The JSE socially responsible investment index and the state of sustainability reporting in South Africa

Abstract

The JSE Limited (JSE) in South Africa is the first bourse in an emerging market to develop a sustainability index for its top 160 listed companies. This article provides an overview of the Index methodology and uses the first and second rounds of the Index to assess the state of sustainability reporting among participating companies. It describes general trends related to priority issues in companies' reports, the extent and manner of reporting, and which kinds of companies are emerging as leaders in reporting. More detailed patterns of reporting are considered with respect to the four key categories in the Index: corporate governance, society, economy and environment. The article also considers the role of the Index in terms of the nascent socially responsible investment (SRI) movement in South Africa. It argues that a number of challenges need to be met in order to enhance the impact of the Index and of SRI on corporate behaviour in South Africa and Africa.

1. Introduction

The JSE Limited (JSE) in South Africa is the first bourse in an emerging market to develop a sustainability index for its top 160 listed companies. Called the JSE Socially Responsible Investment (SRI) Index, it was launched in May 2004 following a developmental process of roughly one-and-a-half years. Apart from being the first such index in the developing world, it is notable for the fact that it is sponsored by the JSE itself, rather than being driven primarily by a focused organisation (as in the case of the Dow Jones Sustainability Indexes (DJSI), for example). The JSE's motivation was given as follows:

For some time now, South African companies have been considering how to meet the emerging requirements of investors and civil society for companies to demonstrate more socially responsible behaviour and hence for companies to truly embrace the triple bottom lines of environmental, economic and social sustainability. A corollary of this realisation is the growth of socially responsible investment (‘SRI’). Many large investment institutions have already announced policies to assess the social responsibility of the companies in which they invest. (JSE, 2003: 2)

Based on these motives, the index has three broad objectives:

• (1) to highlight companies from the JSE All Share Index with good sustainability practices;

• (2) to provide the basis for financial SRI products; and

• (3) to satisfy the need to find an objective and accepted method of measuring the sustainability performance of listed companies. (JSE, 2003)

This article seeks to assess the preliminary success of the Index in achieving these objectives, based on an analysis of the first two rounds of the Index. It begins by providing an overview of the Index's methodology of assessing companies' performance. This assessment process relies to a significant extent on information provided by participating companies, particularly in the form of companies' sustainability reports (published either as part of the annual report or ‘stand-alone’).

The article uses the data generated for the first and second rounds of the Index to discuss prevalent patterns in sustainability reporting among participating companies. The criteria for this analysis are those used in the Index itself. The resulting conclusions provide some indication as to how successfully the Index can claim to highlight companies with good sustainability practices.

A further, related objective is to consider the role of the Index with respect to the nascent socially responsible investment (SRI) movement in South Africa. SRI is ‘investment that combines investors’ financial objectives with their commitment to social concerns' (AICC, 2004). In the United States, SRI represents roughly ten per cent of funds under professional management and, combined with significant shareholder activism on corporate citizenship issues, this has a crucial impact on corporate management (Monks et al., 2004).

In South Africa, however, SRI represents only about one per cent of investments under management, and there is relatively little awareness of and support for SRI (AICC, 2004; Heese, 2005). The second objective of the Index – to provide a basis for financial SRI products – therefore has important implications for the broader corporate citizenship agenda in South Africa and indeed Africa (due to South African companies' significant and growing investments in the rest of the continent).

2. An overview of the JSE SRI Index

Following in the footsteps of similar initiatives on the Dow Jones and FTSE, the JSE SRI Index has the potential to be a crucial market-based driver for corporate citizenship in South Africa. Parallel to the King II report on corporate governance, which enjoins companies to report on the ‘triple bottom line’ of social, environmental and economic issues, the JSE SRI Index has already contributed significantly to exposing companies to corporate citizenship in South Africa.

In designing the criteria and methodology for the Index, the JSE needed to adapt international experience to the South African context, allowing for a product that would be practical for both local and multinational operators. Given the existing links between the JSE and the FTSE in the UK, the JSE SRI Index used the FTSE4Good Index as a model, but initiated a fairly substantial stakeholder engagement process to ensure that the South African context was adequately catered for.

One example of this adaptation is that the JSE SRI Index avoids automatic exclusions and negative weighting for high-impact sectors in its assessment process, whereas the FTSE4Good penalises the extractive sector, for instance. This avoidance was motivated by the importance of the extractive sector in the South African economy, and indeed in Africa. It was also motivated by the desire to encourage widespread participation in the Index, so as to enhance its impact. This process of adaptation and refinement will continue in coming years.

