What ESG means for investors in Africa

While ESG has become well-established in developed countries, it is a newer concept in emerging markets. Our panellists explore how African countries are embracing and applying ESG principles.

The popularity of ESG investing in the developed world has boomed in recent years, as awareness of the issues among investors has grown.

ESG investing has also been gathering momentum in emerging markets, where social and environ has a more direct impact.

In Africa, there are many ways that companies and governments are applying ESG principles, particularly when it comes to the environment.

Emily Waita Macharia, public affairs director at Coca-Cola Africa, said there was a growing understanding of ESG issues on the continent. Many countries have taken steps to incorporate the United Nations’ Sustainable Development Goals (SDGs). However, there are challenges in tackling issues, particularly where they overlap with the continent’s economic growth.

She explained: “Waste generation is escalating for obvious reasons - population growth and changing consumer habits - which cannot be stopped if Africa has to achieve social and economic transformation.

“On the other hand, if environmental issues are not resolved, they will undermine the achievement of the SDGs. They’ll undermine the socio-economic development of the continent. The cost of inaction is clearly significant.”

Hany Assaad, co-founder of emerging and frontier markets-focused private equity manager Avanz Capital, said many African countries recognised that climate change was much more of a local issue than a global one, particularly with the continent’s history of catastrophic weather events. 

He explained: “There are 54 countries in Africa at very different levels of economic development, with some that have deep industrial roots and some that are just beginning their industrial life.

“But, as we know, the climate issue is paramount to all of these countries because they feel it through the erratic behaviour of climates and how that impacts them, whether it is through hurricanes, droughts or floods in their daily lives.”

Despite the growing awareness, there are challenges for governments and corporates who wish to address the ESG issues facing the continent.

Queen Chinyere Quinn, founding partner of advisory firm Kupanda Capital, highlighted an example in the energy sector.

“What we know now is that there are 600 million Africans who don’t have access to modern, clean energy,” she said. “In addition, there are 200 million who don’t have access to reliable power. This is a grand challenge, but it’s also an opportunity.

“There have been billions of dollars committed toward addressing climate change and energy access, yet only $300 million has been allocated towards the off-grid sector in Africa over the last few years.”

Chinyere Quinn continued: “There’s clearly an issue around investor risk perception. Investors and operators often don’t understand the risk exposure that they have to the space.

“They don’t understand how to properly underwrite new clients, [or] how to actually ensure that people have an ability to pay for the services that they are providing.”

Claudia Castro, director of fixed income research at Invesco, said developed countries could do more to help emerging market countries address the challenges of a changing climate. However, the Covid-19 pandemic has complicated things, she noted, by increasing levels of public indebtedness. 

Nevertheless, this could lead to opportunities for private sector investors, such as tying debt refinancing to sustainability goals.

“This way, everyone pitches in, and it adds to the general case for thematic bond issuance,” explained Costa.

Indeed, there could be a more prominent role for private capital in helping promote ESG in Africa, such as in project finance, according to Costa. She noted that there was a growing need for a comprehensive approach towards ESG, involving private capital, new technologies, and greater education surrounding the issues.

“Engagement is more than a buzzword,” she said. “It is more important to remain engaged and create incentives that support improvements in education as well as in other areas.”

The above article was drawn from ‘ESG in emerging markets or on emerging markets? The reality as viewed in Africa’ session at our ESG@Invesco digital client event on 17 June 2021. Please click here to watch the session.