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ESG – The next big bet of our generation.

Africa cannot afford to be left behind.

In November 2021, the world gathered once again in Glasgow, UK for the COP26 meeting.  It was fully attended by all the leaders of the world, with a few exceptions and the who is who in business and all other walks of life.  A few years back it was in Denmark, and prior to that perhaps the most impactful to date and prior to Glasgow – Paris.  But what could be so great that it has the ability to pull world leaders to converge to one site, almost like the Rendez-vous of the year not to be missed. It was similar to the Oscars for the entertainment world, the Davos for the business world, the Olympics for athletes, and the comparison goes on.  I am not a political analyst, but I do not think I need to be one to state that  the abvious that politicians will usually follow the crowd, i.e that which is trendy or popular. This is why many political campaigns invest so much on focused group as part of their ongoing campaign strategy, which also shapes their thinking on policy.  This is true even for modern dictatorships but more so for democracies as they need to be seen to be on the side of their electorate.  Businesses will fall in the category of democracy, as their ‘electorate’ is the customer, who are often free to choose, except in the case of monopolies which are limited  today in most societies, including Africa.

History can observe that across centuries there has always been the ‘big thing’ for each generation. From the industrial revolution a few centuries ago, to aviation in the early nineteen century, to internet (& online business) in the eighties & nineties and most recently social media facilitated by mass access to connectivity and innovation. And now comes ESG.  As with all these ‘big things’ they address a particular challenge of the time or anticipated future problems of society. If one considers businesses and governments as problem solvers (to solve the problems of their ‘customers/ electorate - clientele) – as the case should be, then anyone who anticipates and makes adequate investments on the ‘big thing’ of the times will always score great success with their clientele. That clientele is the current millennials and post millennials  who will not vote with their feet.  They are very much into ESG and they are the future electorate and customers.  Any business or government that wants to be relevant in the medium to long term cannot ignore their preferences or views. 

For the previous ‘big things’ Africa has always played catch up to the rest of the world. There is absolutely no reason for that to be the case with ESG. We are very well versed with the issues. we also suffer the impact and perhaps more so than some parts of the world, and should therefore be on board the moving train, by taking strategic decisions and getting involved right from the very start. And so now is the time for all governments and businesses that do not want to be left behind to make the right strategic decisions.

 

Environement with trees in city

But what exactly is ESG? 

It's an acronym used in the business world: E – Environment; S – Social & G – Governance.  They are basically non-financial performance indicators that are used to gauge how an organisation fairs in each of these areas.

One can write a paper for each of these sub-groups, but It suffices to put down just in broad outline what each represents, as the objective of this write-up is to explain the implications for us and how it is expected to have a significant impact on Africa either positively or negatively depending on whether we chose to embrace the agenda or not.

E – Environment

This is perhaps the most spoken about and to an extent the new and trendy one of the 3. It’s about how we protect planet earth from the negative impacts of climate change (including all the activities that impact climate change like carbon emissions, deforestation, waste management, etc). It is what all the various COPs including COP 26 in Glasgow are about.

S – Social

It relates to matters of looking after employees (CARE, Health, safety, fair wages, diversity, inclusiveness, etc) and our responsibility to the relatively disadvantaged in society – like corporate social responsibility.  This one has been around for some time, but its profile has been raised even more by its link to the environment as part of the ESG indicators.  

G – Governance

How an organisation or society is managed for the betterment of the main stakeholders, particularly from a transparency and corruption avoidance standpoint.  In recent years, matters like Executive remuneration and tax avoidance have been prominent in good governance discourse. As with ‘Social’, its link to the environment as part of the ESG indicators has raised its prominence.

In a nutshell, ESG is about protecting the earth and being fair to all people in society, especially the relatively socially disadvantaged. It is not difficult to imagine why the current youth (and future electorate/customers) are so glued to the issue, as attitudes change from generation to generation.  One only needs to have a conversation with one’s children for those who are parents to see the changing demographics in ideals towards fairness. And obviously, organisations and governments are taking strategic decisions to invest in ESG, as they believe good performance in these areas will help them build trust with their electorate/customers cohorts which should lead to sustainable positive outcomes for their organisations /societies and ultimately increase their valuations in the case of private / profit-oriented organisations and reputation for not-for-profit organisations and governments.

 

Below are a few examples of potential cases where ESG considerations may be applicable:

Sovereign wealth funds

Sovereign wealth funds by nature have huge reserves of cash to invest, and entities will compete for their investments.  It is fair to say that ESG considerations would play a key role in their decisions on where they choose to invest. 

Companies embarking on mergers & acquisitions

Valuations for sale and realisation of investments  - ESG considerations. Even valuations for stock market listings or ongoing valuations on the markets will include ESG parameters. This is already been seen in the oil & gas industry.

