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Successes and failures of JSE SRI index (2)

GCX Africa and Sun International – The Better Business Breakfast Forum
Ethical/Responsible Investment In South Africa – Truth Or Myth?
25 March 15 – Better Business Breakfast Forum Podcast

Q: TRACY DAVIES: I’m an attorney at the Centre for Environmental Rights which is a legal NGO. In our engagement with investors about environmental impacts of South Africa’s big corporations, what we see and what they admit is that there’s a closed loop between the investors and the companies, and the investors just listen to what the companies say and then they make their decisions on that basis. They themselves say they “drink too much management Kool Aid.”

This is not just a problem with investors, it’s a problem everywhere. If you look at, just to take three examples of companies on last year’s JSE SRI index, ArcelorMittal, Sasol and Lonmin. ArcelorMittal had a Supreme Court of Appeal judgement against them last year due to their environmental performance and their engagement with communities. Sasol is currently suing the government to set aside all our air pollution laws, and Lonmin’s social responsibility credentials were completely shredded at the Marikana commission. If these guys are on our list of best performers, then we can’t say that responsible investing in South Africa is truth, it’s only a myth. If they are the ones, and quite frankly from the point of view of the environment, and the people affected by those companies, they are some of our worst performers, but they are being told in the investment community that they are the best of the best. So there’s no incentive for them to change.

So this is a huge problem. It’s not difficult for investors to find out this information, this is not secret information, all they need to do most of the time is just read the newspapers. But they just don’t seem to be taking these major impacts into account when they’re make their investment decisions.

A: KEVIN JAMES: It’s a very murky issue what happened at Marikana, but you would expect an index to be able to red-flag certain things.

A: CORLI LE ROUX: There is no answer that will please every single person who follows the index. An index is within parameters, it is a basket of shares that operate within certain rules. Whether you agree with those rules is up to you, and the reason why Lonmin is back in the best performers is because of the index rules.

We are aware of these issues and we’ve had a process around controversial issues where we have ongoing engagements with these companies, and we make the tough decisions about whether to include them, exclude them, down-grade them. When the results come out, we take ownership for the decision that was made.

I agree with Tracy that the right message is sent. We cannot take ownership for all their regulatory management, we cannot verify whether they are meeting the laws, we cannot police how they are implementing the laws, but we can engage with them about what they disclose around how they are meeting their regulatory or corporate requirements, and how they are engaging with investors around that.

So to take the Lonmin example, following Marikana, in the 2012 SRI index we precluded the entire mining sector from the best performer categories. Some of the companies didn’t qualify at all, some of them did qualify, but there were six companies that were down-graded from best performer status as a result of Marikana and it was because we felt, after deep discussions, that there were systemic issues throughout the sector. Subsequent to that, we have had a number of engagements with the mining community.

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