On March 23rd, Egypt has launched a new index for listed companies called Standard & Poor’s/Egypt Stock Exchange Economic Social & Governance Index (S&P/EGX ESG).
The index was constructed by the Egyptian Corporate Responsibility Center (ECRC), a joint project between UNDP and the Egyptian Institute of Directors (EIoD) affiliated to the Ministry of Investment, in collaboration with the Cairo-Alexandria Stock Exchange, using Standard & Poor’s (S&P) methodology.
The index is designed to track the performance of the top 100 listed companies on the Egypt Stock Exchange that demonstrate leadership on environmental, social and corporate governance (“ESG”) issues covering a number of variables. Index calculation was done covering the period from 1st of July 2007 till 30th of June 2009 and the top 30 companies were then selected to be included in the index. It was interesting to find out that several companies included in the top quantitative index in the Egypt Stock Exchange (EGX), called EGX 30, were unable to find places in the new index. By linking ESG to share price performance, the S&P/EGX ESG Index will enable investors to take a leading role in driving firms to enhance transparency and disclosure and ultimately improve reporting standards.
The index is another step that compliments Egypt’s efforts in improving practices of corporate governance and corporate social responsibility. Since 2000, Egypt has been modifying its laws and regulations and listing rules adding additional corporate governance provisions. This has resulted in the decline of listed companies from over 1200 to less than 250 companies.
The new index aims to create some sort of a healthy competition among listed companies with regards to their corporate governance practices (a sort of “name and shame” for companies that will fail to make it to the index). Almost a year ago, and since it became known that ECRC is working on the new index, listed companies started approaching the project to know how they can rank better in the index. Many companies hurried to construct investor relations websites and developed Annual Reports – this wasn’t part of their standard practice.
The index calculation is rather complex but goes generally through 3 phases. During the first phase, the index team evaluates EGX 100 companies based on the information they make available to the public voluntarily. At the second phase, the team evaluates the same information that is available “about the companies” from independent sources such as the media, environmental authorities, labor authorities, etc., scores are then adjusted according to the results of this stage. Finally, scores get into a mathematical model that produces the final index.
Sustainability and transparency have become overriding corporate themes worldwide. The S&P/EGX ESG index will set a new benchmark for improving sustainability disclosure in Egypt and set priorities for investor engagement in the wider region. As awareness of ESG increases, it will be essential for companies to delve into their business practices and strive to improve them.
This step taken by Egypt is the first of its kind in the MENA region but hopefully will be followed by similar steps by other countries. It is important to mention that the only similar index that was launched before by Standard & Poor’s was launched in India in January 2008. Egypt’s experience shows that Egyptian companies still have a long way to go to match international best practice in corporate governance. Egypt hopes, therefore, that this index will help to improve corporate governance practices among its listed companies.