The development of the Index and its ongoing refinement includes a significant amount of interaction between a range of stakeholders from the financial and corporate sustainability sectors. The JSE formed an Index advisory committee to debate key issues and provide direction for the Index and its methodology. The committee has changed in composition and now includes some listed company representation, as well as participation by key non-governmental organisations such as the World Wide Fund for Nature, the parastatal electricity supply utility Eskom and academic representation by way of the UNISA Centre for Corporate Citizenship. There is clearly recognition of the need to include a variety of parties and to refine the Index's impact and methodology. Evidence of this is the restructuring of the Index questionnaire for the third round and the substantial modification of the criteria prior to the start of the second round.

The Index is centred on a set of about 70 criteria or indicators (originally more than 90), grouped in terms of the four overarching categories of corporate governance, society, environment and economy. The original criteria were based on the FTSE4Good model but were tailored to suit the South African context, and they will be continuously modified. It should be noted, however, that not all South African stakeholders are satisfied that the Index includes all the priorities. For instance, Cosatu is concerned that the Index does not place sufficient emphasis on the need for companies to contribute to job creation (Makgetla, personal communication).

Since the Index focuses on the entire triple bottom line, it is quite difficult to cover in depth each aspect of South Africa's sustainability imperatives. The Index attempts to identify all those key issues that comprise sustainability in South Africa and include them in a questionnaire that is not excessive in length but still asks the right questions. Involvement of other key stakeholders in the Index developmental process should be welcomed, since their participation will help to refine the direction taken by the Index.

Company performance is assessed against the criteria, and inclusion on the Index requires a minimum score. For each of the four overarching categories, criteria exist for policy, management and performance, and reporting and consultation. Each criterion is either a core or non-core indicator, and companies have to score positively against at least 50 per cent of the core indicators. In terms of the environmental indicators, high impact companies have to score higher points than low impact companies.

To illustrate, Table 1 provides examples of core indicators for each of the performance areas and in each of the overarching categories, as they were identified for the first round of the Index.

Table 1: Selected core criteria for the JSE SRI Index's first round (2004)

Category	Performance area	Sample core indicator
Corporate governance	Policy	Designated executive is responsible for risks and opportunities presented by each of the triple bottom line practices Policy commits to achievement and maintenance of King II requirements
	Management and performance	Processes and structures in place for internal auditing of business operations Internal reporting processes and structures and management review in place Performance in line with 60% or more of (selected) elements of King II
	Reporting and consultation	Regular, clear and comprehensive disclosure made whenever disclosures made Reporting by the company is clear, transparent, complete and simple
Environment	Policy	Policy identifies direct and indirect current and future impacts the company has on the environment Designated executive responsible for risks and opportunities presented by company's environmental impact Policy commits to monitoring and performance review Policy commits to continuous improvement in environmental impact
	Management and performance	Development of awareness of significant environmental impacts Documented targets, initiatives, programmes or management systems to address and monitor most significant impacts across all operations
	Reporting and consultation	Quantitative, comparable and non-selective data on environmental issues given publicly where relevant Regular, clear and comprehensive disclosure made whenever disclosure made Performance against targets fairly reported on
Economy	Policy	Policy commits to use of reasonable targets, key performance indicators/scorecards, appropriate to the company's size and business Evidence of policies relating to asset protection (including intellectual capital and IT), research and product development, etc. appropriate to the company's size and business Policy identifies the economic impact the company's activities may have on entities within the company's sphere of influence or where it operates
	Management and performance	Short and long term risks, challenges and opportunities are managed Internal reporting processes and structures and management review in place Regular strategic planning and organisational development exercises undertaken Achievement of targets, key performance indicators or scorecard measured
	Reporting and consultation	Quantitative, comparable and non-selective data on economic issues given publicly where relevant Performance against targets fairly reported on
Society	Policy	Policies and strategies in place relating to employee occupational health and safety Policies and strategies in place to identify and manage the impact of HIV/AIDS on the company's activities Policies and strategies in place relating to employee upliftment, including a commitment to develop reasonable targets (employment equity, diversity and skills development) Policies and strategies in place relating to external empowerment, including a commitment to develop reasonable targets (equal opportunities, black economic empowerment and affirmative procurement) Code of ethics or business principles in place
	Management and performance	Documented initiatives or programmes to address employee occupational health and safety appropriate to the company's size and business Documented initiatives or programmes to address the impact of HIV/AIDS on the company's activities Documented targets, initiatives or programmes to address employee upliftment Documented targets, initiatives or programmes to address external empowerment
	Reporting and consultation	Quantitative, comparable and non-selective data given publicly where relevant Performance against targets fairly reported on Stakeholder dialogue undertaken whenever relevant
Source: JSE (2003).

