Materiality summary

Governance

Compared with the TMT sector, Industrials pose less of a demand on boards in terms of dynamic and disruptive technological demands. The nature of the competition in these industries tends to demand close attention to asset management and productivity, utilising assets efficiently and managing large workforces across complex operations. Thus, board balance and effectiveness, leadership selection and preparation, remuneration and incentives and system integrity are all mid-level issues in terms of materiality. Following recent failures, such as at Steinhoff, as well as questions around Capitec and the Resilient stable, and the issues related KPMG, audit independence is emerging as an issue of above-average importance (though much of the noise has emerged subsequent to the current reporting and assessment period). Companies in the South African market have generally been reactive to these issues.

Ethics

Anti-competitive behaviour is a potential vulnerability in the automotive industry, particularly between OEMs and dealerships, locking customers into costly service agreements. However, the high rate of off-plan ownership in South Africa reduces this vulnerability significantly.

Niche products create opportunities for monopolistic market behaviour, such as collusion between major manufacturers. In 2017, AECI settled a R14m fine with the Competition Tribunal for collusion with Investchem in the supply and manufacture of surfactants.

Labour

Given the high number of employees working for relatively low wages in the industrial sub-sectors, fair labour issues that include engagement and working conditions, as well as skills development, are highly weighted for materiality, being societal concerns that can impact on long-term profitability. Relatively dangerous businesses, including manufacturing (especially of hazardous materials), trucking and logistics are exposed to occupational health and safety risks.

Society

Given the depth of the industrial sector’s investment in the communities where its operations are located, societal concerns of community impact & relations, internal and industry equity (BBBEE) and external societal risks are of above average significance. Companies doing significant business in South Africa (and the continent) have raised vulnerability to equity and empowerment obligations.

Customers

Apart from automotive dealership businesses selling to end customers, where treatment of customers is of particular importance, the industrial sector is predominantly engaged in business-to-business (B2B) trade where quality of service (on-time delivery and reliability) are the key issues relating to product suitability. Equitable access to products and services and data privacy rank low on the materiality weighting scale.

Environment

Consistent with the demands for production and logistics efficiencies, the most material environmental issue relates to the efficient usage of energy, followed by conservation of water and containment of bio-physical impacts. External environmental risks related to extreme weather events (and possibly climate change), have an average materiality weighting.