ESG practices in Africa are improving

Uptake is essential for development and building value, says new PRI signatory, CDC.

Strong environment, social and governance (ESG) practices build real value and make commercial sense. These practices are especially important for businesses in Africa, particularly in sub-Saharan Africa, which is rated by some as the most difficult continent in the world in terms of ease of doing business, and is home to a larger proportion of poor people than any other region. Corruption, bureaucracy, inefficient capital markets, poor infrastructure (especially the lack of access to reliable power), and the effects of diseases such as HIV/AIDS, tuberculosis and malaria make many of the region’s economies highly challenging for entrepreneurs and growing businesses. Despite these challenges, there is a growing determination to resolve seemingly intractable issues and shake off the poor reputation of many African companies. We have seen a trend in Africa towards active management of ESG practices. In particular, there is recognition that having good ESG practices builds competitive advantage and value in the business. A strong ESG record can help companies win international customers, build stronger brands, reduce costs and improve performance. It also encourages companies to operate to international standards and owners recognise that this is essential if they are to attract potential buyers when they choose to sell.Within Africa, different businesses have different ESG concerns. Those with high environmental concerns include ones which have large factories, are involved in oil and gas extraction, large-scale agribusiness, forestry, construction, new infrastructure projects and resource intensive industries, such as cement plants. There are also high ESG concerns in businesses that use low skilled workers, such as textile production, those which operate in countries with weak employment legislation, that involve workers handling hazardous substances and last but not least, businesses which can pose health and safety dangers for consumers, such as food producers. From the business integrity and corporate governance perspectives, there are risks and opportunities for improvement across most sectors. Many fund managers investing in businesses in Africa are now demanding a strong commitment to responsible investment principles. In CDC, this is something we absolutely insist upon. Our fund managers are helping investee companies design action plans for tackling problem areas and introduce appropriate improvements over the investment period. This will often include employing health and safety specialists to manage improvements in environmental and social management and the general health and safety of employees.

While we are seeing an increase in businesses introducing ESG practices, this is not true of all businesses. Across sub-Saharan Africa poor business management is a major barrier to growth. In many countries, while laws are in place, they are ineffectively enforced as there is a shortage of enforcement officials. This results in lax corporate governance standards. There is also a shortage of expertise on environmental and health and safety issues. In sub-Saharan Africa, HIV infection rates are between 15% and 20% for some countries, including Zambia, Namibia and South Africa. Across the region more healthcare professionals are needed to educate communities and provide treatment for employees and their families. The introduction of HIV programmes by some businesses has increased awareness and prevention but further work is needed to encourage best practice with respect to the battle against HIV, malaria and tuberculosis. Self-interest is a helpful motivator here: a healthy workforce means a more efficient workforce, which can help businesses grow and achieve long term success. This one measure could make an enormous social and economic impact. To further compound ESG challenges, the global financial downturn is being felt by African businesses. Exports have declined, by around 15% in South Africa, and capital remains in short supply. Many equity investors who were finally looking to invest in the continent are turning away. Debt capital is scarce.This flight of capital means that the very businesses on which economic growth and ultimate poverty eradication depend, are starved of growth finance. Due to recessionary pressures, many companies have cut back on costs and some businesses may be tempted to cut corners on ESG matters, which will have detrimental problems for the business in the long term. Despite this, there are reasons for optimism. African economies are growing – the IMF is still predicting 4.1% GDP growth in sub-Saharan Africa for 2010. Not as much as the region needs, but this is still a positive trend and we hope this growth encourages investment back to Africa. We are also seeing a growing number of African companies preparing for the upturn by investing in building strong ESG practices, giving them a commercial advantage in the future. As international ESG best practices continue to evolve and more organisations sign up to investment standards, such as the UN’s Principles for Responsible Investing, more African businesses will become better aware of how to improve ESG. While sub-Saharan Africa remains a tough business environment, there is a desire to improve ESG practices and a growing realisation that this, in turn, will help to improve business performance and value and ultimately help stimulate economic growth, thereby reducing poverty.
Richard Laing is chief executive of CDC, the UK government owned development agency that invests in private equity funds in emerging markets