Sustainability is a consideration
INCREASINGLY evidence is showing that companies that incorporate longterm sustainability considerations efficiently can already offer investors lower cost of capital in the short to medium term, according to Corli le Roux, head of SRI Index and Sustainability at the JSE.
She says the implication is that the company that incorporates long-term sustainability considerations efficiently may be well positioned to sustain longterm value creation, which is good news for investors such as pension funds who make up the bulk of institutional investment, and whose interest is in sustaining return for their beneficiaries.
“The added reputational benefits and competitive advantage that superior environmental, social and governance (ESG) management offers both the issuer and investor is an accolade that many find a positive factor motivating the move to expand their policies and practices to integrate ESG imperatives,” says Le Roux.
In 2012, the Johannesburg Stock Exchange joined four other exchanges — Brazil’s BM&FBovespa, the Istanbul Stock Exchange, the Egypt Stock Exchange and Nasdaq OMX — making a commitment to work in collaboration with governments, investors and stakeholders to advance transparency and reporting on sustainability. The initiative has increased to eight stock exchanges globally.
“While the JSE’s commitment was underscored by what has already been achieved in promoting corporate transparency on ESG issues through King 3 and the SRI Index, one of the ways in which we will be furthering our commitment is through the continued evolution of the SRI Index in the future,” says Le Roux.
“As a first move, the 2013 annual review of the SRI Index only considers publicly available information, thus raising the bar for companies in terms of requiring expanded disclosure to meet the index admission criteria.
“In addition, we have also expanded the coverage of the assessment process. Up to 2012, only the Top 100 companies were assessed automatically, while remaining small caps could elect to participate voluntarily. From 2013, the SRI Index process includes an automatic review of the public data of the entire FTSE/JSE All Share Index, expanding our data collection process to about 160 companies representing 99% of the JSE’s market capitalisation.”
The results of this year’s review will be announced at the end of November.
She says the UN-supported Principles for Responsible Investment and the Code for Responsible Investing in SA (Crisa) initiatives have potential to impact the way in which investment decision-making and shareholder activism expand to incorporate ESG considerations, not merely through the principles espoused by signatories, but by the significant amount of support they have from key players.
“The momentum that has been created through these initiatives, and the work that is being conducted to find practical ways of incorporating the consideration of ESG at all levels of the investment value chain is bound to find expression in deeper engagement between companies and investors.
“Significantly, it is also expected that these initiatives will impact on the relationships between asset owners, asset consultants and asset managers in clarifying the roles and responsibilities for embedding ESG,” says Le Roux.
While the effects of the South African investment community’s voluntarily adoption of Crisa on the marketplace are not yet seen in the form of a significant mainstreaming of responsible investment, Le Roux says the debate is expanding and a paradigm shift is taking place.
“Practical expression of the support for Crisa is seen in the increasing engagement of the investment community in the sustainability debate, for example through participation of key Crisa supporters in the investor network of the International Integrated Reporting Council.”
However, Le Roux says it is difficult to gauge the appetite among South African investors for investment vehicles that not only promise sustainable returns, but sustainable environmental development.
“At this stage of the evolution of responsible investment in SA, there seems to be a predominant focus on improving data collection and analysis, as well as to expand engagement with investee companies. Given the lack of empirical evidence demonstrating outperformance or even sustainable returns, this seems a sensible approach when companies are moving towards integrated reporting and given the smaller size of the local listed universe relative to global markets.
“There is an inclination towards an integrated approach to investment, rather than creating niche products. However, the fact that Regulation 28 to the Pension Funds Act does not include the concept of prescribed assets leaves room for flexibility and innovation in the retirement fund industry to create approaches or investment vehicles that may need more particular needs or incorporate particular priorities such as the environment.
“The developmental investment policy of the Government Employees Pension Fund is a good example as it sees investments being made in line with four core pillars, of which environmental sustainability is one.”