Each week Emerging Markets ESG publishes an interview entitled, “Five Questions about SRI.” The interview features a practitioner’s insights about SRI in emerging markets and through Emerging Markets ESG shares this expertise with a wide global audience. The goals of Five Questions about SRI are fourfold:
- To collect a catalogue of examples of SRI in practice in emerging markets;
- To raise awareness about SRI in emerging markets;
- To reflect on what SRI in emerging markets means to practitioners; and
- To enable SRI practitioners in emerging markets to network with peers around the world.
This week’s interview is with Corli le Roux, Head of SRI Index and Sustainability, Strategy and Public Policy Division, Johannesburg Stock Exchange, South Africa.
As South Africa’s only full service securities exchange, the Johannesburg Stock Exchange (JSE) connects buyers and sellers in four different financial markets, namely equities, equity derivatives, commodities derivatives and interest rate instruments. The JSE offers the investor a first world trading environment, with world class technology, surveillance and settlement in an emerging market context. It is amongst the top 20 largest equities exchanges in terms of market capitalisation in the world. As a central player in the local economy, the exchange sees itself not only as regulator of listed companies, but also as influencer. In relation to sustainability, our activities include: company regulation (the Listings Requirements include a requirement to apply the principles of the King Code on Corporate Governance or explain where this has not occurred); investment tools (such as the Socially Responsible Investment (SRI) Index Series and other customised products); and sustainability advocacy as well as a growing focus on strategic internal sustainability. The first of its kind in an emerging market and a leading sustainability index worldwide, the SRI index’s intention is two-fold: to encourage companies to operate responsibly and transparently and to prompt institutions to consider environmental, social and governance (ESG) factors when evaluating potential investments. The index was established in May 2004 and comprises listed companies which meet criteria related to their ESG and climate change policies, management practices and reporting. The 2011 SRI index constitutes a total of 74 companies, with 22 of them making the best performer threshold. Corli le Roux joined the Johannesburg Stock Exchange’s Legal Counsel and Strategy Division in August 2001 following four years as legal advisor to SAFEX (The South African Futures Exchange). Over the years, Corli’s responsibilities have expanded into various strategic arenas, and as a result she has since 2002 been responsible for the development and operation of the JSE’s SRI Index, a pioneering initiative through which the JSE has been providing critical thought leadership around sustainability and responsible investment. Since February 2012, Corli has moved into the Strategy and Public Policy Division of the JSE, from where she oversees the SRI Index and the development of a strategic sustainability framework for the JSE. Corli represents the JSE on various committees, including the Institute of Directors’ Sustainable Development Forum, the Integrated Sustainability Task Team for the Third King Report on Corporate Governance 2009, the Integrated Reporting Committee as well as its working group. During 2011 she was a finalist for South Africa’s Most Influential Women in Business and Government Awards 2011/2012. Corli holds a BA LLB from the Rand Afrikaans University (now the University of Johannesburg), as well as an ICMQ (International Capital Markets Qualification).
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Socially Responsible Investment or SRI is a concept that has been around for a very long time, and, depending on your point of view, denotes either the broad approach of considering sustainability elements in investment, or a narrower perspective focusing on specific investments for the greater good (often with a mainly social bias).
We prefer a broader interpretation which would include environmental, social and economic elements underpinned by governance. The contemporary terminology of ‘responsible investment’, which encapsulates an integrated perspective of investment performance across financial and sustainability considerations, to ensure that all areas of impact are taken into account, is global trend that is worth supporting.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Corli le Roux: The largest degree of separation lies in the investor’s approach to investment. Traditional SRI and screening has a long history and was often catalysed by political upheaval, social injustice and other extreme events or value considerations – apartheid South Africa being a prime example of the scale this approach can take.
The bulk of mainstream investment today unfortunately tends to have a bias towards pure financial performance, often within shorter term timeframes rather than considering long term value creation across a range of risks, impacts and opportunities. Traditional narrow SRI may take an equally limited approach, away from financial sustainability towards a niche approach reserved for a restricted portion of assets under management, where a perceived ‘sacrifice’ in return could be tolerated. This has made the two approaches very difficult to align or integrate.
However, with the advent of responsible investment, the lines are increasingly being blurred, with investment decisions being inculcated by considerations of risk and impact across more than just the financial, particularly with environmental and social elements. In a country like South Africa, with its unique history, some of these elements (particularly governance and specific social elements such as transformation, labour and human rights) have already been mainstreamed as these considerations are virtually a ‘licence to operate’ for businesses in this country. There is however an increased move towards an integrated approach to truly mainstream sustainability, as was evidenced by two significant developments recently: firstly, the promulgation of Pension Fund regulation which requires in its preamble that pension funds consider the impact of environmental, social and governance elements on their investments, and secondly, the launch of the Code for Responsible Investing in South Africa (CRISA), which was launched in July 2010, and serves as a framework for institutional investors to incorporate ESG in their policies and investment decisions, including engagement and proxy voting.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in South Africa to manage?
