Overview Environmental Legislation  – South Africa

South Africa is one of the most carbon intensive economies in the world. It has sound environmental legislation aimed at achieving sustainable development and the conservation and management of the country’s rich natural resources, including laws that support public participation, impact assessment and environmental management. ​

The right to a clean environment that is not harmful to South Africans health and well-being and is protected for future generations is enshrined in the South African Constitution. Furthermore, the National Environmental Management Act (NEMA), imposes a general duty of care on all persons to take reasonable measures to avoid, or to minimize and rectify, significant harm to the environment.​

In South Africa, the National Development Plan guides the implementation of the Sustainable Development Goals (SDGs). At the heart of the plan is the aim to eliminate poverty (SDG 1) and reduce inequalities (SDG 10). It also includes a focus on nearly all of the SDGs. For further information on South Africa’s progress towards meeting the please visit the South African SDG Hub. ​

It is important for financial institutions to be aware of the pertinent legislation that is applicable to their client’s business because regulatory fines and enforced work stoppages could result in credit, liability and reputational risks accruing to financial institutions.

This section provides:

  • An overview of the key pieces of environmental and social related legislation in South Africa, as they relate to financial institutions’ lending activities
  • Guidance on best practice for ensuring effective implementation of the legislation by clients as part of the credit assessment processes

Legislation Guidance (please click on the relevant panel):

Environemental Legislation
The Companies Act (Director’s Liability) – Legislation Overview and GuidanceWater – Legislation Overview and GuidanceWaste – Legislation Overview and GuidanceNEMA (Environmental Authorization) – Legislation Overview and GuidanceLand Restitution – Legislation Overview and GuidanceMining – Mineral and Petroleum Resources Development Act (No. 28 of 2002) (MPRDA).Climate Change – Carbon Tax Act 15 of 2019Occupational Health And Safety ActBasic Conditions Of Employment Act

 

The Companies Act (Director’s Liability)

Overview

The Act applies to both FIs and the companies they finance.

The fundamental fiduciary duty of company directors is to act in the best interests of the company as a whole, which includes the collective body of shareholders. Fiduciary duties are now accepted to include environmental and social risks, particularly those risks associated with climate change. This duty is especially pertinent for financial institutions who are exposed to environmental and social risks through the clients that they lend to. Part of a financial institutions fiduciary duty is to ensure that they are not lending to clients who pose significant environmental and social risks that could result in reputational, credit and liability risks accruing to the financial institution. 

The fiduciary duties of directors have been partially codified in the Companies Act and are mandatory for all directors of companies in South Africa. These duties are set out in section 76 of the Companies Act. The Companies Act applies to all company directors. 

Penalty

If a director fails to comply with the companies act they are liable to a fine or up to 10 years’ imprisonment

Interpretation and Guidance

Environmental and social related risks to the profitability and long-term sustainability of companies are increasing, as the impacts of climate change become more severe, and the need to transition to low carbon economies becomes more urgent. In addition, public sentiment is growing around the impacts of climate change and companies are increasingly being held accountable by shareholders for the environmental and social impacts companies have on society.

Fiduciary and other company law duties requiring company directors to act in the best interests of their company and shareholders are likely to apply in the environmental and social risk management context, given the material financial risks they pose, which are foreseeable, requiring company directors to develop strategies to manage these risks.

Internationally directors are being required to assess how climate change affects the company’s business model, both in terms of physical and transitional risks, to develop plans to address and minimize these risks and report on these risks and the steps that the company is taking to address these risks.

National Environmental Management Act (Director’s Liability)

Overview

In addition to the director duties imposed by the Companies Act, there are also certain director duties in South Africa’s framework environmental legislation – the National Environmental Management Act 107 of 1998 (NEMA).

Section 24N(8) of NEMA provides that:

"notwithstanding the Companies Act or the Close Corporations Act, the directors of a company or members of a close corporation are jointly and severally liable for any negative impact on the environment, whether advertently or inadvertently caused by the company or close corporation which they represent, including damage, degradation or pollution."

