The SRI Index closes the “virtuous circle”
First of its kind in an emerging market
“THE JSE’S SOCIALLY responsible investment (SRI) index should ideally become the benchmark for non-financial risk management in South Africa, reflecting what’s globally aligned but locally relevant. Already it offers an aspi- rational benchmark for organisations with regard to solid triple bottom-line performance, and a number of companies are using the index as a framework to guide their internal risk management. Particularly for larger multi-national corporations, the SRI index closes the ‘virtuous circle’ of what they need to look at because it’s unique in this environment,” says JSE Limited Legal Counsel Corli le Roux.
Established in 2004, the SRI index was the first of its kind to be launched in an emerging market and there’s currently no other index that covers South African specific sustainability and social responsibility issues.
Received positively locally and internationally, the SRI index performed well since its inception. Says Le Roux: “We’re really delighted with the fact that the companies have bought into the concept to the extent that they have and that we can now comfortably say that sustainability is becoming part of the way companies do business in SA.”
The eligible universe for the SRI index is the FTSE/JSE all-share index, which includes the top approximately 160 companies on the JSE representing 99% of its market capitalisation. The SRI index is representative of companies across the board – of the 58 current constituents 34 are among the top 40 companies, seven from small-cap companies and 17 from midcap companies.
“We find that the larger companies and those that have had to deal with sustainability issues for a longer period, tend to have a better grip of what they need to do. But the index takes a very deliberate developmental perspective, trying to encourage companies to improve over time, therefore the criteria are reviewed every year to determine whether they’re still appropriately pitched and whether we can now start raising the bar to encourage companies to improve and push their performance to the next level,” says Le Roux.
Previous reviews have already resulted in significant development and criteria being moved to more demanding levels, and this is bound to happen again in the upcoming review from the new model now being developed, notes Le Roux.
At the same time constituent companies have been much more transparent than they used to be in the beginning. “We find that companies are now disclosing information that they previously deemed private and confidential.
“Where we needed to clarify many aspects from internal documents before, we can now find it in annual reports and brochures, and on websites and the like.”
The nature of reporting is also improving. “We see much more substantive reporting in the sense that it’s no longer just windowdressing; companies are starting to report on real performance, primarily because they have a good idea of what they need to be reporting on and because the targets and objectives are now starting to crystallise.”
One of the objectives of the SRI index was precisely to help crystallise the debate on the issue of social responsibility and sustainability in SA. “At the time of the index’s launch, there was considerable noise about the topic and so many new developments that companies became confused and were not exactly sure of what was expected of them. They needed guidance, and we created the index as a tool to assist them in identifying the issues that needed their attention,” says Le Roux.
“Secondly, we wanted to give recognition to companies for the great things they were already doing because, particularly in SA, they had to deal with certain aspects in the social arena that were much more urgent and more demanding than anywhere else in the world, like empowerment, diversity and transformation.
“And lastly, to encourage investment in these companies by providing a tool for investors to assess companies on a broader base beyond just their financial performance.”
After launching with 51 constituents in 2004, the number of participating companies decreased slightly in 2005 when the first review took place. “After the first year, some companies felt they were now familiar with our needs and expectations and therefore wanted a year for consolidation and to establish precisely what they needed to do in terms of the requirements,” says Le Roux.
Last year the SRI index had its highest success rate to date with 58 out of 62 applicants qualifying for inclusion in the index.
“The number of small and medium-sized companies that are successful in terms of complying with the criteria for the index was also increasing, for instance small-cap companies increased from 4 to 7 in 2005 – 2006, almost doubling in number. This confirms to us that sustainability is not just a priority for big corporations, but that smaller companies are also starting to understand what triple bottom-line entails.”
Companies have bought into the concept. Corli le Roux