Corli le Roux: As mentioned above, companies in South Africa have been shown to excel in many of the social elements, given the need to deal with many of these issues with particular focus and urgency within our unique history. Similarly, the evolution of governance through the three King Reports on Corporate Governance (“King Code”) and their incorporation into the JSE listing requirements has meant that South African companies generally adhere to or strive towards best practice standards around corporate governance.
Despite these considerable strides, environmental issues still present a hurdle for companies across sectors and across company size. Companies that have traditionally been exposed to environmental concerns as a result of the high impact of their activities, such as the extractive industry, have demonstrated advanced practices, and the financial sector has shown tremendous leadership in this regard as well. However, much remains to be done in ensuring that this area of focus sees improvements in both performance and disclosure, even in well-performing sectors. The good news from our experience with the JSE SRI Index is that companies increasingly demonstrate and pursue commitment to understanding their impacts, resulting in an upwards curve in terms of corollary improvements.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in South African companies to analyze?
Corli le Roux: A major challenge for investors in the local context, similar to the global experience, is around access to investment-grade comparative ESG data, coupled with a lack of analytical capability on sustainability considerations in the mainstream. The qualitative nature of many aspects of sustainability data is an exacerbating factor in this regard.
Analysis of governance is fairly advanced in South Africa (as a result of the mainstreaming prompted by the King Code), as is consideration of key social themes such as black economic empowerment (resulting from the various sector charters and statutory codes of good practice in relation to transformation of share ownership, management and control).
However, little analysis is conducted around environmental concerns (particularly in the mainstream) and integrated sustainability, both as a result of disclosure lacking comparability and quantification, as well as the lack of analytical capability to draw conclusions about value creation and financial sustainability as a result of ESG impacts.
Emerging Markets ESG: What does sustainability mean to the Johannesburg Stock Exchange? Would you please introduce the SRI Index and describe its key characteristics?
Corli le Roux: As a pivotal player in the local economy and a unique organisation with global reach, the JSE’s approach to sustainability is multifaceted, aiming to exert influence and provide thought leadership to achieve corporate behaviour change. Our commitment to sustainability is longstanding and increasingly being integrated in the JSE’s strategic pathway for the future.
Our endeavors traverse the regulatory approach, investment products, advocacy as well as an internal corporate sustainability framework that is being developed.
From a regulatory perspective, listed companies have for many years been subject to the principles of the King Code, on a “Comply or Explain” basis. Since 2010 these principles include a move toward integrated reporting. Specific governance requirements such as separation of chief executive and chair, appointment of an audit committee, etc. apply in addition.
Positioning the JSE as the first exchange in the world to launch a sustainability index, the SRI Index (also the first of its kind in an emerging market context), launched in 2004, remains our flagship sustainability initiative, which has contributed significantly to the local sustainability agenda by helping companies integrate sustainability into their corporate strategies and providing investors with a broad-based assessment of corporate policies and practices against a range of ESG indicators comprising core elements (recommended minimum standards) and desirable elements (aspirational).
The Index is deliberately developmental, with the criteria evolving as sustainability priorities progress (for example, in 2010 a number of indicators focused on climate change were introduced). The Index also progressively raises its inclusion thresholds so as to incentivise companies to advance their adherence to the criteria.
The constituents of the FTSE/JSE All Share index, which comprises 99% of the JSE’s market capitalisation, are eligible to participate, with the largest 100 companies (by market capitalisation) being assessed on an automatic basis.
The 2011 annual review of the Index (completed in December 2011) yielded 73 constituents, with 23 best performers meeting a higher threshold. The Top 40 companies, especially from the mining and financial sectors, tend to dominate in terms of performance, however, rapid growth amongst Mid Cap companies has been very encouraging, while a handful of Small Cap companies qualify consistently.
The JSE is an active participant in both local and international debates around the topics of sustainability and responsible investment. As one of the first exchanges in the world to become a signatory to the United Nations Principles for Responsible Investment, a founding member of the Integrated Reporting Committee of South Africa and a member of various topical sustainability committees including the King and CRISA committees, the JSE is well respected as a thought leader in the sustainability sphere.
Internally 2012 is a major year of transition with the JSE positioning a vision for the next 5 years, one centered around building a sustainable value proposition for our clients, shareholders and other stakeholders, a vision in which we will continue exploring avenues to promote the sustainability agenda throughout the investment value chain.