Scoring against each criterion is on a scale between 0 and 3, based on specific guidelines for each criterion. The generic requirements for each score are as follows:

• Score 0: nothing in place and only sporadic or ad hoc activity takes place, if any.

• Score 1: objectives/systems are in place but do not meet the level set by the criteria; or evidence exists that regular/systematic efforts are being made to set objectives/implement a system.

• Score 2: objectives/systems are in place and are reported on, fully meeting the level set by the criteria.

• Score 3: objectives/systems are in place exceeding the level set by the criteria.

Those companies that form part of the JSE All Share Index (ALSI) are eligible to participate in the assessment process. The Index is voluntary with no obligations to participate imposed on companies. Companies that choose to participate are required to complete a questionnaire and submit supporting documentation – annual reports, sustainability reports and so on – to the Index data provider who completes the company assessment on behalf of the JSE. Like the criteria, the questionnaire is also modified on an annual basis in line with any changes to the criteria.

An independent data provider carries out questionnaire design, administration, and analysis. Sustainability Research & Intelligence (SR&I) was appointed to play this role in July 2003, which is similar to that of SAM or EIRIS, the organisations responsible for the research associated with the DJSI or the FTSE4Good, respectively. For the third round of the JSE SRI Index beginning in late 2005, SR&I collaborated with KPMG to assess company performance for the Index.

The Index is in its infancy and will continue to be refined. One of the problems of the assessment process is that companies complain, among other things, that the questionnaire is too long and tedious. This was particularly pertinent in the first and second rounds of the Index, in which a fairly comprehensive questionnaire was deemed necessary in order to establish a baseline of what South African companies could and would report on. Now that such a baseline has been established, a more concise questionnaire has become possible. Although the number of questions was similar to previous years, the questionnaire for the third round of the Index was much more user-friendly and was completed on a web-based platform. Whether the concerns companies have expressed about the length of the questionnaire have been addressed remains to be seen in the next round of the Index.

A further issue is that the assessment of company performance is based, at this stage, on information supplied by the companies themselves. External sources of information are not used in the assessment process, as they are with the FTSE4Good and DJSI, although this will eventually be the case. This omission is problematic given the variety of often contradictory opinions and perspectives on companies' performance. Using additional sources of independent information will encourage companies to go beyond a checklist approach and encourage them to deal with those non-financial issues that are material to their business. Already, questions have been raised about the presence on the Index of certain companies which are said to have a questionable track record on social or environmental issues. The Index process does allow for companies to be removed from the Index if they contravene the law or if they are judged by a JSE panel, which can be convened to deal with such circumstances, to have violated the Index criteria. This has not yet happened, however.

Considering that a substantial component of the data used for assessing companies is derived from companies' sustainability reports, the first and second rounds of the Index provide a useful opportunity for appraising the state of sustainability reporting among participating companies. Such an appraisal will also have implications for the Index methodology's significant reliance on these reports. It should be noted that the reports assessed are produced by companies that have probably devoted more attention and effort to sustainability reporting than other companies, given their participation in the Index.

3. The state of sustainability reporting in South Africa

3.1 General trends

South African companies that are leaders in sustainability reporting have moved towards systematic reporting and are beginning to provide an increasing range of quantitative and comparable data for stakeholders to use to assess their progress, or lack thereof. Where numerical data is inappropriate, leaders are beginning to explain in a more systematic manner their strategies and programmes for addressing key issues. In these respects, these leaders are part of an international trend (SustainAbility et al., 2004).

However, the majority of companies still describe their sustainability activities in an aspirational, anecdotal and episodic manner, with an emphasis on positive content. There is also in many cases a predominant focus on corporate social investment, or philanthropy. This approach does not allow the reader to assess the extent to which the information provided is representative of the company's overall performance.

