How the JSE’s scoring model falls short

LEGAE’s approach to environmental, social and governance (ESG) performance moves beyond that of the JSE’s socially responsible investment (SRI) index by interrogating the operations of a company to determine whether they are in line with the claimed policies.

Inclusion in the index, which was launched in 2004, is determined by reference to the details of the ESG policies and implementation disclosed by companies included in the FTSE/JSE All Share index.

The criteria for inclusion in the SRI index are determined by the JSE in consultation with an advisory committee and reviewed annually. From this year, the index will rely only on information publicly available. Previously, it accepted information provided confidentially by companies.

Unlike the SRI index, which relies on a company’s own account of how it adheres to its ESG policies, Legae interrogates the detailed information available in integrated annual reports to get answers to 17 questions on environmental issues, 21 on governance and 30 on social.

Legae trawls through the integrated annual reports in search of the answers and scores its 100 companies on the basis of each answer. Where no answer is found, the company scores zero. By scoring zero because a company either does not have a policy or does not disclose the required information, Legae is putting pressure on companies to ensure that shareholders get the level and quality of disclosure they need to make informed decisions.

The JSE’s approach is less nuanced. In 2013, it had 72 “constituents” in its SRI index, including six described as “best performers”. The other 86 companies in the JSE All-Share index failed to make the grade. There is no detailed explanation for why a company did or did not make it to the index.

Last year, environmental NGOs lashed out at the continued inclusion of Lonmin, ArcelorMittal and Sasol in the SRI index, describing the index as “nothing more than greenwash”.

By providing the details backing its scoring, Legae might avoid this accusation. The NGOs will be able to see why it ranked Lonmin 44th with an overall score of 44.2%, made up of 29% for environmental, 46% for social and 58% for governance.

The things Legae did not like at Lonmin included a lack of disclosure of environmental targets and that its performance on environmental issues was not measured against targets. On the governance side, the board was deemed to be effective, but the independence of the auditors was problematic, given their high non-audit fees and that they been auditing the company for 44 years. A poor rating on BEE issues resulted in Lonmin’s ranking on social issues.

ArcelorMittal South Africa came 58th in Legae’s scorecard with an overall 40.34%. As with Lonmin, its weakest showing was on the environmental front. Sasol’s ranking at 28 was largely attributable to its governance score of 68.5%, which helped to counter the low 28.5% environmental score. — Ann Crotty