Edition: April 2016/ June 2016


Practical utility of ESG data

More people should pay closer attention, Michael Rea* urges, for better-informed debate and decision making.

Late last year, when the Economic Freedom Fighters held a march to the JSE, it submitted a list of 17 “demands”. The EFF appeared ignorant of the extent to which JSE-listed companies already comply with several.

To demand that companies invest in education, for example, ignores a multitude of readily available facts. Not the least of them is that companies pay a variety of taxes to government that ought to be used – properly, effectively and in the absence of blatant corruption and maladministration – to provide the level of education today’s children require. Add to this the fact that many JSE-listed companies voluntarily invest billions – yes, billions – of rand in educational support projects and bursaries that benefit far more than their complement of income-earning employees.

Those wishing to place an unhealthy burden on big business are either ignoring the metadata that is within the public domain, or simply unaware of the utility of the integrated annual report (IAR).

At the moment, the Financial Services Board ought to be enforcing the Code for Responsible Investing in SA (CRISA). The code sets out expectations for pension funds to evaluate the environmental, social and governance (ESG) fitness of companies prior to making investments. At a bare minimum, the Government Employees Pension Fund ought to be championing the full and effective evaluation of companies to assess whether they’re reasonably meeting societal expectations of, for lack of a better term, “fairness”.

Using publicly available data, the GEPF and other big pension funds could be assessing the long-term sustainability of a company on a wide array of factors that extend well beyond the ratio of assets over liabilities. For example, whether:

  • Companies are using and/or wasting more water than the communities in which they operate can tolerate;

  • Mining companies are actually the most dangerous, and then ask why the data proves that five companies in the Food & Beverages sector are within the 2015 list of ’10 Most Dangerous Companies’ by the ‘Lost Time Injury Frequency Rate’ while only two of the top 10 are miners;

  • Government should continue enacting legislation that will further cripple the mining industry, since objectively the mining sector contributes more to socio-economic development (per rand in profit) than any other.

Trade unions really should pay much closer attention to ESG data, if only because a properly developed IAR contains a plethora of useful information that could better inform bargaining positions. By understanding key ratios such as ‘Rands Revenue per Employee’ and ‘Rands Profit per Employee’, as well as retrenchment rates and average rates of pay compared within industry sectors, unions could shift from positions that threaten job security to those that partner with business to argue for better benchmarks of “fairness”.

Each year Integrated Reporting & Assurance Services (IRAS) compiles a database of ESG data that is by no means difficult to obtain. Using a self-styled Sustainability Data Transparency Index (SDTI), IRAS has been able to rank 323 companies in each of 22 JSE-listed sectors plus state-owned enterprises based on whether companies reasonably disclose quantitative comparable data for 95 indicators.

IRAS identifies the companies that fail to disclose even the most basic of ESG data, such as ‘Number of Employees’. It calculates uncomfortable ratios such as the ‘Income Disparity Ratio’ which last year found, for example, that the average executive director at Mr Price earned in less than a day what it took the company’s average employee to earn in an entire year (an IDR of over 400:1).

Rea . . . answers easy to access

IRAS also identified a set of companies that appeared to be so embarrassed by their prior year’s IDR that they managed to manipulate their management accounting sufficiently to ensure that data wasn’t available to calculate a new IDR.
Which companies are emitting the most carbon into our atmosphere?
Which companies are killing the most workers?
Which companies are retrenching the most workers while making obscene profits and paying out more in dividends to shareholders?
Which companies are actually committed to transformation?
Which companies are protecting the future viability of jobs through adequate research and development spend?
Which companies are actually “more sustainable”, and thus “the better investments”?
All these questions, and many more, can be easily answered through ESG data. The likes of the EFF ought to query those companies that can’t answer if it seriously wants to help change corporate behaviour for the better.

Rather than waste time asking JSE-listed companies to do even more to support an education system that is already over-funded and under-performing is pointless. Asking companies and government to prove their worth through measurable progress against measurable ESG targets is what needs to happen.

For its part, the FSB ought to start making sure that pension funds apply CRISA as well as the United Nations Principles for Responsible Investment (UNPRI). Employee pension funds are not only there to provide post-retirement income, but are also to influence the types of change – such as protecting jobs – that fund members seek.

* Michael H Rea is the managing partner at Integrated Reporting & Assurance Services (IRAS) and the principal author of IRAS’ annual review of ESG reportin