Similarly, the presentation of case studies tends to highlight the positive without providing context to reveal how representative the case study truly is. Although the growing focus on corporate citizenship has galvanised most companies into some level of action, it could be argued that for the majority this is limited more to the use of sustainability rhetoric than to the comprehensive management thereof. It seems that companies are only starting to familiarise themselves with the meaning of corporate citizenship.

A key feature of sustainability reporting among participating companies, irrespective of company size, is the evident reluctance to formally commit to stakeholder involvement, especially when it comes to social and environmental issues. This contrasts with the clarity of companies' commitment to shareholder and investor communication. Even the disclosure of charitable activity rarely mentions community or stakeholder input and feedback opportunities.

There is a generally an emphasis on reporting on matters that are mandatory or recommended, such as in the King II Report on Corporate Governance (King Committee on Corporate Governance, 2002) or sector-specific Black Economic Empowerment (BEE) charters. The overwhelming majority of companies report on their King II compliance objectives and their status in moving towards or maintaining the achievement of those objectives. Equally, issues that legally require disclosure, such as employment equity and occupational health and safety, receive above average objective and quantitative coverage by the majority of companies.

An exception here is HIV/AIDS, which is given significant attention despite the absence of regulation to this effect. The case of reporting on HIV/AIDS demonstrates that where companies perceive a demand or need for such information they are quite prepared to disclose information to a level materially above that required by law.

While the existence of government regulation contributes to the emphasis on issues considered in corporate reports, the relative lack of regulatory enforcement may be one of the reasons why the majority of South African companies do not commit themselves to objective targets or report their performance against such targets. Furthermore, companies generally do not describe the way in which these targets will be achieved, i.e. the systems used for identification and management. Those companies that do commit to public targets tend to state these in general terms and to report on their performance against these targets in a general, rather than a direct and objective manner. Only a small minority of companies, most of them in the resources sector and with substantial international exposure, report their performance in a manner that allows for year-on-year comparison of performance against targets.

There are two important, overlapping categories of companies that are clear leaders in sustainability reporting. The first is high environmental impact companies and the second is companies with substantial international exposure. These companies tend to report in a more balanced manner on the entire range of triple bottom line issues. They are also more likely to use the reporting guidelines developed by the Global Reporting Initiative (GRI, 2002). As a result, they are most likely to provide information and data that allow for comparative analysis or assessment.

Reporting in accordance with the GRI guidelines is at present a minority activity. Roughly a third of the companies participating in the Index use the GRI as basis for reporting, but do not necessarily report ‘in accordance’ with the GRI. In total, 28 South African organisations use the GRI as a reporting framework, according to the GRI website (www.globalreporting.org), and most of these are members of the Index. Only seven South African organisations have formally registered their reports with the GRI as ‘in accordance’ reports. However, interest in the GRI as a reporting framework is increasing among listed companies, as well as parastatal companies, and it is even being used by other organisations, such as municipalities (see Antoni & Hurt's article in this issue). In general, there is an acknowledgement that the Index has focused companies on the importance of reporting on the triple bottom line and the majority of companies participating on the Index now include information on the non-financial aspects of their business.

Interesting trends in sustainability reporting are discernible by means of comparing the first and second rounds of the Index using those criteria that deal specifically with company reporting on the triple bottom line. Figure 1 shows the trends for all companies for key criteria in each category for both rounds of the Index, based on the scoring scale introduced above. The assessments were made using the companies' annual or sustainability reports. (Note that the criteria dealing specifically with sustainability reporting did not change significantly from the first to the second round.)

Figure 1: Reporting trends for participating companies for key selected reporting criteria

A key feature of the comparison is that companies performed better in the second round, with some fairly notable increases, especially in environmental and social reporting. This is supported by anecdotal evidence gathered as part of the Index process, which suggests that participating companies are paying more attention to reporting on the triple bottom line than previously.

Significantly, companies are placing more emphasis on providing comparable data. Figure 1 indicates that companies are beginning to use numbers to demonstrate the effectiveness of their social and environmental management systems. Stakeholder engagement is also improving, although it is not yet a standard feature of annual or sustainability reports. However, the smaller data set for the second round may be responsible for a bias towards companies with better reporting performances.

Using the trends shown in the figure and the authors' own personal observations, the follow sections provide a commentary on specific aspects of reporting on non-financial issues in South Africa.

3.2 Reporting on corporate governance

JSE listed companies are required to adhere to certain aspects of the King II Report on Corporate Governance. Although a small minority of companies have voiced opposition to the burden the guidelines place on them, the majority formally state their commitment to comply with the requirements. Even though they may not yet have achieved full compliance with the requirements of the Report, many companies nevertheless publicly report on their governance structures and systems according to the standard format it provides.

