29 November 2012 at 11:39 pm
On 28 November 2012, the Johannesburg Securities Exchange announced its Socially Responsible Investment (SRI) Index Constituents and Best Performers for 2012 (see here).
This year’s best performer list includes, amongst others, ArcelorMittal South Africa, a company that has featured repeatedly in the list of companies facing criminal investigations into alleged contraventions of environmental laws in the annual National Environmental Compliance and Enforcement Report (NECER) published by the Environmental Management Inspectorate in the Department of Environmental Affairs.
Concerns about ArcelorMittal’s compliance with environmental laws have featured in the NECER every year for the past five years. The 2011-2012 NECER records inspectors’ findings that three ArcelorMittal facilities are operating in violation of environmental laws, and that criminal investigations into violations are underway at two of these facilities. (In October this year, it was reported that the Gauteng Department of Agriculture and Rural Development had issued a compliance notice to ArcelorMittal in relation to the Vanderbijlpark plant due to non-compliance with its atmospheric emission licence. ArcelorMittal shut down the offending furnaces completely.)
ArcelorMittal is not the only listed company that has the dubious distinction of being listed both on the SRI Index and in the NECER.
• BHP Billiton is the subject of a criminal investigation by the Department of Environmental Affairs at its facility in Meyerton, Gauteng (NECER 2011-2, p.42).
• Inspections at Exxaro Base Resources Zincor in Gauteng found that hazardous waste was disposed of in an unlined dam and without a licence, and that the facility had caused both surface and groundwater pollution (NECER 2011-2, p.46). (According to a Ministerial reply to a question in Parliament (Q2114) in August, Exxaro’s Glisa colliery also faces a criminal investigation by the Department of Water Affairs, and Exxaro has been issued with directives in relation to both its Glisa and Leewpan collieries.); and
• SAPPI was found to be in non-compliance with environmental laws in 2008, and was again found to be in non-compliance during a follow-up inspection in 2011. NECER 2011-12 reports that SAPPI was found to be conducting “environmentally harmful activities” and to have constructed facilities without the required authorisations (NECER 2011-2, p.47).
While these “dual listings” on the SRI Index and the NECER may strike one initially as simply incoherent, the reality is that the criteria for the JSE’s SRI Index are such that criminal non-compliance with the law does not exclude a company from inclusion on the Index. At most what is required is a commitment to legal compliance (see pages 8, 12 and 13 of the SRI Index’s Background and Selection Criteria 2011). What it demonstrates, however, is that a listing on the JSE’s SRI Index is no indicator of a company’s status as an environmentally responsible investment.
With the 2012 results, the JSE released a media statement (which you can find here) stating that “six potential best performers have been precluded from the best performer category in the 2012 SRI Index due to the mining sector not being considered for best performer status after recent labour unrest in the industry.”
The JSE’s statement is at pains not to implicate any mining companies in the unrest. As a result, while excluded from the best performer list, the mining sector is still prominently represented on the SRI Index. Lonmin plc, Harmony Gold, Exxaro Resources, BHP Billiton, AngloGold Ashanti, Anglo American Platinum Limited, Anglo American plc, African Rainbow Minerals Limited, Impala Platinum Holdings, Kumba Iron Ore, Royal Bafokeng Platinum Limited and other mining companies remain on the list of constituents. The platinum mining sector in particular is extraordinarily well represented on the SRI Index, despite this sector being at the heart of the recent unrest.
While labour unrest in an industry can exclude companies from being considered for best performer status, facing criminal prosecution for environmental violations apparently does not even suspend companies’ candidacy for best performer status on the JSE’s SRI Index.
This is the third consecutive year that the Centre for Environmental Rights and its partners have pointed out to the JSE that, instead of facilitating investment in responsible companies and incentivising companies to implement more responsible practices, the SRI Index rewards companies whose environmental compliance history is – at best – chequered, thereby undermining the recognition given to companies with more exemplary compliance histories. To their credit, in the past year, the JSE has undergone a strategic review of the SRI Index, and we are assured that “a clear approach towards dealing with issues of legislative compliance will definitely be part of the recommendations” that will inform a five-year vision for the Index.
While acknowledging these efforts, until the SRI Index has implemented more appropriate criteria and improved integrity checks, environmentally responsible investors should exercise caution when dealing in securities of companies listed on the Index.
For the history of the CER’s engagement with the JSE about its SRI Index, click here.