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November 18, 2003
Johannesburg Securities Exchange to Introduce Socially Responsible Investing Index
    by William Baue

In addition to requiring listed companies to comply with King II codes, JSE is also launching an SRI index based on triple bottom line and corporate governance practices.

The Johannesburg Securities Exchange (JSE) in South Africa may be the world’s foremost market in terms of promoting socially responsible investing (SRI). First, JSE required all listed companies to comply with the second King Report on Corporate Governance (or “King II”) codes, which require the use of Global Reporting Initiative (GRI) Sustainability Reporting Guidelines. Now, JSE is introducing an SRI index based on triple bottom line performance. This new index takes into account social, environmental, and economic sustainability, as well as corporate governance, best practice.

Instead of mimicking existing SRI index models, the JSE SRI Index is forging its own approach.

“Fundamentally, there has been a departure from the FTSE4Good methodology in that the JSE index will focus primarily on sustainable development performance and will not have any outright exclusions, as South African domestic investor appetite for screened indexes is limited from both a wholesale and retail perspective” said William Frater, a senior analyst at Frater Asset Management, one of the few investment firms in South Africa that specializes in SRI. Mr. Frater is also a member of the JSE SRI Index Advisory Committee.

The starting universe for the JSE SRI Index is the FTSE/JSE All Share Index, which consists of the top 160 companies listed on the JSE. JSE is currently soliciting responses to its SRI Index Questionnaire by November 30 to ascertain which companies meet the SRI Index Criteria for inclusion. The Advisory Committee devised both the questionnaire and the criteria.

“Only those that pass the criteria will be included and at this time we are only midway through the process so I can't say how many companies will finally make it into the index,” said JSE spokesperson Nicky Newton-King.

JSE has contracted Sustainability Research and Intelligence (SR&I), a South African corporate social responsibility (CSR) data provider, to collect publicly available information, compile questionnaire responses, and analyze the results.

“Data collection presents an enormous challenge, as South African companies have not had to supply such an extensive array of non-financial information before,” Mr. Frater told

Participation is voluntary for companies, who will be scored on a scale from “0” (lowest) to “3” (highest) on a series of criteria in four categories: social, economic, and environmental sustainability practices, and corporate governance practices. Each category is broken into three segments (policy, management and performance, and reporting and consultation), each of which contains several criteria. In order to be included in the JSE SRI Index, companies must achieve an overall score of at least 70, and must surpass individual thresholds that vary from category to category.

Certain criteria are regarded as “core” or “not negotiable,” and a company must achieve a score of at least “1” on at least half of these core indicators in each category in order to be considered for inclusion in the JSE SRI Index. For example, one of the criteria in the “policy” segment of the social category requires that a company have “policies and strategies in place to identify and manage the impact of HIV/AIDS on the company’s activities.”

The Advisory Committee has wrangled over how best to weight the SRI Index, as the top ten companies in the FTSE/JSE All Share Index make up more than half of its weighting.

“The challenge from the mechanics perspective is whether or not these companies' weighting in the index is determined more by their size or by their sustainability performance,” said Mr. Frater. “Should size be a major determinant, there could be a credibility problem, as all of the top ten have a ‘high impact’ element to them from a sustainability perspective--notably four are mining companies, two are banks, one a chemical and oil company, one an insurer, one a brewer, and one a luxury goods and tobacco company.”

“On the other hand a significant departure from existing index weighting could result in pension fund advisors regarding the index as too much of a departure from market benchmarks,” he added.

JSE is remaining flexible to allow experience to dictate how best to structure the SRI Index. Regardless, the index is well-positioned to promote progress.

“The index will hopefully reward those who are performing well, and thus offers a further ‘business case’ to motivate companies to improve their sustainability and governance performance,” Mr. Frater concluded.


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