Companies seeking to recruit top talent

With the current high attrition rates in many companies, and the need to recruit and retain top talent,  ESG credibility could increasingly become a significant consideration with the young workforce of today and tomorrow.

Government / Companies wanting to borrow

They could be refused funds outright for poor ESG record or inability to demonstrate good ESG credentials or compliance.  In the same way, they could receive financing but at very high borrowing rates. 

International Development assistance (IDA) by Multilateral /bilateral organisations may be tied to a nation’s record on ESG.  A government that has no statistics will not be able to demonstrate compliance and hence may loose out on valuable IDA funding.

Determining Return on investments for investors

The cost of ESG compliance of the investee company may be taken into account. There could be a negative impact on valuation if the target company is non-compliant. 

Young people

There will be opportunities in the job market for those who are adequately skilled and opportunities to create numerous businesses to support the ESG ecosystem.

I am sure you can enumerate many more examples of the implications of ESG adoption and upskilling for the various stakeholders in society.

The EU is leading the way already (both governments & regulators), clearly under pressure from their electorate.  We have seen political parties with ‘Green’ agenda make strides across Europe progressively.  We note that the traditional and main political parties are moving grounds to avoid leaving this space entirely to the ‘Greens’. This (ESG) will be an issue that will define society for the next 20 – 50 years, just as online trading transformed business operations over the past decade or so.  We saw how ‘bricks and mortar’ retailers struggled during the covid pandemic.  Those that survived were mostly those that had anticipated in the power of online trading and had invested in time.  Those that were left behind, fell off the way. If there are any lessons to learn from this experience, then surely it is that one should not be indifferent to changing demographics and trends.  It is worthy to note that mandatory reporting and certification of ESG data comes into effect in the EU in the financial year 2024.

 

Although regulators in some regions in Africa may lag behind those in other continents, the case can be made for them to move fast with this as well, as it is important for regulators to proactively help our businesses anticipate global trends.  Indeed, the Revised OHADA ‘Accounting Standard’ (applicable to virtually all French-speaking countries in Sub Sahara Africa) which came into effect on 1 January 2018, actually provides for ESG disclosures in its note ‘35’ to the financial statements on sustainability, although it has a threshold for applicability and appears to exclude the financial services sector.  Enforcement of compliance is however not obvious, and as such many companies that are within the threshold still fail to make the sustainability disclosures in their financial statements. Regulation or no regulation, there is value to be created by any organisation in self-adopting ESG reporting.

The recent announcement of the creation of a Standards Board by the IFRS Foundation on ESG reporting is a significant development, even for African countries and certainly in Sub-Sahara Francophone Africa, where the local regulation on sustainability disclosures does not go far enough in terms of industry sector, reporting thresholds and enforcement. There is however a requirement for some companies to report under IFRS in the OHADA region. Surely those under obligation to report under IFRS will also need to make any disclosures that the Standard will stipulate. Full ESG reporting is on its way to our region.

As the saying goes, the early bird gets the fattest worm.  This is more so true for those who set the pace in every new ‘big idea’.  This is because it takes time to build trust, and once trust is built, desirable sustained outcomes follow.  Amazon for example has a high trust value, having been the early pace setter in online trading, taking initiatives to build trust with their customers, and we can all see the results.  Facebook was also early in social media and has done well as Amazon.  These are examples of online trading and social media (the ‘big thing’ of the 80, 90 and current).  One can see also a rising star in the ESG space – Tesla (the electric car company started by Elon Musk – an origin of the African continent).  Musk is considered today the world’s richest person, and his business is still to an extent futuristic, again the one who set the pace in electric cars in a bid to protect the environment, the E in ESG.

Whilst environmental issues (the E part of ESG) and precisely climate change are top of the agenda today in many continents, in our Africa context, we see social and governance issues daily (the S & G part of ESG) and they remain on the foreminds of our future electorates/customers.   Any organisation that can connect with the public early on and builds that trust in the area of ESG, will build a significant competitive advantage over those waiting for legislation or regulation or even donors and lenders to compel them to do so.  Naturally, there is less trust built by one who does something because they have been compelled to do so than one who does it voluntarily or even better many years before others, as part of their organisation’s culture.  An organisation that achieves this would have essentially built trust.  The late comers will be playing catch up almost permanently in a reactive manner, rather than anticipating, almost like one constantly managing problems, instead of managing risks to avoid problems.

To conclude, it is the author’s recommendation for governments, corporates, and NGOs in Africa to build ESG considerations into overall strategic plans going forward.

 

Contact us

Sylvester Njumbe

Sylvester Njumbe

Associé, PwC Congo (Brazzaville)

Tel: +242 0 57 18 34 34

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