A key weakness of corporate governance reporting by the majority of companies across all sectors is that beyond the prescribed description of the structures and internal reporting processes, very little information about their actual operation or the results of their interventions is divulged in a manner that would make it possible to assess their effectiveness. This is an area where case studies are not used to illustrate the level or effectiveness of governance structures.

To comply with the King II requirements, companies seek to demonstrate that their risks are managed and that they have the internal reporting process and structures in place. However, few do so in a fashion that allows the report reader to assess readily what the risks are, how they are being managed and what the is target for reducing or eliminating the risks. For illustrative purposes, Sasol's recent report is one of the exceptions in that it provides a clear overview of key risks and how Sasol responds to them (see Table 2) (Jonathan Hanks, Incite Sustainability, personal communication).

Table 2: Extract from Sasol's 2004 sustainability report (www.sasol.co.za)

Risk	Summary of measures taken to address the risk
Major fire or explosion at any site with large hydrocarbon inventory	All Sasol sites have identified and quantified their major risks in these two categories. Risks have been quantified in two ways. First, using the insurance estimated maximum loss (EML) approach and secondly, using a public risk approach (e.g. in terms of the US OSHA/EPA requirements, the EU's Seveso II Directive or South Africa's Major Hazard Installation requirements). Specific mitigation and contingency plans have been drawn up
Major release of hazardous gas or vapour
Major shipping or transport incident (fire, explosion, emission, spillage or gas pipeline rupture)	In most cases (except in those instances where Sasol uses its own transport), responsibility to mitigate these emergencies lies with third parties. Where Sasol uses third-party logistics service providers, a process is in place to assess compliance to specific requirements. In addition, Sasol provides first-line advice using emergency call centres
Global acceptance of the Kyoto Protocol could have a significant effect on Sasol's gas-to-liquids (GTL) and coal-to-liquids (CTL) operations	Global acceptance of the Kyoto Protocol could have a significant effect on Sasol's CTL operations and GTL technology. Sasol is a significant CO2 emitter, with fossil fuels being a major raw material and energy input. On the other hand, the use of carbon credits and the possibility of CO2 sequestration from both CTL and GTL processes may present significant opportunities for Sasol
Impact of HIV/Aids and tuberculosis on our workforce	Board-level approval has been given to the development and implementation of the Sasol HIV/Aids Response Programme (SHARP) as the mechanism for addressing these issues of concern. Based on the preliminary results of our voluntary counselling and testing programme we estimate between 10% and 15% of our South African workforce may be currently infected, with the highest concentration in our mining operations

3.3 Environmental reporting

Mining companies report in the greatest detail on environmental issues. There is a clear tendency towards comparable, figures-based reporting, even though still only about half of the major companies in this sector (generally the ones with substantial international exposure) provide such information. Resources companies with substantial international operations also regularly disclose material fines or penalties incurred, as well as environmental incidents. However, no South Africa-based companies have gone as far as reporting on remedial measures to address shortcomings. The resources sector also has the highest number of reports with independent verification.

The leadership role of mining companies, commensurate with international experience, is both in response to the visible physical impact of their activities, as well as to greater stakeholder interest in this impact. Companies other than those in the resources sector display a substantially lower ability to describe their environmental policies, their management systems or the results of their activities in this area. This is probably due, in part, to a lack of understanding of their environmental impacts and the potential problems involved. Indeed, during the first two rounds of the Index assessment process a large retail company expressed the view that only mining companies and possibly some of the heavy industrial operators have any environmental impacts, suggesting that the level of understanding and awareness remains low, but it is increasing. This opinion is echoed by a number of other low and medium impact companies – which is a matter of concern because these categories include companies in the chemical and engineering sectors with potentially very real and material environmental impacts. Possible causes for this lack of awareness may be the relatively low levels of regulatory enforcement and of consumer or non-governmental organisation (NGO) pressure.

Many companies in the services, financial and retail sectors, do not report on their environmental activities. If they do, it tends to be at a generic and selective level, reflecting their assumption that their impacts are limited to direct ones such as office-based resource consumption. Awareness of indirect impacts and activities to mitigate or manage them are very limited even among the largest financial institutions in the country. Industrial and consumer goods and services companies' disclosure of their programmes and activities is very mixed, and tends to be selective and anecdotal. No reporting of failures, fines or incidents was found for these sectors. Instead there is heavy reliance on case studies or selective good-news events.

