Africa is shaking off its reputation as an ESG backwater. Major index compilers now offer ESG equities indexes, governments are encoding sustainable finance regulations and green investments are rolling in.
Holding back the development of a flourishing sustainable finance market in this ESG sleeping giant, however, is the absence of good quality ESG data.
While some jurisdictions, including South Africa and Kenya, are responding to investor demands for greater transparency into their companies’ sustainability records, others lack the resources or motivation to follow suit. Corporates too, many of them young, are finding it hard to put the sorts of data-gathering systems and controls in place that will ensure they can offer investors and customers the performance metrics they increasingly demand.
Regulatory controls are weak, too, meaning there are few legal inducements for companies to collect their ESG performance data.
“Data is the biggest challenge, with many companies beginning their data collection/reporting journeys and also a lack of strong quality national census/research information that can hinder understanding of baselines and impact,” Clémence McNulty, Partner Sustainability & Climate Change with a brief for Africa at EY, tells ESG Insight.“In certain areas and because of the challenging operating context, there is some information already available, but in many areas this is still emerging.”
Needs and Opportunities
Africa has much need for a strong ESG market. The continent is home to some of the largest areas of land vulnerable to the impacts of climate change, biodiversity loss and pollution. It also has some of the poorest communities in the world, is riven by social divisions and scarred by exploitative companies and rapacious governments.
But the nations of Africa also offer huge opportunities. Investors in natural capital, renewable energy, nature-based carbon mitigation and a multitude of other climate-positive projects are looking at the potential of allocating capital to the continent. Africa also has a young workforce that is connected to the wider world via mobile communications. This technological development, exemplified by Kenya’s Mpesa mobile payments system, offers opportunities that were never possible before because it is providing funding channels that are directing finance to remote regions.
However, it’s Africa’s vulnerability to the risks associated with climate change that make the development of strong ESG data capabilities a priority. Without that, companies operating in the continent will find it difficult to attract financing from banks and other financial institutions keen to put their money into sustainability projects.
Some corporates, largely based out of the stronger economies are integrating ESG into their processes.
“Interestingly whilst ESG reporting may not always be as sophisticated as in other jurisdictions, by nature of a sometimes more challenging operating context – for example in relation to access to electricity and water or scarce resources to operate, or social circumstances that require additional focus on diversity and inclusion – African companies have often integrated ESG considerations into their operations,” says McNulty.
While the carrot of investor demand is emerging in the region to encourage corporate ESG reporting, there is no corresponding development of a stick in the form of regulatory obligations.
Again, the developed economies are the outliers. While the South African government has no ESG reporting laws, companies listed on the Johannesburg Stock Exchange must comply with its annual “apply and explain” sustainability reporting rules. The Sustainability Disclosure Guidance is aligned with the Taskforce on Climate-related Financial Disclosures (TCFD) and the IIRC’s International Framework.
The Central Bank of Kenya last year issued guidelines climate-related risk management and the Government of Mauritius followed suit this year.
Do It Yourself
Elsewhere, however, the picture is less rosy, forcing companies to set their own reporting standards based on structures developed overseas.
“The regulatory environment serves as a major barrier to ESG investing in Africa,” wrote Africa Matters, a sustainability advisory firm for financial institutions based on the continent.
“Although there is a deficit in regional regulatory capabilities in this area, new market entrants, portfolio companies and firms with decades-long history in Africa are experiencing external pressure to adopt international regulations and utilise ESG data, ratings and related services in order to adhere to international best practice as a way in which to reduce ‘greenwashing’.”
With restricted access to technology and datasets limiting the development of a strong ESG ecosystem in Africa, there is a lack of baseline data that financial institutions can use as benchmarks for the continent.
McNulty points to the tiny volumes of investment into research in Africa. She cites an Intergovernmental Panel on Climate Change study that found less than 4 per cent of global funding for climate-related research went into Africa.
“That is incommensurate with Africa’s high vulnerability to climate change,” she says.
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