We believe that a market exists for a certified skills base of African ESG professionals. Banks, private equity investors, DFIs, portfolio companies and corporates will all benefit from being able to assess a verified pool of local, indigenous talent. In a recent hire, a large West African Private Equity fund took 12 months to find a suitably experienced and indigenous environmental, social and governance (ESG) professional, despite having access to the best recruitment agencies in Africa and London. These situations are definitely avoidable, and need a solution if we are to have a chance of building a responsible investing climate in Africa.
At present, ESG is largely seen by investors as a compliance function, or at best a risk management control. Furthermore, there is hardly any enforcement by regulators on the continent regarding performance, yet there exists a plethora of Environmental and Social Impact Assessment (ESIA) regulations in every country which results only in delayed approvals for developments and exorbitant annual licensing fees. Little wonder that ESG is seen as a grudge purchase in Africa, resulting in significant pressure on fees. As a result, there are literally thousands of freelance ESG consultants in Africa who have no means of differentiating themselves by virtue of qualification or skills, and compete purely on price. We estimate that in Nairobi alone, based on records provided to us by the regulator, there are over 200 freelance ESIA consultants. Similar numbers exist in Maputo, Lagos, Accra, Casablanca, Cairo, etc.
A few may have relationships with consultancies in London or Johannesburg who sub-contract their work to them, but it remains extremely difficult for them to “swim upstream” and bypass their feeders to directly access the clients, and the fees, on offer in Europe or the UK. In fact, no ESG consultancy has eversuccessfully expanded from Africa into the EU, UK or US.
So where are financial institutions operating in Africa sourcing their ESG talent?
In most cases it’s through expatriate ESG consultants, being flown in at significant expense, and who may not speak the language, understand cultural norms and traditions, and lack insight required for meaningful engagement with the communities affected by the investments made by their employer. Further, these highly qualified ESG professionals tend to leave their roles within a few years, for the following reasons:
- They get bored because they’re just doing basic ESG compliance reporting and are managing consultants who do the interesting and challenging work.
- They have insights to affect and enhance the commerciality of the deal by applying ESG strategically, but are kept periphery to the deal team.
- They are lonely – they tend to be the only ESG person within the FI, surrounded by a sea of CFAs and CAs.
- They are ambitious. Out of the roughly 130 Private Equity companies investing in Africa, only two have had an ESG professional at director level.
- They are revenue focused. They want carry and exposure to profit and so leave the ESG function to join the deal team.
Alternatively, fund managers, especially those running first- or second-time funds under $80m, hire someone who is local, cheap and, due to an absence of
experienced professionals, junior. We find that the majority of the GPs, especially those with smaller funds cannot afford senior ESG professionals. They go
ahead with someone junior, local and less expensive. Typically these consultants are offered around $1,500 to $2,000 per month cost to company, with two to three years’ ESIA experience. The problem with this scenario is that this is a job of a lifetime for the young consultant: they now have the opportunity to gain international exposure and experience that they would never have gained working for a local ESIA consultancy. They are going to ensure achievement of just enough compliance to keep the LPs happy and the funds rolling in. This person is not going to speak up and challenge very senior investment professionals when the limits of responsible investing are being tested.
The scenario frequently leaves LPs frustrated because they don’t see sufficient levels of ESG performance in the GP. The ESG consultant is just too junior to convince management on the commercial benefits of integrating ESG strategically into an investment cycle. Management then blames the ESG function for not delivering the results to keep the LP happy.It’s a vicious cycle and reinforces the notion that ESG doesn’t deliver results and is just a grudge purchase. ESG is a new skill in emerging markets. It is not taught at universities. The only real training is on-the-job. The short courses offered every six months by the DFIs are not sufficient to produce a new generation of local, indigenous ESG professionals. The solution is in education, training, research and knowledge sharing. Currently, there exists no institution for building a new generation of ESG professionals on a pan-African basis, and for establishing a comparable evaluation of ESG skills and accreditation.
The African Responsible Investment and Finance Association (AfRIA) has been proposed as a non-profit organisation that aims to help to build capacity and leverage expertise to promote the development of sustainable financial markets and systems in Africa. Founding membership opportunities are available and further details can be obtained from me.
James Brice is Group CEO, EBS Advisory, an ESG and impact consultancy to business, investors and financial institutions in African and other emerging markets.
E-mail: James Brice