In the article ‘The story behind the term ESG’, Giuseppe Perrone acknowledged that, in less than 2 decades, the term ‘ESG’ – which was devised with the aim of integrating environmental, social and governance considerations into capital market activities – has made significant inroads in influencing sustainable investments globally. Today, the Global Sustainable Investment Alliance is reporting that global sustainable investments have accounted for more than 36 percent of the US$98trillion global investments over the last two years, and are estimated to reach US$50trillion by the year 2025.
Following this is the shift from investing solely for profits to the critical consideration of how activities of a company impact the environment, society and the governance systems it adopts. ESG considerations are becoming key benchmarks in investment appraisals, giving investors the power to influence which companies are funded vis-à-vis the important issues affecting our world today – protection of the environment, the promotion of inclusive leadership, and women and girl-child empowerment among others.
With little over 0.1 percent of global sustainable investments made in Africa over the last two years according to the report ‘The elephant in the room: bringing sustainable investment to Africa’, there is a huge opportunity for private companies to leverage the adaptation of ESG considerations to attract sustainable investments going forward.
By legislative design, private companies in Africa cannot publicly raise investments by way of equity or debt. Unlike publicly listed companies which can raise investments through the stock exchanges, private companies can only use the means of private placements to raise investments from individual investors, venture capitalists, institutional fund managers, etc. And these actors continue to play leading roles in providing critical funding for businesses across Africa, with some US$1.4billion reported venture capitalist deals in Africa, according to the African Private Equity and Venture Capital Association.
While economic potentials of the African continent – as evidenced by the African Continental Free Trade Area (AfCFTA) with an income potential of US$450billion by 2035 – may provide some insight into the growing interest of global investors in Africa, private companies must undertake deliberate steps to attract and sustain these investments.
Environmental, Social and Governance issues are the principal considerations for ESG frameworks. The primary measure of the Environmental standard is the extent of a company’s environmental footprint. It assesses how a company engages, for instance, in waste disposal, reduction of carbon emissions, and compliance with national environmental protection laws and regulations among others.
The Social standards examine the relationship between a company and its employees as relates to workplace attrition, workplace safety, commensurate remuneration, complaint procedures, dispute resolution mechanisms, and the employment of local people.
The Governance framework focuses on the internal workings of a company; such as composition of the board of directors, tax strategy, the rights of shareholders, anti-corruption and bribery practices, etc.
These broad frameworks have been developed into globally accepted measurable and reporting metrics, which are helping companies track their compliance. Considerably, the global investor community has embraced these ESG ratings and are aggressively using same to appraise new investments, as they promote transparency and fairness in ESG-compliance.
Further, investors are designing special-purpose investment instruments such as carbon market instruments, green bonds and climate change finance, and committing huge sums of monies to them. It is reported by the Green Finance and Development Centre that the overall financial commitments toward these special purpose funds summed to a total US$247billion as of 2019, and this trend of sustainable investments is estimated to grow to US$1trillion by 2030.
While there are growing international efforts to amplify the need for national governments to comply with Environmental standards, in Africa at the company level national stock exchanges, including the Ghana Stock Exchange, are launching various ESG disclosure guidelines for publicly-listed companies as the avenue to integrate ESG compliance into their operations – having arrived here after so many years of advocacy.
To accelerate the adoption of ESG frameworks by private companies in Africa and make them eligible for huge opportunities for sustainable investments, advocacy and awareness-creation must be the starting point.
The advocacy approach must be driven by Africa-oriented concepts to help increase the appreciation of ESG issues. The focus must be to drive ownership of the effects of private companies’ operational activities on the environment and society, while ensuring sustainable governance practices are entrenched.
Additionally, there must be a deliberate pursuit of a tailored African ESG frameworks while considering the continent’s history, values, customs and cultural relativities. This will help foster a sense of ownership among business leaders and their communities, and promote verifiable compliance and reporting among private companies.
Furthermore, owing to the lack of harmonised legislation governing the implementation of ESG standards, compliance by entities in most African states has become a question of positive morality. To drive uniform compliance, a comprehensive piece of legislation governing ESG standards must be enacted by African countries. This must be supported by the establishment of functional institutions tasked with ensuring compliance with provisions of the enactment. As an alternative, already-existing institutions like the Office of the Registrar of Companies can be given additional resources and empowered to enforce compliance with these standards.
Gradually, ESG considerations are taking centre-stage in all discussions of sustainability and becoming an important benchmark for funding assessments across the world. In Africa, its in-roads are becoming visible, and it is time private companies embraced its frameworks and incorporate its demands into their operations to attract critical investments going forward.
>>>the writer is the Managing Partner of Sustineri Attorneys PRUC (www.sustineriattorneys.com), a client-centric law firm specialising in transactions, corporate legal services, dispute resolutions and tax. He also heads the firm’s Start-ups, Fintech and Innovations Practice divisions. He welcomes views on this article and is reachable at [email protected]