Penalty

If a director fails to comply with NEMA they are liable to a fine of up to ZAR 10m or up to 10 years’ imprisonment.

Furthermore, a director may be held personally liable to compensate the state or third parties for costs incurred in taking remedial measures and for the reasonable costs incurred by the state in investigating and prosecuting the crime.

Interpretation and Guidance

Whilst these provisions are typically thought to apply to real sector businesses, they could apply in the context of a financial institution. If a financial institution failed to recognize and take steps to mitigate it’s portfolio’s contribution to climate change, or significant pollution or degradation of the environment.

In this context, the director of a financial institution could be held liable for the harm to the environment, as opposed to the harm to the company (as is the case with the company law provisions discussed elsewhere).

This approach would encounter significant difficulties in relation to causation and attribution, but is worth considering as societies awareness of environmental and social risks, particularly those related to climate change, grows.

Useful Resources

The Taskforce for Climate Change Disclosure Report on Climate Related Financial Disclosures provides a useful starting point for financial institutions to consider their exposure to climate change risk.

The Companies Act, No. 71 of 2008

The Companies Act, No. 71 of 2008 – An Explanatory Guide, the Department of Trade and Industry

Land Restitution

Overview

The Act provides for the restitution of rights to land to persons or communities dispossessed of their rights after 19 June 1913 as a result of historical racially discriminatory laws and practices.

Initially, land claims had to be lodged on or before December 31, 1998, by a person or a community historically dispossessed of a right to land with the Department of Rural Development and Land Reform.

The Land Claims Court has the right to determine a right to restitution of any right to land in accordance with the Act. The Court may order the restoration of land, a portion of land or any right to land in respect of which the claim or any other claim is made to the claimant or award any land, a portion of or a right to land to the claimant in full or in partial settlement of the claim and, where necessary, the prior acquisition or expropriation of the land, portion of land or right to land.

Penalty

Any person who contravenes the provisions of the Act, shall be guilty of an offence and liable on conviction to a fine or to imprisonment for a period not exceeding six months. 

Any person who lodges a claim with the intention of defrauding the state shall be guilty of an offence and liable on conviction to a fine or imprisonment or both.

Interpretation and Guidance

Investment by Financial Institutions can be placed at significant risk in the event that there has been or is a land claim registered against part or all of the property or properties utilised by businesses or individuals that they are involved in financing. The legal proceeding and loss of land by a client as a result of a land claim could result in a non-performing loan.

It is important that financial institutions always ascertain whether or not a land claim has been registered against any parcel of land targeted for development or for investment. This can be easily done via the Department of Rural Development & Land Reform, which maintains a database of land claims. Land claims are not limited to rural land but can be made for urban land as well. Once a claim has been gazetted the land cannot be sold until the process is complete.

Useful resources

Department of Rural Development & Land Reform

IFC Performance Standard 5: Land Acquisition and Involuntary Resettlement 

NEMA (Environmental Authorization)

The National Environmental Management Act

The environmental impact regulations contained in NEMA (2014) specify activities that may have a detrimental impact on the environment. These activities include new builds and expansion projects, mining applications, phased activities and developments that are located near, in or can have an impact (directly or indirect) on sensitive receptors (e.g., wetlands, biodiversity hotspots etc.). The activities are classified into three Listing Notices. Activities contained in Listing Notices 1 and 3 require a basic environmental impact assessment (Basic Assessment) to be conducted, while activities in Listing Notice 2 require a more comprehensive assessment, which includes a scoping assessment and specialist studies, known as an environmental and social impact assessment (ESIA).

