Africa’s red light on eco-investing


More than half of East Africans reported to have experienced economic crimes including sustainability fraud in the last two years. FILE PHOTO | SHUTTERSTOCK

Dangote Cement, Africa’s largest cement maker builds elementary schools free of charge in villages where they operate, sparing local children a dangerous commute along busy highways.

Ghanaian mining concern AngloGold Ashanti has been in talks to relinquish land it once controlled back to the community.

Jumia, the pan-African online retailer, has committed to increasing its roster of female tech employees, last reported at 22 percent.

Large African firms are making strides to improve community well-being, strengthening their social license to operate.

They are part of the great global tide of the environmental, social and governance (ESG) movement pushing businesses to pursue better outcomes for all.

It seems like a no-brainer – so why aren’t more African businesses and governments on board?

Perhaps they are sceptical. The rise in recent years of stakeholder capitalism, which factors ESG considerations into investment decisions, has triggered a backlash.

Critics contend that money managers who dare lift their gaze beyond a company’s balance sheet do so in violation of their fiduciary duty.

For them, ESG amounts to fuzzy math and wish fulfilment, lacking in rigour and subject to the dictates of social justice bullies.

Read: Importance of ESG and its true fiscal value to business

In America, for example, more than a dozen states have passed or introduced anti-ESG legislation to date.

What a collective crow of satisfaction there must have been last month, when news broke that more than $8 trillion in investments previously characterised by trendwatchers as ‘sustainable’ had been reclassified, in anticipation of tighter anti-greenwashing regulations soon to come from the US Securities and Exchange Commission.

Greenwashing may be down the priority list for anti-ESG agitators, the most vocal of whom seem to prefer their capitalism unwashed.

But regulations that enforce consistency in ESG metrics and prevent money managers from making spurious sustainability claims should be applauded by proponents and critics alike.

When pro- and anti-ESG camps tug the rope from opposite ends, both sides help straighten the sag in ESG standardisation.

The new SEC rules follow in the wake of stricter sustainability reporting requirements issued by the European Commission.

Beginning in 2024, all listed companies in the EU will be required to adhere to more meticulous disclosure standards.

Yet while the EU and the US move toward comprehensive global ESG metrics, complete with strengthened impact-driven enforcement mechanisms, a full-spectrum approach to ESG has yet to be proposed by a regional body such as the African Union.

This is lamentable, because ESG investing is only getting bigger, and failing to engage risks a political and financial shutout that African countries can ill afford.

By 2026, ESG will account for more than one-fifth of all assets under management worldwide.

Even the 2022 Report on US Sustainable Investing Trends, applying its own revised methodology, indicates that one out of every eight dollars of the $66.6 trillion in US assets under management is already allocated to sustainable investment.

Leading the movement are major institutional investors, 60 percent of whom report higher performance yields for ESG investments than for non-ESG equivalents.

Nine out of 10 asset managers in a recent PwC survey saw value in integrating ESG into their investment strategies; for three-quarters of them, applying an ESG lens to investment decisions has become central to their fiduciary duties.

The top ESG priority for sustainability-minded asset managers and investors is reducing carbon emissions.

Other priorities include avoiding investments related to the military, weapons, or tobacco; divesting from fossil fuels; avoiding business in high-conflict risk countries; improving board performance; and supporting sustainable natural resource management.

Thankfully, governments are stepping up. Nigeria and South Africa are in the lead, each with a burgeoning ecosystem of environmental disclosure regulations, social impact guidelines, corporate governance codes, and an increasingly ESG-oriented business culture, driven by rising public demand for accountability and enforcement. Ghana, Kenya, Mauritius, and other African countries are following suit.

The challenge now for them – as for governments and businesses everywhere – is to deepen the granularity and measurability of those ESG ecosystems, based on the needs and priorities of African stakeholders.

As the metrics grow more robust and the world converges toward universal standards, African businesses, governments, and regional organisations must weigh in to ensure that those standards serve African interests.

Read: Explainer: What the 's' in ESG means and its application

A good place to start is moving from a compliance approach to one of impact, exploring where sustainability standards and enforcement can be tightened: where a recommended voluntary disclosure should be made mandatory, or a ‘comply or explain’ standard toughened into ‘comply or else’.

Evidence is mounting that ESG sceptics and laggards are on the wrong side of history. There is no reason for African leaders to be among them.

The writer is an ESG advisor based in New York.