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Why ESG is here to stay in African investments

Apr 14, 2014
Africa is still touted as the next investment frontier and the figures bear it out: with over $50 billion foreign investments in 2012 according to UN figures it is the recipient of more foreign direct investment (FDI) than any other continent. Investors appear to view the developed world as over-regulated, and regions such as North Africa or parts of the Middle East too unstable. Africa's economic resurgence has its roots in small but real improvements in governance and transparency, more open societies empowered by social media, and economies leapfrogging directly to new technologies such as the mobile phone as a business tool. More than 720 million Africans have mobile phones and 167 million have access to the internet. However, due to its low domestic savings rates Africa has to rely on foreign investments to fuel its growth and here two models have presented themselves:
  1. The Chinese 'ask no questions approach' which trades infrastructure investments for access to natural resources; and
  2. The conditional model espoused by the 'West' where investments seem to come with a range of conditions, especially in respect of environmental, social and governance performance.
While some observers have mistakenly framed the two options as a choice between two new forms of colonialism, it is worth looking dispassionately at some of these conditions - particularly those set out in 'global standards' developed by organisations such as the World Bank and the International Finance Corporation (IFC) - the largest source of development assistance in the world and the leading facilitators of infrastructure development funding globally. The most widely accepted of these standards - the 8 IFC Performance Standards and the sector-specific environmental health and safety guidelines supporting them - are remarkably simple in what they seek. In the case of their direct investments (including project and corporate finance provided through financial intermediaries), investors are required to identify and manage business risks and impacts so that development opportunities are enhanced. Globally more than 500 asset & investment managers managing more than $30 trillion are signatories of investment codes such as Equator Principles which are based upon the IFC Performance standards and require disclosure of environmental & social risks and management responses to such risks. Together these institutions account for nearly 80% of global project finance and they include banks from Nigeria, South Africa, Morocco, Egypt, Togo and China's Industrial Bank. The traditional Chinese investment model has over the years encountered sufficient and widespread opposition from African civil society in countries such as Namibia, Botswana and Zambia. This has led to social issues being approached more openly with more space given to opportunities for local labour and suppliers. Several surveys are underway by various Chinese-based institutions to measure and understand Africa's opinion of Chinese FDI. Chinese Banks now have to adopt a recently launched Green Credit Policy, and a draft CSR Policy for Outbound Investments in the Extractive Sector is due out in May. So while it appears that Chinese investors in Africa are starting their ESG journey, this does not imply that 'First World' investors who placed an earlier emphasis on environmental, social and governance (ESG) issues have been more successful. Rather their approach to ESG issues has more often than not resulted in a compliance, "tick the box" approach, resulting in a "do the minimum" level of ESG interest. This is why it is critical that as Africa continues to grow that project developers and foreign investors are guided by ESG standards towards achieving holistic risk management approaches. All these ESG guidelines are by their very nature generic and encourage interpretation in terms in terms of local context and sectoral expertise. Thus even Africa's biggest development finance institution - the African Development Bank (AfDB) approaches wildlife protection and anti-poaching measures not as measures to appease western sources of capital, but as its head, Donald Kaberuka explains, as part of its basis for sustainable economic growth. The issue, according to Kaberuka, concerns the survival of the ecosystems on which African economies and communities depend for tourism revenues. This makes wildlife protection a key issue for Africa's largest development bank and the projects it considers in pursuit of its mandate. A project's failure to consider stormwater flow paths in built-up areas during extreme weather events can lead to catastrophic structural failures affecting projects such as shopping centers. Alternatively failure to openly engage with and compensate informal land users of areas being converted to formal farming can lead to consistent community conflict, road blockages and crop sabotage. Failure to explore the use of slightly more expensive but more eco-friendly inputs in a production process can lead to later impacts on cash costs when waste disposal charges or penalties mount. The list of issues to consider is potentially endless and such global ESG standards offer a widely accepted methodology deemed not only as reasonable for risk management purposes but also structurally encourage project proponents to explore more efficient, more sustainable alternatives. In its search for sustainable economic growth, African communities and institutions must set aside fears of externally-imposed standards. Rather they should take advantage of the proven methodologies such standards, when diligently applied with local context and sectorial expertise, can make on project timelines, project risk profiles and improved economic returns for the investments fuelling Africa's economic resurgence. James Brice, CEO, & Markus Reichardt, Principal, Environmental Business Strategies Pty Ltd: www.envirobiz.co.za.

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