2 African stock exchanges among world ESG leaders

Two African stock exchanges are among leaders in requesting companies to report on Environmental, Social and Governance (ESG) issues, including South Africa’s JSE Ltd (www.jse.co.za) which this year became the first exchange in the world to require listed companies to move towards integrated reporting which includes ESG reports along with profit figures, as reported on this blog in June. The Egyptian Exchange (www.egyptse.com), Brazil, China, Indonesia and Malaysia are other exchanges discussing with the United Nations Principles for Responsible Investment initiative (www.unpri.org) through its sustainable stock exchanges dialogue.
According to an article in the Financial Times (www.ft.com) today (20 Dec), many investors are still slow to understand how to value the ESG reporting companies are giving them. Both Unilever and Rio Tinto have complained that investors are still only interested in short-term performance. Investors’ reasons for not taking interest could include because their holdings are very short-term, because they only work quantitatively, or because they believe that ESG is about imposing one’s own politics on the investee company. The article quotes John Wilcox, of corporate governance consultancy Sodali (www.sodali.com), as saying: “In the US, in particular, ESG is very politicized. Wall Street is not that comfortable with non-numerical issues, so it tends to focus on the financial results. Because these are half-yearly or quarterly, it tends to reinforce short-termism. Yet long-term success is a function of many things that do not lend themselves to quantification such as culture, long-term planning, environmental and social responsibility, human rights and even human resources issues.”
In general, it is more visible when investors penalize companies for poor ESG, such as when Deepwater Horizon, a BP oil rig, exploded. Some investors in India’s mining group Vedanta have publicly sold out their shares over concerns about the company’s human rights record (see for instance this article in the Guardian newspaper).
Wilcox is quoted that it is the wrong question if investors ask whether good corporate governance increases economic performance: “The real question is: does poor performance on governance increase risk – and the answer is clearly yes.”
However, there are cases where good governance is rewarded by investors. The example given is Brazil’s Novo Mercado of the Bovespa exchange (www.bmfbovespa.com.br), which demands higher governance standards than the main market. Wilcox says “Companies voluntarily agreed to higher governance standards to list on a more exclusive exchange on the basis that this would attract more capital. It worked extraordinarily well and is the best example we have that good governance is equted with better performance – companies listed on the Novo Mercado have tended to outperform their peers.”
In addition to ESG reporting to investors, there is also a requirement to be accountable where companies are stepping up sustainable procurement policies – the article cites governments, Tesco and Wal-Mart as examples.
Stock exchange and fund management investors are starting to believe that if they take more notice of ESG reporting, they will have a better understanding of how the company is run. Some funds believe there is a way to quantify ESG and Risk reporting as a contributor to excess returns, future competitiveness and long-term increase in relative value.

2 Responses to “2 African stock exchanges among world ESG leaders”

  1. rob

    Carte blanche, a SA programme highlighted the impending environmental waste water disaster about to hit Johannesburg as a result of historical mining practices. There appears to be substance to this and the question remains are all of these good governance “reporting” practices actually backed up by action? Also a common theme in SA governance is we “actively engage our stakeholders……etc etc.” but try submitting an email through the website to get a response and its difficult. There’s a lot of smoke and mirrors in SA but I have to say that the JSE sets a leadership trend for the rest of Africa to follow but the rest of Africa appears to be busy.

  2. Tom Minney

    thanks for the feedback. I was happy when the African Stock Exchanges Association highlighted that it is time for the African capital markets, ans especially stock exchanges, to start moving and improving in order to make the most of the current huge appetite for African investment. Better information and improved ESG reporting rules can also help. There is a lot of potential for big improvements, and the web makes it possible for any companies to communciate much more clearly and openly with a range of stakeholders, its a pity they are not following that through as it can have good benefits in the medium- and longer-term.