the following link: Capital Markets https://www.fsca.co.za/Regulatory%20Frameworks/Pages/Capital-Markets.aspx

The FSCA Communication is also available under Home > Regulatory Framework > Industry Communication > Capital Markets > FSCA Communication or by clicking on the following link: Industry Communication https://www.fsca.co.za/Regulatory%20Frameworks/Temp/FSCA%20Communication%2028%20of%202023%20(FM).pdf

As an interested party in the developments related to the regulation and supervision of financial benchmarks in South Africa, you are invited to complete the Questionnaire set out in Annexure A published with the Discussion Document and submit same in Word format to the Authority via email to FSCA.RFDstandards@fsca.co.za by 14 December 2023.

For further information regarding the FSCA Communication, please contact Roslynne van Wyk at FSCA.RFDStandards@fsca.co.za.

Copies of the documents are below:

FSCA Communication 28 of 2023 Discussion Document_Development of a framework for financial benchmark

Discussion Document – Development of a framework for financial benchmarks

Annexure A – Questionnaire_Discussion Document Development of a framework for financial benchmarks