3.4 Economic reporting

There appears to be a limited but noticeable trend among companies of different sizes and from a variety of sectors to expand their statutory financial reporting to include broader economic issues. This generally takes the form of a value-added statement in which economic contributions to society such as payroll, taxes and royalties and geographic spread of output are itemised. As yet there is no standardised form for this reporting. This approach reflects a generally low level of awareness of indirect impacts that company activities may have.

3.5 Social reporting

Across all sectors and sizes, companies' reports outline their various policies on issues such as BEE, employment equity, ethics and, to a lesser degree, occupational health and safety and HIV/AIDS. However, formal policies or commitments for stakeholder engagement are much less common. Some of the BEE-related issues that are more recent in character, such as affirmative procurement, tend to be covered in a less specific manner. In general, companies still struggle to demonstrate effective management, as they generally do not provide evidence of programmes supported by timelines and targets.

The disclosure by most industrial and consumer goods and services companies of their programmes and activities is selective and anecdotal. Content is limited exclusively to positive information that does not provide the reader with insights into how representative the case studies are. The disclosure of data that would allow for comparative analysis of performance is very uncommon. In this area the extractive industries follow the general trend. Only a small minority of companies disclose any information on fines or penalties incurred in this field.

Less than five per cent of companies provide any information that would allow for the effectiveness of their stakeholder engagement procedures to be assessed. Although companies stress the importance of engagement, very few actually discuss who they have spoken to, when and for what reason. Companies that do so competently include, for example, BHP Billiton, Anglo American plc and African Bank. Some of the leaders in this field publish stand-alone reports that go a long way towards meeting the criteria of non-selective, comparable reporting (for an early example of this, see Anglo American, 2002).

In terms of South African law, occupational health and safety data must be reported to the relevant government department (for example, to the Department of Minerals and Energy in the case of a mining company). However, few companies outside the extractive sector choose to disclose their reportable OHS data in their annual reports.

In general, reporting on social issues is the most anecdotal and unsystematic of all the categories, except for employment equity figures, given the legal obligations in this area. Once again, however, targets and present performance against these are not disclosed to the same level. While this may be due to the variety of issues covered under ‘social’, this has not been altered by the introduction of the industry charters. Even in relatively uncontroversial areas such as corporate donations there is a general reluctance among companies to disclose quantitative, comparable or non-selective data. Instead the focus on selective, positive information and case studies persists.

4. Assessing the implications of the JSE SRI Index and sustainability reporting

4.1 The Index's impact on companies

There is no doubt that the Index has increased awareness of corporate citizenship among JSE listed companies. Its most significant effect has arguably been on those companies that otherwise would have had limited exposure to sustainability issues. This is important because the smaller South African listed companies, in particular, still face capacity and awareness constraints in their move towards greater disclosure on sustainability issues. For those companies unfamiliar with the triple bottom line, the Index has provided them with a deeper understanding of a range of sustainability issues. The assessment process was a de facto gap analysis of company strengths and weakness vis-à-vis the triple bottom line.

A further important contribution, both for companies and the broader stakeholder community, has been that the Index has for the first time provided a set of criteria that defines the priorities for corporate citizenship in the South African context. It thus contributes to benchmarking corporate reporting and, to a lesser extent, to actual performance.

However, despite the media coverage of the Index, as well as the interest expressed by a range of listed companies, the anticipated increase in the number of companies participating in the second round of the Index did not materialise. The reasons include questionnaire fatigue and a lingering uncertainty as to the benefits of participating in the Index. However, there has been a slight increase in participation (about five extra companies) in the third round, despite the fact that there were a number of companies who were no longer eligible for the Index because they had been removed from the All Share Index. Furthermore, it is also apparent that there are a number of companies willing to participate in due course, following preparations that will enable their inclusion in the Index.

Companies which have volunteered to participate in the Index have done so as a result of several interrelated factors, including the reputation value of participating in the Index and an understanding that corporate citizenship may have commercial benefits. The reputation aspect is probably one of the most important factors, and it is related to companies' desire to attract investment from the international SRI sector. Being part of the Index may also attract the attention of the government as a sign that these companies are progressing with their social transformation mandates.

