In compliance with the King Report, South African businesses listed at the Johannesburg Stock Exchange have to report annually on the nature and extent of their social, transformation, ethical, safety, health, and environmental management policies and practices.
Also, if they do not have social measures implemented, they need to explain why they do not do so. The social activities of companies are measured independently.
With the creation of a socially responsible index, the Johannesburg Stock Exchange wanted to establish a possibility for investors to evaluate if potential investments into businesses are ethical.
Furthermore, they plan to promote companies that focus on a socially sustainable environment.
As such, the 40 biggest companies listed on the JSE will automatically be evaluated in terms of social responsibility.
Other listed businesses have the choice to be evaluated.
On a basis of various criteria, a United Kingdom based organisation called Ethical Investment Research Services (EIRIS), working together with a local partner, currently the University of Stellenbosch Business School (USB), estimates and evaluates social responsibility of the companies.
They look at a company's attitude towards the environment and towards society. In addition to this, they assesses the company's governance and management practices, as well as reporting activities.
In 2012, 108 companies were assessed, of which about 70% fulfilled the base requirements to become a constituent of the Johannesburg Stock Exchange Social Responsibility Investment Index. Of those, 10 companies were identified as the best performers.
Businesses from the mining sector were excluded from the “best performer” category, to take the labour unrest in the sector into account.
The idea of providing information about the social sustainability of companies is a very modern and advantageous approach.
It helps investors, who often act on behalf of other financial backers, to promote sustainable businesses and to avoid those companies that are harming society and the environment with their operations.
While the 40 biggest companies are automatically evaluated, other listed businesses can chose if they want to be included.
However, companies that do not meet the minimum requirements to be listed in the index are not published.
Therefore, a company can only win if it decides to go for an evaluation by the EIRS and USB.
Either it meets the requirements and will be published in the Social Responsible Investment Index or it does not meet the requirements and does not appear in the index, without being published.
Thus, nobody will be able to know that the company had tried to get into the index.
Furthermore, the Social Responsibility Investment Index does not compare the different companies within the index, which makes it impossible to create a hierarchy.
To put it in a nutshell, the JSE SRI rewards socially responsible businesses, but does not punish those that behave in a socially irresponsible manner.
Therefore, it fails to create pressure on listed companies to implement Corporate Social Responsibility (CSR) measures.
The general South African public and investors, aiming for responsible investments, would significantly benefit from a redesign of the SRI to make it more effective.
Firstly, it should explicitly mention why certain companies are rated well, but even more importantly, it should also declare why other businesses are evaluated negatively.
Currently, companies that know that they have sufficient CSR activities and measures, let the JSE attest these circumstances.
It would also be instructive and crucial to point out those businesses that are ignoring their social responsibility.
This would put more pressure on South African companies to act in a socially responsible manner and, in the long term, avert conditions that lead to labour and social unrest, such as that experienced by the mining sector in 2012.
