Socially Responsible Investment And Macroeconomic Stability In South Africa: An Application Of Vector Error Correction Model

Paul F Muzindutsi,Tshediso J Sekhampu

doi:10.19030/jabr.v29i6.8201

Paul F Muzindutsi, Tshediso J Sekhampu

Open Access

https://doi.org/10.19030/jabr.v29i6.8201

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Abstract

<p>The study reported in this article investigated the relationship between the Social Responsible Investment (SRI) sector and macroeconomic stability in South Africa. Johansen co-integration approach and Vector Error Correction Model (VECM) were employed to test the relationship between SRI Index and a set of macroeconomic stability variables (inflation, real exchange rate, interest rates and money supply). Secondary data for the period April 2004 to December 2012 was analysed. There was a long-run association between all the variables during the period under consideration. However, the inflation rate, real effective exchange rate and money supply were not significant in predicting short-run changes in the SRI Index. A significant short-run relationship between SRI Index and the difference between long term and short-term interest rates (term structure) was observed. Macroeconomic variables are significant in explaining the behavior of the South African SRI sector in the long-run.</p>

Highlights

O ne of the growing areas of the South African stock market development is the Socially Responsible Investment (SRI) sector
The aim of the study reported in this article was to investigate the role of macroeconomic stability variables in explaining the behavior of the growing SRI sector in South
A co-integration approach, VCM and causality tests were used to assess the relationship between the SRI Index and a set of macroeconomic variables (consumer price index (CPI), real effective exchange rate, money supply and term spread

Summary

Introduction

O ne of the growing areas of the South African stock market development is the Socially Responsible Investment (SRI) sector. Sustainability is categorised into three pillars, namely: environmental, economic, and social sustainability (JSE (Johannesburg Stock Exchange), 2004). Economic sustainability involves good corporate governance practices that encourage long-term financial performance while adapting to changes in macroeconomic factors and ensuring feasibility of the business (JSE, 2011:4). Social sustainability entails the establishment and maintenance of a positive relationship with all stakeholders. This involves development of strategies that promote social upliftment, development and poverty reduction, while taking account of diversity, employment equity, empowerment, fair labour practices and health and safety (JSE, 2004). In responding to the growing interest in responsible investment around the world, the Johannesburg Stock Exchange (JSE) launched a Socially Responsible Index (SRI) in May 2004. The SRI Index serves a useful tool for companies and investors to achieve the goal of sustainability by respecting the community and environment in which they operate in (JSE, 2009)

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