Across the continent of Africa, a new investment trend is taking root: environmental, social, and governance (ESG) investing. Africa is experiencing a surge in interest in sustainable and responsible investment practices. This rise is driven by a combination of factors, including rapid economic growth, climate change vulnerability, and evolving regulations.
Certain economies in the continent are attracting investors that are increasingly ESG-conscious and demanding transparency and responsible practices from companies. With certain countries in Africa being highly susceptible to climate change, ESG investing may offer solutions to mitigate these risks and promote sustainable development. Governments across Africa are recognizing the importance of ESG and developing regulatory frameworks that encourage sustainable practices and attract ESG-focused investors.
Africa is still heavily influenced by the prevalence of extractive industries and is deeply reliant on natural resources such as coal, oil, metal, and minerals. These industries have a significant impact on the environment and local communities. However, there are a host of green or “clean” investment opportunities in Africa, and these investments could play a crucial role in addressing the pressing issues of electrification, poverty, and hunger, as well as increasing access to essential resources like drinking water.
The African Union has set up its Agenda 2063, which integrates ESG as a key element in advancing the continent’s development. This goal is strategically aligned with the Sustainable Development Goals established by the United Nations in 2015. Sustainability in business has gained significant traction in recent years and is expected to continue growing. Companies in Africa will experience increased demands and expectations regarding how they conduct business, irrespective of their size.
In the 2023 Oxford Business Group Global CEO survey, 19.7% of CEOs surveyed in Africa expressed that the primary motivation behind their adoption of ESG standards and initiatives was to enhance their corporate image and reputation. Other driving factors they cited included compliance with regulatory requirements, as well as internal demands from shareholders, board members, and employees. The African Private Equity and Venture Capital Association found that 18% of LPs surveyed highlighted ESG considerations as a key priority.
The adoption of ESG standards in Africa is driven by a combination of investor push, with established local investors bringing their own standards, and regulatory push, in countries that have already implemented ESG regulations. Policy makers aim to create an investor-friendly environment and attract investments, especially in the areas of impact and green investments. Moreover, investors are increasingly taking into account ESG considerations when investing in businesses. This should create a virtuous cycle, in which more jobs are created. This would address a key concern on the continent. More jobs could promote social stability in some jurisdictions where such stability is a challenge, ultimately driving economic progress and development for the countries at stake.
The absence of standardized ESG policies poses a challenge. While there are country-by-country regulations in place, not all jurisdictions have implemented them. When an investor implements its own ESG standard, it is not necessarily aligned with what its neighbouring investors are doing. This creates difficulties in rating and reporting on ESG performance and in measuring by verifiable action what investors or businesses are doing. As a result, there is a lack of recognition and certification for effectively integrating ESG principles.
There is a strong culture in Africa of an informal economy, making it harder to regulate businesses and to measure and report ESG standards. The immediate need to tackle poverty, unemployment, and poor infrastructure can conflict with long-term ESG-focused investments. It is likely that as economic development in Africa progresses, so will the focus on ESG standards.
A study by the Boston Consulting Group published in March 2023 showed that some large African companies are awarded high ESG ratings for implementing high ESG standards. Businesses that have implemented high ESG standards have better access to consumers and can increase their market share. It also provides a competitive advantage for businesses in terms of receiving financing and access to investments from jurisdictions that already implement strict ESG rules, such as the European Union.
Africa presents a wealth of opportunities. It is a market in transition, with rapid urbanization and a need for more infrastructure to ensure access to water, electricity, waste disposal, education, and wealth. The implementation of ESG standard across the continent would likely lead to increased investments in the region.
Gabon
As an example, Gabon implemented several politically driven initiatives a few years ago, including Green Gabon, which focuses on the forest heritage and renewable resources of the country, which has one of the largest forests in the world.
In 2013, the hydrocarbon sector represented 45% of the creation of national wealth, while the Green Gabon section represented only 4% of the country’s gross domestic product (GDP). It is expected that the Green Gabon sector will represent 22% of GDP in 2025. The goal of Green Gabon is the regulated exploitation of renewable resources through the preservation and sustainable development of seven key sectors including wood, fishing, and farming.
One of the key aspects of Green Gabon is to ensure the traceability and the certification of wood. Gabon has become the first country in the world to make wood certification mandatory for forest concession in order to prevent deforestation. Gabon has implemented incentives for industrial investment, preferential tax treatment for processed wood, and a ban on the export of unprocessed logs.
The Legality and Traceability Control System was initiated in 2021, and gave the Gabonese Ministry of Water, Forest, Sea and Environment the right to conduct audits and grant certifications. The goal is to ensure the local transformation of raw material and promote trade through these incentives. Gabon has also issued green and blue bonds, some of which have been backed by the US International Development Finance Corporation and have proven very successful.
Other Illustrations of Country-By-Country ESG Initiatives
Benin was the first country in Sub-Saharan Africa to launch green bonds in 2021. In 2022, Senegal’s National Employers Council launched the Label RSE-CNP program to recognise companies that are committed to corporate social responsibility (CSR). A CSR Charter has already been implemented.
Cote d’Ivoire adopted a law on sustainable development in June 2014, making CSR reporting mandatory for larger companies and requiring them to define a sustainable development policy. In 2018, Tunisia adopted a CSR law creating an observatory responsible for monitoring the implementation of CSR programs and drawing up an annual CSR report.
Botswana, Ghana, Kenya, Namibia, and Tanzania have also implemented their own reporting rules, including disclosures guidance for businesses.
While Africa's ESG journey is still in its early stages, the momentum is undeniable. With continued economic growth, a growing focus on climate resilience, and evolving regulatory landscapes, the continent is poised to become a significant player in the global sustainable investment market. However, challenges remain, such as a lack of standardised ESG reporting and limited access to green finance. Addressing these hurdles will be crucial to unlocking the full potential of ESG investing and fostering a more sustainable future for Africa.
To learn more about the ESG and sustainability regulatory landscape around the globe, please check out Morgan Lewis’s ESG Investments: Global Regulatory Series.