Centre for Environmental Rights - Advancing Environmental Rights in South Africa

Sustainability guidelines, indices and governance codes espousing the “sustainability agenda” – for example the JSE’s SRI Index, the King Code on Corporate Governance for South Africa, and the Global Reporting Initiative Guidelines – rely on a company’s own assessment of its performance. They allow the companies themselves to decide what is and is not important, meaning that in many cases serious breaches of environmental laws are not mentioned, or are classified as being of “minor” importance. There appears to be little to no robust independent verification of the claims made by companies, as is evidenced by the fact that in many cases information clearly indicating that these companies are repeatedly in non-compliance with environmental laws is easily available in the public domain.

As the findings in Full Disclosure demonstrate, companies included on indices such as the SRI Index also often feature in the list of companies facing enforcement action, and sometimes criminal investigations, for contraventions of environmental laws, as reported in the Department of Environmental Affairs’ annual National Environmental Compliance and Enforcement Reports. African Rainbow Minerals, ArcelorMittal South Africa, Exxaro, PPC, Sappi and Sasol are some examples.

It is clear that the major shareholders of these companies are failing to ask enough, if any, questions when red flags are raised about management of environmental risks and impacts. This is extremely concerning, particularly because many of South Africa’s asset managers and institutional investors claim to be actively integrating “environmental, social and governance” criteria into their investment decisions and engagements with the companies that they invest in. South Africa’s asset managers, many of whom have adopted the Code for Responsible Investing in South Africa, have an important role to play and a responsibility to go beyond lip service in the integration of environmental, social and governance criteria into investment decisions.

…while sustainability indices and governance codes promote the principle of the “triple bottom line” … in reality neither South Africa’s private sector nor our stock exchange gives serious consideration to non-compliances with environmental laws.

The CER’s research confirms what many have already said about accolades such as inclusion on the JSE’s SRI Index: while sustainability indices and governance codes promote the principle of the “triple bottom line” i.e. that companies should be concerned not only with profit and loss, but also with their social and environmental impacts, in reality neither South Africa’s private sector nor our stock exchange gives serious consideration to non-compliances with environmental laws.

The criteria for inclusion on the JSE’s SRI Index, for example, are exceptionally weak in relation to environmental indicators. The criteria are weighted in favour of what is publicly stated by the listed companies themselves, requiring simply that companies make certain commitments and develop and disclose their environmental policies. In relation to environmental obligations, the reporting of “non-compliance, prosecution, fines, [and] accidents” is regarded as a “desirable indicator”, but is not required, even if companies are pursing the title of “best performer” on the SRI Index.

It appears that little to no robust independent verification of companies’ claims about their performance is carried out, and even easily available and clear information which directly contradicts these claims is not taken into account in compiling the SRI Index.

The CER’s assessment was motivated by its concern that while big industry in South Africa publicly claims to be committed to the advancement of the “sustainability agenda”, many listed companies still operate in non-compliance with the law and in the process cause severe degradation of the environment.

According to the JSE’s “SRI Index – Background and Criteria” for 2014, one of the key objectives of the SRI Index is to “identify those companies listed on the JSE that integrate the principle of the triple bottom line and good governance into their business activities”.¹ The SRI Index is supposed to “serve as a facilitation vehicle for responsible investment for investors looking for non-financial risk variables to include in investment decisions, as such risks do carry the potential to have significant financial impacts”.²

The JSE is praised for being the first stock exchange and emerging market to launch a sustainability index, doing so in 2004, with BM&F Bovespa in Brazil following suit in 2005. SRI Index constituents are perceived by the public as “certified good corporate citizens”³ with a “longer-term horizon who are managing risks responsibly”.⁴ Companies on the SRI Index take pride in their inclusion, issuing public statements to that effect on their websites and in their annual reports.

The JSE also requires that companies listed on the JSE All Share Index comply with the King Code. The King Code is viewed as a “ground-breaking code of corporate governance” and is cited as “the most effective summary of the best international practices in corporate governance”.⁵ The King Code regards sustainability as “the primary moral and economic imperative of the 21st century” and recognises that sustainability “is one of the most important sources of both opportunities and risks for businesses”.⁶

If this is the position in South Africa, why then are companies such as Lonmin, exposed in the Marikana Report for non-compliance with its social and labour plan and the poor working and living conditions of its miners; Sasol, a company which recently launched court proceedings against the state in a bid to set aside air quality standards which aim to reduce the pollutants that operations of Sasol and other big industry emit; and ArcelorMittal, which was recently compelled by a court order to release a copy of its environmental Master Plan to concerned community members after stubbornly refusing to do so for many years; nonetheless praised for their commitments to corporate responsibility and sustainability?