An environmental assessment practitioner needs to be appointed by the project proponent so that the required scope of works is conducted independently, objectively and within the time frames required. The regulations place a high importance on the Environmental Assessment Practitioner remaining independent and objective of the project proponent and that the public are engaged in the application process through a process of stakeholder engagement and public comment. In addition, the 2014 Regulations have implemented stringent time frames to complete the assessment process.

ESIA’s can typically take between 300 or 350 days from date of application, where as a basic assessment can take between 197 or 247 days from date of application, depending on the size and complexity of the projects. Fees associated with ESIAs:

  • R10 000 for a full ESIA application in terms of NEMA or NEMWA;
  • R2 000 for a basic assessment (BA) application in terms of NEMA;
  • R2 000 for an application for amendment of an environmental authorisation in terms of NEMA;

The outcome of environmental and social assessment process, if approved by the department of environmental affairs, is an environmental authorization, which typically includes a legally binding environmental and social management plan (ESMP), which details mitigation measures for the identified environmental and social risks. ESMP compliance is typically supervised by independent consultants and/or regulators.

Penalty

NEMA provides for various penalties including fines or jail sentences or a retrospective ESIA / basic assessment study needing to be conducted.

Environmental Management Inspectors (EMIs) commonly called ’Green Scorpions’ are a network of environmental enforcement officials from different government departments. This includes The Department of Environmental Affairs, provincial environmental departments and other provincial and municipal organs of the state. They are appointed in terms of the National Environmental Management Act (NEMA) of 2008. There role is to investigate breaches of NEMA and to enforce its implementation. 

Interpretation and Guidance

EIAs must predict and evaluate the impact of a project on the environment, the socio-economic conditions and cultural heritage and must fully assess alternatives and possible mitigation measures. The environmental impact assessment process is a key tool in effective environmental management for a country and enables decision makers to decide what sort of activities should and shouldn’t take place and to determine what measures should be taken to mitigate and manage the impacts of the activity.

It is important for financial institutions to understand the types of activities that require an ESIA or Basic Assessment as they can have an impact on a client’s cash flow, project development timeframes, the project’s viability and associated costs. Failure to consider the ESIA or Basic Assessment requirements of the activities being financed can result in non-performing loans, as well possible reputational damage for the financial institutions. In addition, if a client’s is found to be in breach of the ESMP it can lead to fines and project delays, which can also lead to non-performing loans.

As such it is recommended that financial institutions include a review of environmental authorisation licenses and associated ESIAs or basic assessments as part of their credit assessment processes, where the nature of the transaction allows. Where financial institutions have sufficient leverage it is recommended that they review a client’s ESIA and include findings from the review into the credit decision making process. Beyond helping to determine whether a financial institution should finance a project or client, the ESIA can also inform loan terms, interest rates and reporting requirements.

Useful resources

South African Council for Natural Scientific Professions (SACNASP)

International Association of Impact Assessors – South Africa (IAIA-SA)

Environmental Assessment Practitioners Association of South Africa (EAPASA)

South African Heritage Resources Agency (SAHRA)

The IFC Performance Standards for Environmental and Social Sustainability

Waste

Overview

Waste management in South Africa is governed by the National Environmental Management: Waste Act, 2008 (Act No. 59 of 2008) and enforced by Chemicals and Waste Management Branch of the  Department of Environment Affairs. The Waste Act supports the waste management hierarchy in its approach, by promoting cleaner production, waste minimization, reuse, recycling and waste treatment with disposal seen as a last resort in the management of waste. 

Waste is considered to be:

…any substance, material or object, that is unwanted, rejected, abandoned, discarded or disposed of, or that is intended or required to be discarded or disposed of, by the holder of that substance, material or object, whether or not such substance, material or object can be re-used, recycled or recovered and includes all wastes as defined in Schedule 3 ….” [NEMWA; 2014].

Waste Activities that require a license/registration typically include collection, transportation, storage, re-use, recycling, recovery, treatment and disposal.