Generally speaking, the largest listed companies, specifically those in the top 40, are more likely to participate in the Index, and this is apparent both in the first and the second rounds of the Index. This trend is also in line with the leadership role in sustainability reporting of the largest companies and those with significant international exposure, as argued above. The companies that participated in the first round but not in the second are typically smaller than the top performers, with less international exposure and sensitivity to reputation issues. They may be seen as being on the brink of a decisive approach to the triple bottom line, with a less clearly defined business case than the more committed participants.

4.2 The role and impact of sustainability reporting

It has been argued that there have been important improvements in sustainability reporting by companies participating in the Index. The Index itself may be seen to have contributed to this increase in effort and proficiency. However, with regard to the impact of sustainability reports, there is significant concern among companies themselves, and practitioners in the corporate citizenship field, that the sustainability reports are not widely read. The key target audiences are typically employees and investors. Considering South African investors' relative lack of interest in sustainability issues – as discussed below – some corporate managers are asking themselves whether sustainability reporting is worth the considerable effort.

A significant problem is that companies' sustainability reports are generally not read by those most affected by the company (such as mining communities, for instance). This problem has two components. First, many companies have yet to learn that an annual document is an insufficient measure for communicating with all stakeholders on sustainability measures. Poor communities, in particular, have limited access to and understanding of formal text-based reports. Instead, more direct, continuous and creative methods need to be explored and applied, and there are important examples of this. For instance, some mining companies are holding regular meetings and workshops with communities in the vicinity of mines, and accessible notice boards with notices in all relevant languages are distributed throughout the area. Sometimes innovative methods such as theatre can also be applied.

Secondly, the broader public and civil society organisations, including the unions and NGOs, have as yet a limited awareness of the potential for sustainability reports to be an important resource in their interactions with companies. Hence these stakeholders rarely read companies' sustainability reports, in contrast to other parts of the world, where advocacy organisations have used sustainability reports to lobby companies or hold them to account.

There is some doubt that the JSE SRI Index has contributed to increased awareness among the wider society. This may be a factor of time, as the Index is only two years old. But there are also broader factors at play. For instance, Ramphele (2005) argues that South African citizens' sense of stewardship, which would arguably include the public engaging actively with business, is constrained as a result of the previous, authoritarian regime, as well as the developmental post-apartheid state and its unintended consequence of demobilising civil society activism.

Thus the Index needs to be seen as part of a growing awareness and understanding of corporate citizenship in South Africa. This includes the examination by companies themselves of the meaning of corporate citizenship, and a similar effort on the part of investors, the government, and civil society. The Index alone will not transform companies; it will require a concerted effort by a wide range of stakeholders. The following section considers in some detail the role of the investment community.

4.3 Implications of the Index for socially responsible investment

As noted above, a stronger South African SRI sector would have a powerful effect on corporate citizenship in the country and indeed in Africa, given South African companies' significant and growing investments in the rest of the continent. Heese (2005: 734, 737) argues that ‘a major inhibitor of South African SRI is the failure … to establish consensus on key issues that would define SRI … although initiatives such as the JSE's SRI index and GRI are adding momentum to the promotion of best-case practices’. Indeed, it can be argued that the Index is playing a vital role in defining key elements of SRI with a particular focus on the South African context. The Index may thus be seen to be contributing to its second objective: to provide a basis for SRI products in general.

However, the Index's success in providing a basis for particular SRI products has been limited to date. It has not been able to catalyse significant, tangible growth in the South African SRI sector in terms of new products. The launch of the Index has led to the creation of only one new fund, the Futuregrowth SRI Fund (linked to FirstRand), which will focus on companies listed on the Index. Although it is ‘early days’ and additional SRI products may yet be motivated by the Index, this limited response from the SRI community is disappointing, especially in comparison to the many focused funds tracking the DJSI and FTSE4Good.

This hesitation to develop SRI products based on the Index reveals important limitations and constraints of the South African SRI sector. Potential reasons for this are as follows, and each of these points deserves more careful investigation:

• (1) The performance of these funds, in general, has not matched that of other mainstream investments, thus discouraging investment. There is also some lingering stigma attached to SRI funds, premised particularly on negative experiences in connection with early BEE efforts. The investment community in South Africa is not fully aware of the fact that the SRI sector has ‘moved on’ and that there are a number of SRI products whose performance is competitive.

