Background:
ESG is the acronym for environmental, social, and governance indicators or factors used to assess an organisation’s or country’s impact. Pre-industrial times, the focus of investors and governments around the world was largely on cash, the strength of the balance sheet (or “books,” as non-finance folks would refer to it). The emergence of ESG—the de facto triumvirate—has been attributed to the societal pressure to ensure the safety of workers during the industrial revolution, as workers moved to urban cities to construct rail lines or work in mines, among other high-risk jobs.
ESG-philic scenarios have been cited in earlier literature, such as Howard Bowen’s book “Social Responsibilities of the Businessman,” published in 1953, which commenced the conversation around corporate accountability; Silent Spring (1962) by Rachel Carson, which documented the environmental harm caused by the use of pesticides (especially DDT) by soldiers during World War II, just to name a few. The first mainstream mention of ESG was not until the 2004 United Nations report Who Cares Wins, which encouraged all business stakeholders—managers, directors, investors, brokers, and analysts—to embrace ESG long-term.
Sustainability and ESG disclosures:
Sustainability is widely considered as meeting the needs of the present generation without compromising the ability of future generations (of humans, animals, and plants) to meet their needs. In addition, the United Nations considers sustainable development as one that integrates environmental concerns along with economic development. The Millennium Development Goals (MDGs) were a global agreement by leaders of 189 countries in September 2000, a set of eight measurable goals ranging from reducing child mortality, combating HIV/AIDS, malaria, and other diseases, to eradicating extreme poverty and hunger. In 2015, the Sustainable Development Goals (SDGs), successor to the MDGs, containing 17 ambitious goals, were put forward by the UN for the period spanning 2015-2030.
On the corporate side, institutional investors, climate activists, and other stakeholders continued to pressure organisations to take action to curb excessive use of water and non-regenerative resources, reduce carbon emissions, empower women and minorities, protect children, and other vulnerable groups, amongst other issues. Largely these concerns fall under the environmental, social, or governance (ESG) mantra. Therefore, it is commonplace to see ESG and sustainability used interchangeably. Other disclosure regimes, such as the United Nations (UN) Global Compact, Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and many others, have grown out of the need to provide reporting frameworks for organisations to assess, measure, and report on their ESG performance.
ESG in Africa
Although Africa is not among the highest emitters of greenhouse gases (GHG), the demand to transition from fossil energy sources to a more renewable/green energy mix is global. Large investment banks and donor organisations have increasingly prioritised ESG disclosures as part of their capital allocation decisions. South Africa has been a key leader for Integrated Reporting—another framework that encourages integrated thinking and the management of six capitals by an enterprise in creating long-term value for all stakeholders. GRI, through its Africa office, has permeated most of the continent. Over 60 percent of all sustainability reports issued from the continent of Africa and indeed most parts of Europe have been observed to be prepared using (or referenced) the GRI sustainability standards.
Challenges with ESG reporting architecture
In the past two decades, the emergence of a myriad of standards around the world from organisations such as the Carbon Disclosure Project (CDP), the Integrated Reporting Council (IIRC), the Global Reporting Initiative, and others has resulted in certain challenges, such as the comparability of sustainability reports and other non-financial disclosures and the reliability of such disclosures. This led to calls for the creation of a single set of global standards that would enhance comparability and reliability of sustainability disclosures. The Task Force on Climate-related Financial Disclosures (TCFD) was the first attempt at such global standards. Nonetheless, disclosures of climate-related information, ESG, or corporate social responsibility (CSR) remained largely voluntary in most jurisdictions outside of the European Union, which is making non-financial reporting (NFR) compulsory.
Make way for the New
In 2023, the International Sustainability Standards Board (ISSB) of the International Financial Reporting Standards (IFRS) Foundation released its first set of standards: IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures). These standards are effective from periods beginning on or after 1 January 2024. The ISSB takes over from the TCFD and has incorporated the Task Force’s recommendations in its work. A few African countries, including Kenya and Nigeria, have indicated their intention to adopt the standards, while several other African countries have commenced stakeholder engagement sessions on developing a roadmap for implementation of the new sustainability and climate disclosure standards.
Opportunities: Why Africa is better positioned
Africa stands to benefit from the adoption of the IFRS sustainability standards. At present, about 30 countries in Africa either require or permit the use of IFRS financial reporting standards for their companies. This can be correlated to the spike in foreign direct investment that Africa has seen over the last two decades. African countries have more opportunities to attract foreign investments and green finance when they adopt the set of global standards issued by the IFRS for sustainability disclosures.
The challenges of transitioning to a net-zero (or carbon-neutral) economy will require significant investments, with estimated annual investments of over USD 25 billion from now till 2030. With a population of over 1.5 billion people, Africa is the second-largest and second-most populous continent after Asia. This present infrastructure challenges—transport, housing, etc.—the need for social services has also spiked with population increase. More than ever before, governments and corporate titans will be required to design and implement innovative financial instruments to mobilise capital for growth, sustenance, and improvement in the quality of lives of citizens.
Criticism
Critics have opined that Africa should not be burdened with the task of transitioning to net zero. The continent can barely provide opportunities to its booming youth population, which accounts for close to 60 percent of its population. In fact, Nigeria alone has over 11 percent of the world’s population who live in extreme poverty (a threshold of USD 2.15 per day), while 429 million people on the continent live below this extreme poverty line (www.statista.com).
Others argue that the West, which developed their countries on the back of coal, lacks the moral obligation to demand that Africa prioritise green development, especially when the continent emits less than 5 percent of the global carbon emissions—the smallest share among all the world’s regions.
Conclusion
Nonetheless, aside from environmental issues or emissions, Africa has a lot to gain from the social and governance aspects of ESG. Gender equality, girl-child education, and protection of women, children, and vulnerable communities are issues that private companies in Africa and leaders of African nations can champion as part of the move towards a more sustainable future.
When it comes to energy security, there are also huge prospects for solar farms, wind turbine projects, and other renewable energy sources in Africa due to the abundance of sunshine, wind, and other resources. Therefore, it was not surprising that Nigeria took the lead as the first country in Africa (and one of the firsts in the world) to put its weight behind adoption of the ISSB’s IFRS S1 and S2 sustainability disclosure standards.
A push for sustainability is a push for securing the future.
Joseph Owolabi, is an expert on climate change and green finance. He is CEO at Rubicola Consulting, with offices in Australia and Africa. He served as officer and global president for ACCA between 2020-2023.