Based on the volume of waste and the nature of the waste handled, the Environmental Impact Assessment Regulations, 2014 (NEMA) requires that users obtain a waste management license CATEGORY A activities require a Basic Assessment study and CATEGORY B activities require a Scoping and Environmental Impact Reporting Study. See the NEMA legislation overview and guidance page for further guidance on the EIA process.

Fees associated with ESIAs:

  • R10 000 for a S&EIR application in terms of NEMWA;
  • R2 000 for a basic assessment (BA) application in terms of NEMWA;
  • R2000 for an application for the transfer of a waste management licence in terms of NEMWA;
  • R2000 for an application for the renewal of a waste management licence in terms of NEMWA.
Penalty

Persons guilty of offences in terms of this Act may be liable to a fine not exceeding R10 000 000 or to imprisonment for a period not exceeding 10 years, or to both

Interpretation and Guidance

Waste generators remain responsible for their waste (‘Cradle-to-Grave’), and must ensure that they and their service providers (waste transporters & managers) are legally compliant, and able to manage waste in an environmentally sound manner. Society is becoming increasingly conscious of the environmental and social impacts of waste, particularly plastic waste. Financial institutions can play an important role in ensuring its clients practice responsible waste management practices and comply with applicable legislation. As such waste management is a long term compliance issue that needs to be monitored on an on-going basis through regular reporting from the client, if the nature of the transaction allows. 

Sectors that are particularly exposed to waste management risks include mining, chemicals manufacturers, retail and healthcare.

Financial institutions financing client’s that produce large volumes of waste as well as hazardous waste, need to ensure that their client’s have waste management licenses in place and are using licensed waste transporters and managers to dispose of their waste. Failure to do so could result in non-performing loans as well as reputational damage. These issues should be carefully considered as part of a due diligence on a client, where the financial institution has sufficient leverage. 

Useful Resources

The Institute of Waste Management Southern Africa

Waste Management Made Easy – Department of Environmental Affairs Guide

IFC Performance Standard 3: Resource Efficiency and Pollution Prevention

Water

The National Water Act

South Africa’s waters are governed by the Water Services Act of 1997 and the National Water Act (NWA) of 1998. The NWA is founded on the principle that all water forms part of a unitary, interdependent water cycle, and should thus be governed under consistent rules. It contains comprehensive provisions for the protection, use, development, conservation, management and control of South African water resources. The strategic objectives are stipulated in the National Water Resource Strategy.

The NWA requires that certain water users obtain a license with the Department of Water Affairs and follow specific requirements. Activities that typically require water use licenses are abstraction of water from dams or boreholes for irrigation, forestry operations, discharging waste water into water courses and altering the physical structures of rivers and streams.

Penalty

Breaching the NWA can result in a fine or imprisonment of up to 5 years.

Interpretation and Guidance

South Africa is a water scarce country and climate change is expected to increase water scarcity. On top of this, demand for water is increasing as the population and economy develop. A growing economy relies on a reliable and safe water supply.

Water could present a significant reputational and credit risks to a financial institution financing a South African client with high water consumption, using water in an unsustainable manner or contaminating water resources.

Long term risks associated with the client’s water use need to be considered. If the client is operating in a high-risk water area, water may become less available during the loan’s tenor impacting on the operations of the business and/or its ability to expand. 

Agricultural companies and manufacturing operations are typically required to obtain a water use license. Determining whether a water use license has been obtained should be included in a financial institution’s due diligence for these types of clients.

Useful resources

The WWF Water Risk Filtr Tool can be used to help understand the most vulnerable areas in South Africa and across the world to drought and floods. This is an important tool that banks' can use to assess their portfolio’s exposure to water risk. 

Mining – Mineral and Petroleum Resources Development Act (No. 28 of 2002) (MPRDA).

Overview

MPRDA is the main piece of legislation governing all stages of the mining and petroleum production process in South Africa. ​

The MPRDA specifically tasks the Minister of Mineral Resources with ensuring “the sustainable development of South Africa’s mineral and petroleum resources within a framework of national environmental policy, norms and standards while promoting economic and social development”.