• (2) There is limited willingness among the South African investment community, comprising both asset managers and analysts, to take sustainable development into consideration in their decision making. The sector seems unwilling to consider either the ethical dimension or the ‘business case’ for this. Whereas numerous high-profile fund managers in North America or Europe have stressed the importance of non-financial risk management (Monks et al., 2004), such awareness is rarely encountered in South Africa.

• (3) South African pension funds, which represent a significant proportion of investment on the JSE, have hesitated to embrace all the principles of the triple bottom line, particularly compared with their international counterparts (see also Heese, 2005). This assertion is based on observation and a lack of participation on the part of pension funds in key fora that focus on the triple bottom line and its consequence for investment. Furthermore, a key reason for this is that they have been waiting for government guidance on these matters, especially considering the possibility of prescribed investments in BEE (proposed, for instance, by the Black Economic Empowerment Commission, 2001).

• (4) An underlying factor is that the investing public in South Africa has low levels of awareness or is not concerned about the integration of social and environmental issues in investment decision-making. This is also apparent in the relatively low levels of shareholder activism. In some instances, SRI is seen as a luxury with little relevance in South Africa or Africa. This ignores the important contributions SRI and corporate citizenship can make to companies' and regions' competitiveness, especially in the long term (e.g. Monks et al., 2004).

Partly as a consequence of this limited demand by the investing public, the SRI sector is as yet relatively unsophisticated in South Africa. For instance, of the estimated 25 SRI related funds in South Africa (this number fluctuates from year to year), only very few adopt an engagement strategy to proactively encourage corporate citizenship among their portfolio companies. Among those that do are the Frater Earth Equity Fund and the Community Growth Fund.

One further limitation of most SRI funds is that their decisions on which companies to include in their funds rely primarily on information provided by the companies themselves. This is the same constraint faced by the JSE SRI Index methodology.

As argued above, there have been important improvements in South African companies' sustainability reports in recent years, but they nevertheless present the company's subjective perspective. Only about 25 per cent of companies participating in the JSE SRI Index include an external verification statement in their sustainability reports (again, this proportion is likely to be much lower for all listed companies). Furthermore, there are important constraints on most of such statements, as the third-party assurance organisation's brief is commonly limited. For the SRI sector in South Africa to enhance its legitimacy, there is a need for more third-party information provision and monitoring of companies' sustainability performance.

5. Conclusion

The Index is the first comprehensive, formal and regular corporate sustainability benchmark to be used in South Africa and indeed in Africa. As such, it is hoped that it will, over time, encourage and enable companies and their stakeholders to improve corporate policies, management systems, and reporting.

This article has outlined the methodology used in assessing companies' sustainability performance and their eligibility for inclusion in the Index. It was argued that the criteria used for the Index are significant in that, for the first time, they provide a comprehensive definition of what is expected of companies if they are to be good corporate citizens of South Africa and of Africa as a whole. The Index thus plays an important part in ‘grounding’ the international corporate citizenship movement in the African context.

The Index relies primarily on information provided by companies themselves, including their sustainability reports. The first and second rounds of the Index were thus used as a basis to provide an overview of the state of sustainability reporting in South Africa. The preliminary conclusion is that, while many companies' sustainability reports are improving in scope and depth of coverage, there is still an unacceptable absence of comparable, quantitative information, and only a few reports include independent, third-party verification.

There is no doubt that the Index has increased awareness of corporate citizenship among JSE listed companies, and its most significant effect has arguably been on those companies that otherwise would have had limited exposure to sustainability issues. The Index has also provided a framework for companies to assess their existing approach and systems for sustainability management. However, the fact that fewer companies have participated in the Index in its second round poses significant challenges to the Index. It will need to attend to companies' concerns about questionnaire fatigue and become feasible and attractive for a broader cross-section of companies.

With regard to the Index's impact on the financial community, this has also been uncertain. To date, only one new fund has been established to track the Index. For SRI to become a potent force for corporate citizenship in Africa, the South African financial community needs to become more actively engaged. The Index is contributing to this in its own right and the JSE is also supporting capacity-building seminars to encourage the financial services sector to engage more comprehensively with the triple bottom line. However, this is a task that requires committed support by a broad range of stakeholders, including the shareholding public, the media, and the research community.

Additional information

Notes on contributors

Ralph Hamann

Respectively, Director, Sustainability Research & Intelligence, University of South Africa (UNISA); and Head of Research, Centre for Corporate Citizenship, UNISA. The authors thank Corli le Roux of the JSE Ltd and the two anonymous referees for valuable comments on previous drafts of this article.