About two years ago, roughly six months before the World Summit on Sustainable Development (WSSD) took place in Sandton, the JSE Securities Exchange decided to investigate the possibility of establishing a socially responsible investment index (SRI index). General sustainability was a hot topic at the time and the FTSE4Good index had recently been launched in London.
Opinions were divided as to whether the JSE should establish an ethical index - such as the FTSE4Good index - or should establish a sustainability index instead. An ethical index is one that prohibits the inclusion of companies that have activities in "socially unacceptable" areas such as alcohol, tobacco and gambling, for example. The JSE canvassed the views of many organisations, including sustainability specialists, social entrepreneurs and the like and the overwhelming response was that the index should be a triple bottom line one, rather than an ethical one, primarily because SA companies were already focused on the triple bottom line and the King 2 report on corporate governance urged companies to actively engage in this area. Included in these discussions were church groups, activists and fund managers.
One of the reasons for opting for a sustainability index was that ethical indexes are subject to people's prejudices. It was deemed inappropriate to criticise companies for making a legal living. Gold Reef is a good example of a company that wouldn't be included in an ethical index because it's involved in gambling, but it met the criteria for inclusion in the SRI index.
Once the JSE had decided to opt for an SRI index, it drew a set of criteria through broad consultation and invited the top 160 companies listed on the JSE, whose collective market capitalisation accounts for about 99% of the JSE's total market capitalisation, to apply. Of those 160 companies, 74 elected to participate in the process. The JSE had to engage intensively with those companies and assure them they wouldn't regret being included. "This is not embarrassment by ambush," says JSE deputy CEO Nicky Newton-King. "In the first round, given the developmental point of departure of this index, we focused more on policies and practices than on measurable targets."
A data provider - Sustainability Research & Intelligence (SR&I) - was appointed to communicate with the companies in the index. SR&I is responsible for collecting all raw data (comprising public information and responses to the questionnaire) relating to the companies participating in the index and conducting in-depth research into and analysis of each eligible company.
The contract between the JSE and SR&I has been specifically devised to ensure that the data provider respects the confidentiality of all information it gets from the questionnaire. The data provider has further undertaken not to enter any agreements that may present a conflict of interest with the SRI index. SR&I's work was quality assured by accounting firm KPMG.
Newton-King is confident that more companies will want to participate. Fund managers and trustees will want to invest in those companies that demonstrated their adherence to decent triple bottom line procedures.
Over time, the index could be used as an initial screen for all potential investors - a kind of aspirational benchmark.
Many companies have been practising good triple bottom line procedures for years, but it's heartening when an organisation such as the JSE helps these companies to get their message across to a broader audience
The JSE doesn't make any money from the index. Initial funding for the project came from a £500 000 donation from the British government. Any money that is made from the index will go to charity.
