The SRI In­dex closes the “vir­tu­ous cir­cle”

First of its kind in an emerg­ing mar­ket

Finweek English Edition - - CORPORATE SOCIAL INVESTMENT -

“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

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