Sustainable stock exchanges
Markets around the world are adopting the environmental, social and good governance agenda, but “integrated reporting” faces problems in Africa
By Richard Jurgens
In August 2012, police fired on a crowd of striking miners in Marikana, in South Africa’s platinum mining belt, killing 34. The miners were demanding higher wages from their employer, Lonmin, a London-listed firm. Poverty, unemployment and a lack of basic amenities added to their militancy and sense of grievance. Shockingly reminiscent of apartheid-era crowd shootings, the incident made headline news around the world. The South African government came under scrutiny, while Lonmin was accused of bad corporate citizenship. A later commission of inquiry concluded that the company had failed to provide adequate protection for its workers during the strike and that it had not delivered housing for its workers despite previous commitments. The “Marikana massacre”, as it has become known, brought the question of companies’ responsibility for the broader context of their operations sharply into focus. A February 2015 study by Credit Suisse, a huge Swiss bank, lists it as a glaring example of “owner responsibility” for company caused disasters, along with the BP Deepwater Horizon oil rig explosion and the Fukushima nuclear plant meltdown, both in 2010, among others.
At the time of the incident, the idea and practice of corporate social responsibility (CSR) were well established in South Africa. During the 1980s influential business figures in the country had introduced programmes to tackle urban development and education projects. They also lobbied against the “harshest elements of the apartheid state’s policies”, according to a study by Ralph Hamann of the University of Cape Town. In 1994 with the advent of democracy, the Johannesburg Stock Exchange (JSE) adopted a code of corporate governance developed by Mervyn E. King, a retired Supreme Court judge. The code established guidelines for responsible investment and sustainable business practices for directors and company boards. A 2002 version of the King code included a section on sustainability. A further revision in 2009 integrated sustainability into business reporting. The latest version, due in early 2016, seeks to incorporate smaller businesses and not-for-profits, according to the Institute of Directors in Southern Africa, a Johannesburg- based NGO that promotes professional directorship.
The King code reflected ideas about CSR that had first gained currency in the 1950s with the emergence of studies in America on the social responsibilities of businesses. Some prominent figures, including the influential economist Milton Friedman, opposed it, claiming that businesses’ only role was to make money for their shareholders. But the Exxon Valdez disaster in 1989, in which millions of gallons of oil were spilt into an Alaskan bay after a tanker grounded, gave CSR new prominence. Responding to the Exxon slick, a group of American shareholders formed the Coalition for Environmentally Responsible Economies (Ceres). A few years later, Ceres and the Tellus Institute, based in Boston, Massachusetts, established the Global Reporting Initiative to promote business environmental reporting. Its scope was then broadened to include social, economic and governance issues. “Businesses are expected to report not just on profit but on their impact on the wider economy, society and the environment,” according to the Chartered Institute of Management Accountants, based in London.
The result, in a term coined by CSR authority John Pilkington, has been a growing convergence on so-called “triple bottom-line reporting”, which integrates a company’s performance related figures under three headings: social, environmental and financial (sometimes referred to as “people, planet and profit”). In recent years, business acceptance of integrated reporting has grown rapidly. According to a 2013 study by consulting firm KPMG, 71% of 9,100 companies surveyed in 41 countries were reporting on environmental, social and governance (ESG) factors in their businesses in 2013, up from 64% of companies surveyed two years before. A 2014 report by consultancy Black Sun and the International Integrated Reporting Council, a coalition of regulators, investors, companies and NGOs, found that 92% of companies that had adopted integrated reporting said it had improved their understanding of value creation. In 2010 the JSE became the world’s first stock exchange to make ESG reporting mandatory for its listed companies.
