The Johannesburg Stock Exchange (JSE) has, over the long term, demonstrated its commitment to promoting sustainability amongst its listed companies. This is unsurprising given the exchange’s operating environment. First, companies operating in emerging economies cannot focus simply on the single (financial) bottom line. Issues of stakeholder engagement, community development and due regard for environmental considerations are a core part of their license to operate. This is not to suggest that companies always conduct themselves admirably, but the issues are not new.
Second, successive iterations of the King Code of Corporate Governance (King Code) have served as the framework for company directors in thinking about their – increasingly broadly defined – governance responsibilities. The first King Code was published in 1994, and the latest version (King III) in 2009. King III expanded the focus on sustainability that was introduced in King II, together with a recommendation that companies produce integrated reports. King IV is currently under development.
The JSE has taken a multi-pronged approach to sustainability. In its Listing Requirements, certain aspects of the King Codes are mandated while compliance with the remainder of King III is required on an “apply or explain” basis. This includes the requirement relating to integrated reporting. In 2004 the JSE also established a Socially Responsible Investment (SRI) Index. Unlike many other indices available at the time, the JSE’s index was not an exclusionary/ethical index but rather one focused on broader sustainability. The primary reasoning for this was that because the index was at its core intended to be about company engagement and behaviour change, if one excluded companies at the outset there would be no opportunity to engage them on sustainability matters. Another differentiating element of the index is that it is progressive in nature.
The indicators have changed over time and meeting the index requirements has become ever more challenging; the assessment of companies against the index criteria moved from being voluntary to being automatic; the evaluation of companies against the index criteria moved from including private information to relying solely on information in the public domain. As the exchange does in many other areas of its business, it established an advisory committee comprised of representatives from business, state-owned enterprises, the investment community, non-governmental organisations, academia and even trade unions to provide guidance and input. Finally, the JSE hosts annual “ESG Investor Briefings,” bringing together top-performing companies and interested investors.
There are some who have criticized aspects of the SRI Index and its operation, particularly in relation to decisions regarding controversial issues or borderline cases. It is undoubtedly true that a clear set of unambiguous criteria which leave companies in no doubt as to whether they are “in or out” would be more comfortable for companies. But the discretion retained by the JSE (always with input from the Advisory Committee) has enabled the exchange to reflect broader social perspectives through index inclusion or exclusion decisions, for example reflecting on labor relations post the Marikana shootings. The index has also had its fair share of (often public) criticism from members of the NGO community who were unhappy about the inclusion of certain companies in the index. The decisions occasionally resulted in difficult conversations – either with listed companies or other stakeholder groups – and unpleasant media. Despite this, the exchange’s view was always that such discord meant companies took the index seriously and that it stimulated debate on very important issues.
While the index never gained serious traction as an investment product, the JSE considers it an enormously successful part of its sustainability arsenal. Coupled with the Listings Requirements, it has been a valuable point of engagement with issuers. Interaction with institutional investors is also increasing steadily. The index has also added to the JSE’s credibility as it participates in the broader sustainability conversation in South Africa and internationally.
At the time that the JSE launched the index (having already begun to include elements of the King Code into the Listings Requirements), it was one of a handful of exchanges engaging directly with sustainability issues. For the leadership of the exchange, the reason for doing this was straightforward: at their core, exchanges are intermediaries facilitating the channeling of capital to its most productive use. Part of the way in which exchanges do this is by requiring companies to disclose information that will improve the ability of investors to make appropriate allocation decisions. As the definition of what constitutes relevant information changes over time, exchanges have a role to play. And ultimately, the more that listed companies are grappling with these issues, the greater the likelihood that companies will be listed for the long-term.
Siobhan Cleary is currently an independent consultant working on capital market issues, including contributing research to the UNEP FI Inquiry into the Design of a Sustainable Financial System. She is the JSE’s former Director of Strategy and Public Policy, where her team was responsible for developing the JSE’s corporate strategy and policy positions on issues such as financial market regulation.
Corli Le Roux joined the JSE as Legal Counsel in August 2001 from the South African Futures Exchange (SAFEX). She has been responsible for the development and operation of the JSE’s Socially Responsible Investment (SRI) Index since inception of the project and oversees the JSE’s advocacy and engagement on sustainability issues. She represents the JSE on various committees covering sustainability, integrated reporting and responsible investment, and is currently Vice Chair of the World Federation of Exchanges’ Sustainability Working Group.