The MPRDA stipulates that the principles of the National Environmental Management Act (No. 107 of 1998) (NEMA) (Hyperlink to the section on NEMA) apply to all mining operations. The MPRDA requires a holder of a mining permission/right/permit to:​

  • Consider, investigate, assess and communicate the impact of their activities on the environment
  • Rehabilitate the mining site to its natural or predetermined state, or to a land use which conforms to the generally accepted principle of sustainable development
  • Take responsibility for environmental damage, pollution or ecological degradation from mining operations
  • Ensure that operations are conducted in line with national environmental legislation

In practice, this means that the holder of a prospecting or mining right is required to have an approved environmental and water authorization and management plan, prior to conducting activities (as per the requirements of the National Environmental and Water Acts).

In addition, the holder of a prospecting or mining right must furnish during all stages of the project sufficient financial provisions for the rehabilitation of the mining or prospecting site after the completion of activities. This is done in terms of a deposit with the Department of Mineral Resources, bank guarantee or a trust deed.

Interpretation and Guidance

South Africa has a well-developed mining sector. There are a high number of tailings dams, as well as ‘ownerless and derelict mines’, which often continue to pollute the surrounding air, soil, and water. These issues have given added impetus to the government’s determination to hold current mining companies fully responsible for any environmental damage they may cause.

Useful Resources
The environmental rules affecting mining are many and complex, and cannot be adequately described in this brief overview. For further information please see the following resources:

Climate Change – National Climate Change Response White Paper

Overview
  • The National Climate Change Response White Paper acknowledges that climate change is a measurable reality and that as a developing country South Africa is especially vulnerable to its impacts. The White Paper was published for public comment in May 2019.
  • It acts as a common reference point for climate change adaptation efforts in South Africa in the short to medium-term, providing guidance across all levels of government, sectors, and stakeholders affected by climate change.
  • The paper recognizes that financial institutions already integrate environmental considerations into their decision-making frameworks. It also states that financial institutions support a range of businesses that contribute to climate change mitigation and resilience.
  • The paper acknowledges that financial institutions can play an important role in mobilizing finance to mitigate the impacts of climate change in South Africa and supporting a just transition to a low carbon economy. Critically, the paper commits the government to identify opportunities in the existing financial regulations governing the domestic financial sector to enhance the sector’s capacity to mainstream climate change in risk and investment decisions.
  • It also states that the government will develop a climate finance strategy that contextualizes and integrates existing and emerging policy and financing instruments, including addressing the role of market-based measures to achieve the desired economic and social changes.

Climate Change – Carbon Tax Act 15 of 2019

Overview

The Carbon Tax Act 15 of 2019 (Carbon Tax Act or Act)  was gazetted on 23 May 2019 and came into effect on 1 June 2019.

The carbon tax will be implemented in phases (the first phase is from 1 June 2019 to 31 December 2022), in order to assist in the transition to a low-carbon economy and minimize the impact on businesses and electricity prices.

The carbon tax will be levied at a rate of US$8.60 per ton of carbon dioxide equivalent of greenhouse gas (GHG) emissions of a taxpayer. The tax will be levied on emissions from fuel combustion, industrial processes and fugitive emissions, where the set thresholds of GHG emissions are exceeded. Certain allowances will also apply in the first phase, to be revised thereafter.

During the first phase, the rate of US$8.60 per ton will be adjusted each year by the consumer price inflation (CPI) plus 2%. Thereafter, it will increase annually by CPI (i.e. from 1 January 2023 onwards).

A taxpayer is liable to pay a carbon tax where it conducts any activities set out in Schedule 2 of the Carbon Tax Act and emits GHG emissions above the listed thresholds. Tax liability may be reduced through using the various allowances available and in some instances, the tax is only payable where the allowances are exceeded.

