Edition: September / November 2015
Woolworths, BAT and Sanlam are best performers. Waseem Thokan*
discusses the findings of Legae Securities’ 2015 survey.
Clear to investors globally is that a multidimensional
approach towards management
of investment risk has become increasingly
necessary. For SA, this concept is embodied in
Regulation 28 of the Pension Funds Act which obliges
institutional investors to consider environmental,
social and governance (ESG) issues in their investment
While the role of companies in society has been
debated for generations, the rise of the modern
corporation has brought into sharper focus the need
to scrutinise the costs and benefits accruing from
companies’ impacts on society and the environment,
and on how these are managed. Given SA’s context
of inequality and poverty, as well as the resource bias
within the economy and the attendant intensity of
environmental impact, these issues are particularly
pertinent for SA companies and investors.
Accordingly, Legae Securities has rated the ESG
performance of the JSE’s top 100 listed companies
using 83 different metrics defining issues such as
environmental and social policies, resource use,
emissions, workforce dynamics, transformation,
occupational health and safety, board independence
and executive compensation.
In 2015’s second iteration, we found that the
companies’ awareness of these issues is improving.
However, active measures to mitigate ESG risks are
Overall company performance remains
disappointing. There’s an average score of 43,5% and
no company scored above 65% overall. A meaningful
proportion of companies are ignorant of the need to
address these issues with 11 of the top 100 scoring less
than 30% overall.
The top ESG performers are Woolworths, British
American Tobacco and Sanlam. At the bottom end are
Reinet and The Capital Property Fund – representing
a broader theme whereby attention to ESG issues
amongst holding companies and property companies
The labour unrest at Marikana, the collapse of
African Bank and the governance issues at PPC
demonstrate the ability of issues that were historically
considered “non-financial” to dramatically and
sometimes irrevocably compromise a company’s
operational, reputational and ultimately financial
performance. Fundamentally, environmental
and social compliance can no longer be seen as a
compliance cost. Rather, they are a business imperative
from a risk perspective. They have the potential
to differentiate companies and underpin financial performance.
ESG considerations have historically been the
concern of governments, regulators and civil society.
But in the context of a more active stakeholder base
(whether a more stringent approach to regulation by
governments, a more contentious labour-relations
environment or a more educated and mobilised
customer), they are factors which companies and
ultimately providers of capital need to consider and manage.
This is reflected in our study where the extent
to which the high regulation of an industry is
positively related to sustainability performance.
within the sample, banks, insurance companies,
telecoms and healthcare companies tend to
outperform. This is likely a consequence of companies
tilting their strategic priorities to more closely
resemble those of the governments or regulators which
control their licenses to operate.
Historically, a company’s primary purpose was to
deliver shareholder value. This idea was predicated
on the work of Milton Friedman and his view that the
only social responsibility of business was to engage
in activities designed to increase its profits. But these
days a review of global academic work on responsible
investing indicates that companies with better ESG
performance have a lower cost of capital.
Further, studies indicate that in 89% of cases better ESG performers exhibit market-based
outperformance and 85% of cases exhibit accountingbased
outperformance. Thus there is a robust and
emerging body of evidence to suggest that maximising
Friedman’s shareholder value requires a more holistic
approach towards stakeholder value, particularly as
companies grow larger.
Although our report highlights that application
on these issues is still emerging, integrated reporting
(amongst other factors) has driven a consistent
improvement in policy and disclosure over the
past five years. The report indicates, for example,
that 92% of companies within the JSE top 100 have
environmental policies in place.
While the trend towards awareness of ESG
issues is clear, there remains limited progress in
integrating sustainable business practice into company
operations and creating chains of accountability
to top management. Although the Companies Act
now mandates the creation of a social and ethics
committee, the vast majority of JSE-listed companies
lack executive directors specifically responsible for
ESG issues. And although many companies mention
environmental or social factors within their strategies,
few integrate them into executive remuneration.
Although broader performance leaves much room
for improvement, there are examples of companies
which directly address responsible corporate citizenry
as a core strategic differentiator. Woolworths, the
best-performing company on our ESG scorecard, has
integrated sustainability robustly within its operating
model through the “Good Business Journey”. To the
extent that environmental and social awareness is
important to Woolworths’ consumer base, this grants
it some market power contributing to the ability of the
business to achieve superior margins.
Reappraisal of the role of regulatory authorities
globally, together with the emergence of technologies
such as social media, has empowered company
stakeholders such as governments, labour and
customers. These stakeholders increasingly influence
companies’ reputational, operational and ultimately