The year 2020 has started with a bang from an ESG perspective. Climate change was right at the heart of discussions at Davos, global fund managers (they don’t get much bigger than BlackRock) announced aggressive intentions to channel investment towards companies who are ESG-compliant and the UK Investment Association announced at the UK-Africa Investment Summit that its members, who control £8 trillion of assets, must report on their climate change impact by 2022.
This is a seismic shift by major institutions not historically celebrated for allowing their social conscience to shape investment decisions. It’s a powerful signal that ESG is increasingly recognised as a core sustainability strategy, driving both risk mitigation and value creation.
What does this mean in practical terms and why is it relevant in Nigeria? ESG considerations are a fundamental element of assessing job quality and sustainable job creation. Nigeria needs to create millions of jobs over the coming years to reverse poverty trends and establish the basis for social mobility. ESG is critical to the sustainability of this effort. Jobs that are here today and gone tomorrow are short term solutions. Incorporating ESG principles into job-creating businesses ensures sustainable and high-quality business operations with a labour force that is motivated and appropriately empowered.
At times ESG is still primarily considered a compliance issue in Nigeria. A contrasting path – where environmental and social principles and values are embedded in company governance to drive long term performance is now however becoming more prevalent. This shift in approach to ESG considerations is increasingly important in Nigeria’s market where rapid industrialisation is possible but if it is not well designed, may have a detrimental impact on future sustainability. Nigerian private equity funds are at the forefront of this and are increasingly structured and resourced internally to integrate ESG analysis at the heart of their decision-making processes.
As risk management and ESG efficiencies come to the fore, private equity as an asset class is adapting to better understand how ESG processes can act as a business benefit, rather than a compliance cost. CDC is at the forefront of these discussions. Together with Norfund, we have this week convened more than 60 private equity fund managers and their portfolio companies’ leadership teams in Lagos to explore the impact of ESG on business performance, with a practical focus on problem-solving and learning how to persuade company management to prioritise and quantify how ESG considerations link to sustainable and long term impact.
Established companies across the oil and gas, power and manufacturing sectors in Nigeria have comparatively well-established environmental, health and safety orientated management systems and processes. This is especially noticeable where they have a significant relationship with a multinational who draws upon global good ESG practices such as IFC Performance Standards. Even in these sectors though, the level to which ESG policy and processes lead to effective implementation varies from organisation to organisation. Implementation becomes even more variable in smaller and medium size businesses where systems are less formal and resources fewer. Smart decision making, support and prioritisation of ESG from PE firms is one effective way of systematising improvement.
While guidelines governing how companies must act from an ESG perspective exists in Nigeria – such as regulations on environmental and social impact assessments, laws on local pay or the Central Bank of Nigeria’s Sustainable Banking Principles, there is a need to strengthen existing sectoral guidelines and ensure a more robust approach to enforcement.
Renewables and energy efficiency have gained some traction within the overall energy mix, with significant momentum for renewables driven mini-grids in 2019. Alignment of solutions to Nigeria’s power problems with ESG principles would be a major step forward – not just to address the obvious environmental issues but to optimise social impact and strengthen governance. Recent examples where industry has decided to turn to coal as a fuel (to ensure reliable supply) rather than gas (because of disrupted supply) demonstrate that there is a long way to go before there is an acceptance of environmental impact over commercial interests, and better incentives need to be put in place to drive optimal behaviour.
Beyond the environment, a further critical element of the social pillar is gender considerations. One in four board members of companies in Africa is a woman according to the McKinsey Global Institute, leading the world averages, but too many women from poorer backgrounds remain excluded from the financial system or overlooked within the corporate value chain. More needs to be done by companies to empower women by offering training and professional development pathways to ensure they are fairly represented at middle and senior management levels. Further thought needs to be invested in how companies design supply chains to ensure women-owned businesses are set up to compete successfully for contracts, and in how they design products and services to make them affordable and accessible to women on low incomes. These considerations are not just important for social wellbeing, they help companies to build a competitive labour force, optimise their value chains and grow into new market segments.
This is where governance is critical and transparency and accountability is best evidenced by thorough sustainability reporting, in line with internationally recognised frameworks. Strong leadership is emerging in Nigeria’s capital markets, with listed companies now required to release an annual sustainability report as part of listing requirements and the emergence of national and corporate green bonds.
This is not about creating new onerous compliance regulations, but about designing the opportunities – big and small – for Nigeria to develop rapidly and achieve transformative environmental and social gains in the process. By designing ESG management systems thoughtfully, using global ESG standards and frameworks as a foundation, CDC believes that Nigerian companies will not only find that their performance is stronger, but they will also position themselves favourably to global capital markets to power future growth.
GUY ALEXANDER & BENSON ADENUGA
Alexander is manager, Environmental and Social Responsibility, CDC Group. Adenuga is head of office and coverage director, Nigeria, CDC Group.