…there must, as a bare minimum for qualification on any new SRI index, be a requirement for listed companies to be in compliance with the law.

While the CER acknowledges that the JSE has recently partnered with FTSE Russel and will be “aligning its environmental, social and governance (ESG) disclosure indicators and data collection methodology with FTSE Russell’s evolved ESG approach”,⁷ it is not clear when this new system will be introduced, or how it will differ from the SRI Index criteria currently in place. The CER is strongly of the view that there must, as a bare minimum for qualification on any new SRI index, be a requirement for listed companies to be in compliance with the law (which includes environmental law). The new index must also have an independent method of assessing all available information relating to potential constituents’ non-compliance with environmental laws.

The CER is also of the view that the JSE Listing Requirements for all listed companies (not only those seeking accreditation on the SRI Index) should be amended to require disclosure of environmental non-compliance. Currently, disclosure is only required in respect of material price sensitive information, with “material” defined as a change in a factor equal to or exceeding 10%. While the CER is of the view that environmental non-compliance should result in a shift in share price, this will not always be the case.⁸ Regardless of whether or not environmental non-compliance directly affects share price, shareholders have a right to be informed, particularly given that environmental impacts and non-compliances can represent significant future liabilities for the company and for the country.

The King Code recommends that companies produce an integrated report which integrates both financial and non-financial risks and is supposed to explain how a company both positively and negatively affects the environment in which it operates and how it creates value over time. While the production of an integrated report is not a mandatory requirement for companies listed on the JSE All Share Index, the vast majority of the companies assessed by the CER have produced integrated reports. In addition to stating that their reports comply with the principles espoused in the King Code, and the International Framework for Integrated Reporting (an international guideline for producing integrated reports), the majority of the companies assessed also claimed to have complied with, or to have been guided by, the Global Reporting Initiative’s (GRI) Guidelines.

Retention of ISO 14001 certification is not an indication that a company is in compliance with environmental laws and permits, nor is it a substitute for reporting environmental non-compliance.

The GRI Guidelines require relatively comprehensive reporting in the Environmental Category, including, specifically, that companies report on the “monetary value of significant fines and total number of non-monetary sanctions for non-compliance with environmental laws and regulations”.⁹ Despite this, the CER’s research has revealed that few companies actually disclose environmental non-compliance adequately or at all.

The CER’s research also revealed that many of the companies assessed regard their ISO 14001 certification as evidence of their compliance with the law.¹⁰ ISO 14001 (the current version being ISO 14001:2015) sets out the criteria for an Environmental Management System. An Environmental Management System refers to the management of a company’s environmental programmes in a comprehensive, systematic, planned and documented manner. ISO 14001 does not stipulate any requirements for environmental performance, but rather maps out a framework that companies can follow to set up and maintain an effective Environmental Management System.

Adherence to this framework does not, in any way, guarantee that a certified company is complying with applicable environmental laws. Certification merely means that the company has systems in place which should, theoretically, help it comply with applicable laws and minimise its environmental impact.

Retention of ISO 14001 certification is therefore not an indication that a company is in compliance with environmental laws and permits, nor is it a substitute for reporting environmental non-compliance.

South African companies are not adequately accounting for the costs of their environmental impacts and non-compliance with environmental laws to investors and to the public.

While there appears to be an overarching acknowledgment of the importance of the triple bottom line and sustainability issues in South Africa, the system currently in place is evidently not working in practice. Investors and potential investors are not receiving adequate and accurate information upon which they can properly assess the risk of investing, and South African companies are not adequately accounting for the costs of their environmental impacts and non-compliance with environmental laws to investors and to the public.

While this is a problem created by the companies assessed, investors also have a duty to at least ask the right questions. Companies which state compliance with corporate governance guidelines must be held to account by their investors. Investors can put pressure on companies by asking the awkward questions and by refusing to simply look the other way.