Only the year before, the UN had established a Sustainable Stock Exchanges (SSE) programme to foster greater corporate transparency. It required stock exchanges, investors, regulators and companies to adopt best practices on ESG issues. In 2012, the UN initiated an exchange programme to get bourses around the world to learn from each other’s sustainability experience. The JSE was among the first five members, with one other African bourse, the Egyptian Stock Exchange, as well as BM&FBovespa in Brazil, Borsa Istanbul in Turkey and Nasdaq in the US. The JSE continued to play a leadership role in advancing the sustainability agenda when it co-chaired the World Federation of Stock Exchanges’ sustainability working group, which was started in 2014. The Nigerian and Kenyan bourses have also joined the SSE. Four African countries were among the first SSE members to distribute a communiqué informing domestic and international investors of the sustainability measures in place at these exchanges.
Yet while the JSE has been at the forefront of CSR initiatives on the continent, much work remains to be done. “CSR in sub-Saharan Africa is still in its infancy,” according to a 2009 study by the German Ministry for Economic Cooperation and Development with funding by the British High Commission in South Africa. In 2014 the London-based Association of Chartered Certified Accountants found that the JSE was “the only exchange [in sub-Saharan Africa] with any form of ESG reporting requirement”. Several barriers are still preventing the adoption of CSR practices throughout the continent, according to the International Finance Corporation, the World Bank’s private-sector arm. These include “knowledge gaps, dominant investment practices that are hard to change…poorly applied regulations at both company and/ or investor levels and the incorrect perception of [sustainable investment] as only ‘ethical’ investment”. A critical obstacle to ESG reporting worldwide, and especially in Africa, is whether it offers business benefits to the companies that adopt it.
The SSE encourages stock exchanges to adopt voluntary initiatives and education programmes to help companies incorporate sustainability without imposing burdens of time and cost that would prevent them from doing so. “Some critics believe that sustainability reporting is a costly process that is impractical for companies in developing countries,” says Anthony Miller, a SSE coordinator. “But real-life experience from Brazil to Egypt to India to Vietnam, is proving that this is not the case. Where exchanges are introducing innovative voluntary initiatives, companies are responding with practical low-cost approaches that result in more and better ESG information for the market.” The main task for African bourses is to change the mindset of businesses, said Martyn Davies in 2010, then of the Gordon Institute of Business Science in Johannesburg. “CSR should not be about charity,” he says. “CSR should create competitive communities who benefit from their natural resources.” So what went wrong in Marikana?
Lonmin was not the only actor implicated: the commission of inquiry questioned the actions of politicians and senior police officers. Other factors were to blame, too. While critical of Lonmin, Marikana residents were also scathing about the local council, according to the same report. They saw it as corrupt and unable to deliver essential services. Union officials were also implicated. “There seems to be no doubt that a turf war between two miners’ unions played a key role in setting up the context for the massacre,” said the Ethics Institute of South Africa in an undated comment on its website. Union leaders had “taken a very narrow view of [their] responsibilities”, the independent organisation said. The King code ought to be applied to other institutional role-players, including the unions, the comment noted. Meanwhile, Lonmin was facing financial constraints. “[Its] first-half profits had decreased nearly 90% compared to the same period the year before. Production and platinum prices were down, while the company’s net debt had increased by 20% since the year before [the massacre],” according to a November 2013 report by Global Research, a Canadian independent research and media association.
In addition, the company risked violating its bank loan covenants that depended on delivering good results. A November 2013 study by Ross Harvey for the South African Institute of International Affairs has also highlighted the role of the migrant labour system in the Marikana platinum belt. Mining houses, including Lonmin, attempted to ameliorate the situation by paying workers “living out” allowances rather than accommodating them in the hostels that were an apartheid legacy. But the Marikana mineworkers then found themselves maintaining a second household—a factor that contributed to their wage demands. Corporate social investment, he concludes, was not adequate to dealing with “the legacy effects of migrant labour”. If Marikana serves as an example, the effective implementation of CSR depends significantly on the context in which it is applied. Businesses may be held accountable to strict measures of their wider impact while other interested parties, including government, labour and the police are not. This raises the question of the effectiveness of CSR reporting requirements in Africa, even where they are in place.