South Africa Leads the World’s Stock Exchanges on Environmental and Social Reporting

Jonas Kron
Investors are increasingly recognizing the important role that stock exchanges can play in improving corporate sustainability reporting and ultimately a sustainable economy. Markets, where investors and companies meet, are driven by information. Because of this strategic position, the exchanges, through their listing requirements (which dictate the information corporations must disclose on an annual basis in order to remain listed) have the power to either mandate or incentivize how companies report on their environmental and social impacts. They can also create indexes that recognize leaders in sustainability.
One could argue that the most significant environmental and social impact of an exchange is its listing requirements. If the requirements include ESG (environmental, social and governance) information, then investors will not only get quarterly profit and earnings reports, but they will receive information relevant to long term valuations and assessments of sustainable performance. With that information, investors will be better equipped to choose stocks informed by environmental and social sustainability considerations.
The Johannesburg Stock Exchange (JSE) is the clear leader for those of us in the investment world who think about and act upon this information. Why the JSE? In part because in the aftermath of apartheid, South Africa needed to rebuild the reputation of its business community and address the crushing economic inequities in its economic system. How companies’ policies and practices impacted the poor was of particular interest in a nation where at least half of its citizens lived in poverty.
In 1994, the King Commission on Corporate Governance (chaired by the current chairman of the Global Reporting Initiative, Mervyn King) published the first of three reports, the King Report on Corporate Governance (known as “King I”). King I broke important ground in South Africa, which eventually led to the “King II” report’s 2002 conclusion that:

Corporate governance is the manner in which organisations direct and control their assets, resources and actions. In companies, direction and control is in the hands of the directors who are accountable not only to shareholders but also indirectly to other stakeholders such as employees, suppliers, customers, the government and the community.

This articulation was put into practice the following year when the JSE required companies to report on their social, ethical, health, and environmental practices or to explain their non-compliance. Companies were required to develop reporting metrics, and to publish a narrative statement of how they were addressing these sustainability challenges.
King II also led to the creation of the JSE Socially Responsible Investment (SRI) Index in 2004 to “meet the emerging requirements of investors and civil society for companies to demonstrate more socially responsible behavior.” Like most SRI indices, the JSE’s evaluates companies against a set of economic, social and environmental criteria to determine whether they will be identified for investors as companies that have sufficiently integrated environmental and social performance into their business model.
These were firsts in emerging markets, and in many respects they were ahead of developed market exchanges. Today, only six of the 30 leading stock exchanges in the world provide any sort of sustainability guidance for listing requirements.
“King III” (2009) culminated the exchange’s work by requiring “an annual integrated report that focuses on the impact of the organisation in the economic, environmental and social spheres.” As the report summarized:

Sustainability is now the primary moral and economic imperative and it is one of the most important sources of both opportunities and risks for businesses…. Incremental changes towards sustainability are not sufficient – we need a fundamental shift in the way companies and directors act and organise themselves.

The anti-apartheid divestment movement of the 1970s and ‘80s gave birth to the modern day shareholder advocacy movement, inspiring a generation of investors to evaluate companies’ environmental and social impacts. With its groundbreaking work on “sustainable exchanges,” it appears that South Africa will continue to play a critical role helping the world developing a more sustainable economic system.