The carbon tax will be paid to and administered by, the South African Revenue Service (SARS). SARS will have access to the Department of Environmental Affairs’ GHG emission database to collaboratively administer the carbon tax and to verify the information submitted.

Interpretation and Guidance
  • Supporters of the tax argue that the case is particularly compelling for South Africa as the country is the 14th-largest emitter of greenhouse gases in the world, and heavily reliant on fossil fuels. This makes it vulnerable to a global shift into investments that mitigate climate change risk and support low-carbon economies, industries and companies. Over the medium to long term, the tax serves to re-orientate the whole economy to be less carbon intensive.
  • The Carbon Tax Act gives effect to the polluter-pays-principle for large emitters and helps to ensure that firms and consumers take the negative adverse costs (externalities) into account in their future production, consumption and investment decisions. Firms are incentivized towards adopting cleaner technologies over the next decade and beyond.
Useful Resources

The Carbon Tax Explained – WWF

Occupational Health and Safety Act No. 85 of 1993​

Overview
  • The Occupational Health and Safety Act No. 85 of 1993 governs health and safety at all workplaces. It is focused on the health and safety of persons at work and places the responsibility on employers “to do everything reasonably practical” to protect the welfare of their employees​
  • The Act requires that every company with more than 20 employees has to have a health and safety committee, which should be tasked with identifying potential hazards, examining the causes of any workplace incidents, investigating employee complaints and consulting with health and safety inspectors.​
  • It calls for employers to evaluate working areas and carry out risk assessments and regular health and safety inspections. The employer must evaluate all work, activities and systems of work that could present potential risks for and to the company’s employees. ​
  • A Health and Safety Officer also needs to be appointed to supervise the health and safety performance of the company, as well as to represent the employer and management at Health and Safety Committee meetings. ​
  • The Act also directs employers to provide and establish precautionary measures and systems to prevent workplace injuries. ​
  • If a person is injured or becomes ill, the employer must notify the Department of Labor. If any high-risk hazards present themselves (such as a chemical spill) the employer must report this as well. The Department of Labor will investigate the incidents and hazards and ensure that employers and employees have done their best to abide by the Act and try to prevent the incident from occurring.
Penalty

Maximum fine of R50 000 or imprisonment for a period not exceeding 12 months, or both a fine and imprisonment

Interpretation and Guidance

South African businesses generally place a high importance on practicing good health and safety. Despite this, well enforced legislation means than financial institutions need to assess health and safety risks associated with high risk industries to avoid non-performing loans as a result of companies receiving fines or other penalties. 

Useful Resources

Basic Conditions of Employment Act No. 75 of 1997

Overview
  • The Basic Conditions of Employment Act applies to all staff, except senior management, workers who work for less than 24 hours in a month, sales staff who regulate their own hours, as well as some government employees.​
  • It sets out the minimum standard of employment. ​
  • The act requires employers to:​
    • Set working hours in line with labor laws. An employee may not be required to work for more than 45 hours per week. ​
    • Follow the law with regard to overtime, public holidays, and work on Sundays. The maximum amount of overtime allowed is 10 hours in a week and it must be voluntary.
    • Give employees annual, sick, maternity and family responsibility leave. Workers are entitled to 21 days of paid annual leave per year, 4 months of maternity leave and one day of sick leave for every 26 days worked. 
  • Employers who employ 5 or more workers must –  provide workers with the following documents:​
    • Written particulars of employment
    • A pay slip each time they are paid
    • Maintain an employee record for each worker
    • Display a summary of the Basic Conditions of Employment Act in the workplace
Penalty

Fine or imprisonment for up to 3 years.

Interpretation and Guidance

South Africa has well enforced labor law and active labor unions, however there have been recent labor issues in the agriculture sector in the country. Banks should pay particularly attention to this sector to ensure that reputational risks do not accrue to them. 

Useful resources