An increasing number of corporate scandals, the recent financial crisis and its interlinked Social and Environmental impacts which have heightened world-awareness of sustainability challenges, and a real concern for business today. It is against this backdrop of change and uncertainty that interest in Environmental, Social and Governance (ESG) issues gathered significant momentum at the turn of the 21st century. The major policies are how effected ESG policies are understood to lead to long-term company performance and corporate sustainability; or are integrated into investment decisions by the financial market.
The United Nations Environment Programme Financial Initiative (UNEP-FI) defines responsible investment as that which incorporates an active consideration of Environmental, Social and Governance (ESG) issues into investment decision-making and ownership, whereby ESG issues are considered on the basis of financial materiality. This is especially so for those investors who want to improve long-term sustainability by considering the integration of ESG issues into investment decision-making.
Responsible investments have two main forms:
- A form in which ESG issues are considered only to the extent that they are financially material;
- The consideration of ESG issues before the maximisation of financial investment returns.
The need for sustainable investment
- Private investment is a powerful development enabler, which when defined in the right way can create jobs, build skills, spur innovation, provide essential infrastructure and services, boost economic development and strengthen standards in public and corporate governance. However, more investment is not enough; it must be of good quality for it to be fully materialised.
Sustainable Investment in developing countries
The Global Sustainable Investment Alliance (GSIA) is an international collaboration-based sustainable investment organisation, whose mission is to deepen and expand the practice of sustainable investment. Sustainable investment is also making inroads in three major African economies: Kenya, Nigeria and South Africa. Globally, there is US$22.89billion of assets professionally managed under responsible investment strategies. Sustainable investment encompasses the following activities and strategies:
- Negative/exclusionary screening – The exclusion of companies from a fund or portfolio
- Positive/best in class screening – Investment selected for positive ESG performance
- Norms-based screening – Minimum standard of investment practices based on international norms
- Integration of ESG factors – Inclusion of ESG factors into financial analysis
- Sustainability-themed investing: Investment specifically related to sustainability (clean energy, green technology)
- Impact/community investing: Targetted investment made in the private market aimed at solving ESG challenges.
Sustainable investment (SI) in sub-Saharan Africa
The International Financial Corporation (IFC), a member of the World Bank Group (WBG), creates opportunities for people to escape poverty and improve their lives. Sustainable investment – the integration of Environmental, Social and Corporate Governance (ESG) factors into investment decision and processes – support this goal.
IFC’s advisory services encourage investors and market participant to integrate ESG factors into capital allocation and portfolio management, using IFC’S own investment practices as a model. IFC promotes sustainable investment by developing/enhancing stock market indices; designing financial instruments; conducting market research; and helping private equity funds establish ESG analytical processes.
Sub-Saharan Africa is developing an organic approach to SI. There is growing awareness that such investment can play an essential part in tackling the social and economic challenges of the region, and that the resulting economic growth will benefit investors over the long-term sustainably.
The relative size of the overall sub-Saharan Africa sustainable market ranks ahead of markets such as the United States and Brazil. The African investing for impact barometer documented a range of investments in Africa which combine financial returns and positive impacts on society and the environment.
Private Equity (PE)
Private Equity (PE) is a small but growing investment discipline in sub-Saharan Africa, expanding in response to improving economic fundamentals. PE fundraising activity in sub-Saharan Africa almost tripled from US$950million in 2010 to over US$2.75billion in 2016. PE fund manage an estimated around US$24billion, with South Africa’s specific fund accounting for around US$14billion.
Barriers to sustainable investment
- The knowledge-gaps syndrome
- Dominant investment practices hard to change
- Poorly applied regulations at the company and investor levels
- Incorrect perception of sustainable investment as only ‘ethical’ investment
- Negative screening in the investment process
A systematic approach will encourage integration of ESG factors into investment decisions in sub-Saharan Africa.
- Key influencers to drive messaging: Sustainable Investment should be presented in the language of investors and the asset owners
- Streamline reporting – reduce information-gathering and execution costs by streamlining the ESG reporting approaches and increasing comparability of ESG impacts through guidelines for Private Equity.
- Leverage local knowledge: leverage local and regional insights in sustainable investment to develop new global best practices
- Make the investment easy: present the sustainable investment case to make the proposition that SI has the potential to generate increased returns and/or reduce risk across all asset classes
- Keep score: investors and investment stakeholders need to keep abreast of investment performance and ESG impacts. Regular surveys of investment products, portfolios and performance are required, along with benchmarking through a regional sustainability index.
- Governments should consider existing frameworks and instruments, such as the policy framework for investment and OECD Guidelines for multinational enterprise, to support their efforts in maximising the positive impact of private investment for sustainable development.
The writer is a lecturer, CEO (KBAN-NYAMEKYE CONSULTANCY) 0242965624; Email: email@example.com