Global power is shifting and there is evidence of renewed, urgent interest in Environmental, Social and Governance (ESG) factors particularly by the US. This is not surprising, since 60% of Americans view climate change as a serious threat.
Investors around the world are increasingly applying ESG non-financial factors within their investment decision analysis process. And now that ESG factors are moving up the global agenda, fund managers and African businesses need to get involved.
What’s behind the growing global interest in ESG and sustainable investment?
Due to the increased interest in ESG by global super-powers, we will inevitably see higher levels of regulation for fund managers looking to make money for these investors.
Regulatory agendas will quickly react to the increased sustainable investment. And there is no reason why African businesses cannot lead the way. ESG is now an essential part of attracting overseas investment. The latest confirmed figures demonstrate this with US$31 trillion of investment funding in 2018 conforming to ESG criteria.
Figures since then will show even more of an increase. Sustainable investing is increasingly an accepted and mainstream part of financial institutions, pension funds and massive investors. Most significantly, the governments of the world’s biggest economies are now demanding investors follow this same path.
For example, the UK Government is proposing (although not decided) that occupational pension schemes of a certain value must disclose environmental and climate risks by 2022. The EU, which is the richest and most important single market globally, regulates financial services across all individual member states. While it doesn’t regulate the corporate disclosures themselves, as this is managed by each state, it can and has asked the sector to disclose its ESG commitment and evidence-based impact.
A leader in this field is the perhaps under-appreciated devolved Government in Wales. It has already initiated the Wellbeing of Future Generations Act. This legislation requires all public bodies to include analysis and awareness of the likely long-term impact of any policy decisions before they make them. The Act particularly focuses on ESG and sustainable investments and policies. This will go on to influence procurement and the private sector and is a positive framework for other countries to use.
Government nudging can lead to significant change
So far, the UK Government’s recommendations (note, this is not yet regulatory or legally expected) have shifted the gender diversity issue at the highest level. There has been a distinct increase in diversity at board level that can be linked to the Government’s ‘nudging’, ‘recommending’ and ‘encouraging’.
We will see more of this nudging from Governments to increase ESG. There are endless announcements from all kinds of global corporations across different sectors about their net-zero goals. Even F1 racing has recently spoken about a move towards sustainable fuel instead of petrol and diesel. It’s even possible that there will be more investors seeking out ESG and sustainable opportunities than there are actual assets on the market.
New US President Joe Biden ran one of the most environmentally focused election campaigns in history. This was undoubtedly at least partly a reaction to his predecessor’s damaging policies and withdrawal from the Paris Agreement but is also to bring greater global focus to the urgency of climate change.
His Cabinet consists of environmental experts and the US has a goal of net-zero by 2050. To achieve this, he has ensured that every role in his Cabinet is focusing on reducing emissions and improving resilience to climate change. This applies where it’s the Department of Transportation or the Department of the Interior. And it’s this holistic approach that will make the difference. It’s also an approach that must be emulated by African businesses in order to capitalize on sustainable investment from overseas.
African Governments and fund managers must step up
In November 2021, the UN Climate Change Summit will be attended by the President along with climate advisor Al Gore. This further underscores America’s total break with the outright climate change denialism that characterized the years between 2016 and 2020 in the most powerful country on earth.
African Governments must now step up. They have a major part to play in the fight against climate change and African businesses do too. By creating sustainable investment opportunities through the integral utilization of ESG principles, African businesses can lead the way. There are many ways companies can lower their carbon footprint and the ones that do so are rewarded.
These investment trends can be clearly seen in the massive amount of global capital now being ploughed into sustainable assets. This is only going to increase and continue. Useful figures showing just how much this is exploding can be seen with the report from the USSIF Foundation on US Sustainable and Impact Investing Trends 2020.
Data from this report shows that US assets that incorporate and utilize sustainable investments strategies increased in worth from US$12 trillion at the beginning of 2018 to US$17.1 trillion by the end of 2019. This is an increase of 42%.
A separate report by Moody that covers the ESG Global update (released February 2021) shows that powerful global economies are crafting pandemic recovery strategies that automatically incorporate a reduction in emissions. This means that we will definitely see yet more acceleration of ESG factors in financial markets.
Regulatory changes will tighten the market for fund managers
We’ve seen how much the interest in ESG and sustainable investment is increasing from the US and around the world. One of the results of this increase will mean much higher levels of due diligence and regulation for fund managers who are working to raise capital from these investments.
In Africa, this could feasibly mean a significant boost to impact investing from global institutional investors and development financial institutions. All of these investors will be doing everything they can to meet their Sustainable Development Goals (SDG) and ESG targets by strategic investment plans.
African countries could benefit from engaging with Chinese investors in particular. China is a global leader in sustainable finance and has been integral in the development of international frameworks. A key part of China’s strategy is to include projects and countries within its Belt and Road Initiative (BRI).
The ICBC Standard Bank has developed an index to measure the potential for sustainable development and engagement in this area, called the Belt and Road Green Finance (BGRF) Investment Index. In basic terms, the index measures the green development capability and economic strategy of the 79 countries included along the Belt and Road. This includes 38 countries in Sub-Saharan Africa.
Currently, the index shows relatively low scores for the African countries in this group regarding environmental efficiency and climate change. This shows that there are huge opportunities for these country’s Governments to develop individual strategies for green development. Financial institutions and global investors can contribute to developing these, which will then lead to capital flow to green projects and industries.
By improving regulation, governance and the availability of trustworthy data, African countries can create endless opportunities for truly transformative ESG and sustainable investments. African fund managers will use these improvements in their decisions to invest in African capital markets and unleash the continent’s potential.