TAKING THE LEAD - JSE MAGAZINE

TAKING THE LEAD

More so now than ever, SA companies are making sustainability an integral part of their business practices, and it’s a trend that looks set to continue

TAKING THE LEAD

There’s a saying that if trees emitted free WiFi signals, everybody would be planting them – and most likely saving the planet along the way. It’s a pity that trees only produce the oxygen we breathe but jokes aside, sustainability is so much more complex than dealing with environmental issues. Corporate SA, led by companies listed on the JSE, is increasingly recognising the potential impact of environmental, social and governance (ESG) risk factors on their financial results.

‘South African businesses are well aware of the concepts of stakeholder value or the triple bottom line of people, planet and profit or the King Report’s integrated performance perspective’, says Vanessa Otto-Mentz, head of group strategy at Santam and board member of the UNEP Financial Initiative’s Principles for Sustainable Insurance – a global framework to create trust in the insurance industry and build disaster-resilient economies.

‘The current South African business dialogue is about risk management and how to have a sustainable business response and embed ESG risks – or sustainability, if you use the broader term – in the business practices and broader value chain,’ she adds.

‘Recent research reflects that businesses are focusing on the business case of sustainability, which is a no-brainer when it comes to energy supply, cost and efficiency; loss prevention and downside risk management as for example weather risk (such as hail warnings sent to customers by Santam); and future value creation possibilities in the form of new business ideas and brand building.’

A number of visionary companies were the driving force behind the creation of the JSE Socially Responsible Investment (SRI) Index, which was launched in 2004 as the first of its kind in the world. It annually reviews listed companies against a set of ESG concerns.

According to Corli le Roux, JSE Head of SRI Index and Sustainability: ‘Numerous companies wanted a vehicle to demonstrate to investors what they were doing in terms of ESG issues. Obviously it has been quite a journey for other companies to expand not only their reporting but also to move forward in their management of these issues. The SRI Index has been a great benchmark for them.’

In 2014, all 156 members of the FTSE/JSE All Share Index were assessed on publicly available information, with 82 qualifying for the SRI Index – the highest number in its 10 years of existence. By far the largest sector represented is mining, which makes up 19% of companies in the index.

Other strong sectors are life insurance, general retailers, general industrials and food producers (each accounting for 6.3% of index constituents), followed by banks.

Nine companies emerged as ‘best performers’, which meet additional levels of performance above the core requirements of the index in terms of ESG and climate change.

The top performers in the high environmental impact category are (in alphabetical order): Anglo American, Anglo American Platinum, Illovo Sugar, Lonmin and Royal Bafokeng Platinum.

Barloworld is in the medium-impact category and, in the low-impact section, Netcare, Standard Bank and Vodacom.

Of all the companies in the index, Standard Bank is the only one to have achieved a best-performer status for eight consecutive years. In its 2014 sustainability report, the bank explains that it considers sustainability to be the purpose of its business: ‘Our long-term profitability depends on the stability and well-being of our continent. Our pursuit of profit in a competitive market will lead to socially beneficial outcomes. We use the fundamental power of financial services to make life better for our fellow Africans.’

During the past financial year, the bank’s social and ethics committee has addressed concerns such as the development of a disability policy, environmental and social risk management, water consumption and the principles and outcomes of ‘treating customers fairly’. The latter is a revised code of ethics that amends the bank’s previous ‘serving our customers’ values.

Overview extra2
‘The global norm for performance is shifting towards the longer term and broader stakeholder responsibility’

VANESSA OTTO-MENTZ, GROUP STRATEGY HEAD, SANTAM

More than 21 000 employees have completed the group’s ethics training in SA, in addition to nearly 12 000 in the rest of Africa and almost 1 000 beyond the continent’s borders.

Sim Tshabalala, joint group chief executive of the Standard Bank Group, explains that the process of embracing sustainability has its challenges: ‘As an organ of society, failure to look after the interests of other stakeholders and the environment creates risks that may reduce the value of the group.

‘Accordingly, the job of maximising the value of the group requires a judicious optimisation of stakeholder interests – it’s a journey filled with trade-offs and dilemmas.’

While sustainability professionals often lament the lack of investor interest in ESG concerns, the JSE has seen increased engagement in the debate.

‘The momentum has picked up over the past five years, as the investor community has become aware of the impact that factors such as climate change and governance failures can have on their portfolios,’ says Le Roux.

‘Global initiatives like the UN Principles for Responsible Investment are crystallising the issues that investors need to be aware of. The Code for Responsible Investing in South Africa serves as a framework for institutional investors to incorporate ESG in their policies and investment decisions, including engagement and proxy voting.

‘These days it’s not enough to see who has made it onto the SRI Index – investors want to understand the depths and details of how a company deals with ESG issues.’

That’s one of the reasons why in June 2015, the JSE announced its collaboration with FTSE Russell, the global index provider – a move that will align the ESG disclosure indicators and data collection methodology. Le Roux explains that the SRI Index is about to be replaced by the Responsible Investment Index and additional financial products.

The new approach promises a range of enhanced benefits for issuers and investors.

‘Our collaboration with FTSE will enable JSE-listed companies to form part of a global universe of corporates whose disclosure practices are assessed against cutting-edge ESG factors,’ she says.

‘The data-collection process itself will afford more flexibility in terms of the products, which we can create to meet the investor needs. This will provide investors with expanded opportunities to integrate sustainability considerations into their investments. We are very excited to take this step forward, to grow ESG disclosure among JSE-listed companies and enable expanded responsible investment opportunities.’

As SA continues to be one of the most unequal societies in the world, social and governance issues have been at the forefront of ESG concerns. According to Le Roux, most JSE-listed companies are ‘acutely aware’ of local matters such as skills development, CSR and BEE – and, as a result, have become comparatively sophisticated with regard to transparency towards social issues.

‘While our environmental reporting, particularly around quantified data, is not as advanced in some industries as in the United States, UK and Europe, our high-impact industries, like the extractives companies, do compare well.

‘They already address the environmental issues, on which other industries in South Africa still need to extend their reporting,’ she says.

Overview extra
‘Typically we find that companies that are transparent in how they deal with sustainability are also the ones that have ESG policies and strategies in place. What we see in industries that are frowned upon as being environmentally destructive is that despite the criticism, these companies are innovative in their thinking and have real long-term perspectives [in terms of] how they can improve.’

Otto-Mentz says a strong global and local theme focuses on building the ESG response into the culture of the organisation: ‘This is clear when you look at the intention of Nedbank [Fair Share 2030], the success of Woolworths with their “good business journey” with customers and suppliers, and Barloworld’s focus on value-based manage-ment for long-term positive outcomes for those who interact with the organisation.’

She adds that SA businesses have also consistently performed well in the CDP’s Climate Change Report and Water Disclosure Project. ‘Yet my view is that full integration is some time away, as current performance metrics in business – like the rest of the world – is geared towards the short term, financial in nature and favours the shareholders.

‘I believe that the global norm for performance is shifting towards the longer term and broader stakeholder responsibility. Look at Unilever, [who are] widely considered the leader in this space. They have stopped making quarterly results public while on the other hand being very public about their “sustainable living” plan and an ambitious strategy to grow while halving the resource impact of the business. They are working on practical aspects like sustainable palm oil production as a raw material input, and access to water and soap to support health.’

These examples show that leading JSE-listed companies are driving progress by embedding ESG in their operations. Or, to put it another way, you can have your WiFi towers and real trees while building a profitable business.

By Silke Colquhoun
Image: Andreas Eiselen/HSMimages