THE FTSEJSE SRI INDEX

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THE FTSE/JSESRI INDEX
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Introduction

• Global trend is towards companies and investors
  embracing the principles of sustainability.
  Recognises
• that commitment to sustainability in all areas of
  commercial activity may enhance reputation and
  reduce business risks
• strong interrelationship between sustainability
  and long term shareholder value
• In South Africa in particular, sustainability is
  in the spotlight as
• companies have had to address labour, affirmative
  action and health related issues with more focus
  than internationally
• corporate governance premium for emerging markets

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Introduction (cont.)

• Not esoteric debate
• Investors are seeking out companies with good
  sustainability records
• Leading to rise in sustainability and SRI funds
• Need to find an objective and accepted method of
  measuring the performance of listed companies

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JSEs role in the debate

• Globalisation means
• Investors can choose where they want to trade
• We need to fight for every cent of an investment
  dollar to come to and remain in SA
• All SA businesses will need to embrace global
  standards if they want to benefit from increased
  investment
• In the JSEs case, this means leveraging our
  position in financial markets to facilitate
  debate on sustainability best practices and
  encourage commitment to them

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SRI Index

• Developed with FTSE and Advisory Committee
• Contribution to sustainability debate and to meet
  the SRI needs of the investment community
• Benchmark index
• Based on FTSE4Good, but customised to -
• reflect the complex nature of sustainability in
  South Africa
• more fully examine the concept of economic
  sustainability in addiiton to social and
  environmental
• Index aims to -
• highlight companies from FTSE/JSE All Share Index
  with good sustainability practices - lots to be
  proud of
• provide the basis for financial SRI products

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SRI Index (cont)

• Only top 160 companies
• Not compulsory to participate
• Want to encourage commitment to Principles of the
  Index
• aspirational benchmark for other companies and
  entities

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Pillars of the Index

• Stated commitment to principles of sustainability
  not enough
• need to integrate sustainability into business
  practices and demonstrate performance
• 3 pillars of the Index
• Principle which companies should be committed to
• Conduct to demonstrate commitment
• Criteria for joining the Index

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Principles of Sustainability

• Identified principles common to a range of
  international and local statutes, charters,
  documents and undertakings in relation to
  sustainability, e.g
• SA Constitution and related legislation King
  2002 NEPAD
• Global Reporting Initiative Universal
  Declaration of Human Rights
• Three core principles
• Environmental sustainability
• Social sustainability
• Economic sustainability

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Environmental sustainability

• Africas rich and critical resource base has to
  be wisely used to provide sustainable support and
  development to the Continent
• particularly if objectives of NEPAD are to be
  achieved
• Companies operating in SA and elsewhere in Africa
  play important role in protecting the resources
  and the environment

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Environmental sustainability (cont)

• Companies need to develop strategies to
• measure / monitor their impact
• implement systems for sustainable use
• Evaluated with reference to -
• proactive responsibility of Board
• risk identification and management
• sustainable utilisation and conservation of
  natural resources
• protection and rehabilitation
• continual reduction in negative impacts
• reporting on and auditing of performance

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Social sustainability

• King II - company is a key component of modern
  society and is often a more immediate presence to
  citizens than the State
• Not only shareholders are affected hence
  stakeholders
• Challenge is to balance performance and
  compliance while taking account of stakeholders
  expectations
• Sustainable development also severely hampered by
  absence of respect for human rights, peace and
  good governance
• Recognising human rights as the cornerstone of a
  democratic society will encourage companies to
  enshrine basic human rights in practices and
  policies

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Social sustainability (cont.)

• Evaluated with reference to -
• corporate governance
• positive stakeholder relations
• appropriate stakeholder engagement
• social risk identification and management
• diversity, employment equity, black economic
  empowerment
• health and safety
• development of human capital
• disclosure standards

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Economic sustainability

• Often regarded as synonym to financial
  performance
• However, should reflect long-term growth and not
  only short-term performance
• Evaluated with reference to -
• corporate governance
• economic risk identification and management
• product protection
• employee satisfaction
• economic accounting
• customer base

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Guidelines to Conduct

• Identify practical means to uphold and integrate
  sustainability principles into business practices
• Relevant governance practices would include
• Vision - understanding of impact
• Policy and strategy - integration of long-term
  sustainability aspects in business strategies and
  establishment of broad and specific goals
• Management systems - centrally and operationally
  to ensure implementation of policy, management of
  risks and maximisation of opportunities
• Performance and monitoring
• Reporting - regular and timeous disclosure of
  risk and opportunity related information
• Consultation

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Criteria and Exclusions

• Criteria will be dynamic, reflecting the
  continuous development of the concept and
  practices of sustainability
• As the criteria develop, companies will need to
  meet the new standards
• SRI Funds typically exclude or down weight
  companies operating in areas of particular
  controversy
• this frees excluded companies from scrutiny
• FTSE and JSE still debating how to deal with
  exclusions and/or down weightings in the Index

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Way forward

• Data collector
• confidentiality
• ease of interface with companies
• Control group
• review and complete questionnaire
• results provide guidance as to appropriateness of
  criteria
• Questionnaire released to all 160 companies
• offer to meet with JSE and/or data provider
  personally to clarify issues

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Conclusion

• Challenges in finalising Index design are great
• Companies are doing tremendous things already
• deserve to be recognised
• Potential benefits are too exciting to ignore
• Future is alive with possibilities