Unlocking sustainable investing in Africa

Despite Africa’s vast natural resource endowment, many countries have failed to effectively utilize their resources to achieve substantial economic growth and development. Thus, Africa relies heavily on concessionary funding and development assistance programs to meet pressing infrastructure financing requirements. Moreover, domestic and regional financial institutions are incapable of plugging the significant financing gap, necessitating international partnerships to mobilize additional capital.

However, Environmental, Social and Governance (ESG) considerations are now more important to governments and international financial institutions, due to the threat of climate change and the pursuit of the UN SDGs. This shift towards incorporating ESG factors into investment decisions places the continent in a vulnerable position as a sizable portion of funding opportunities, especially within the energy sector, are still fossil fuel based. Therefore, a proactive response to ESG considerations is necessary to unlock sustainable finance, which offers a pragmatic solution to Africa’s development and post-COVID-19 recovery funding needs.

Prior to the pandemic, one could argue that the Environmental (E) component of ESG was the predominant focus globally, given the ongoing energy transition. However, the human health and economic inequality crises that ensued from the pandemic, thrust the Social (S) component to the forefront. Consequently, governments in many developed countries have responded by allocating more funds to sustainable development, while foreign financial institutions, particularly institutional investors, are increasing focus on sustainable (ESG) investing.

Africa’s huge infrastructure deficit, coupled with rising social inequalities and the prevailing physical impacts of climate change, require an ESG taxonomy that incorporates and prioritizes the needs of Africans

Whilst the ESG framework is still in its infancy in Africa, its adoption needs to be accelerated. It is imperative that African public and private sector stakeholders shape the implementation of this agenda to effectively address the continents unique challenges. Africa’s huge infrastructure deficit, coupled with rising social inequalities and the prevailing physical impacts of climate change, require an ESG taxonomy that incorporates and prioritizes the needs of Africans.

Hence, ESG investing in Africa should largely target infrastructure development, with emphasis on energy projects that incorporate a fair portion of non-renewable resources, at least in the short term, as the continent gradually builds up its renewable energy capacity. Nevertheless, governments and corporations should accelerate their transition to a low-carbon economy to avoid potential losses in asset value and penalties on non-sustainable products, as the global economy shifts towards clean and efficient energy technologies.

Successful implementation of ESG investing on the continent is hinged on the ability of African countries (and companies) to effectively confront their relatively weak governance systems. This fundamental gap in the Governance (G) component may undeniably be the greatest barrier to embracing ESG investing, which demands transparency and accountability. Indeed, there is evidence of a strong positive relationship between good governance and (economic) development. Consequently, African leaders in the public and private sectors have a responsibility to enhance governance as a key driver for unlocking sustainable finance to improve socio-economic conditions for their citizens.

Bridging the governance gap requires a stable policy environment and a germane financial sector framework that mandates non-financial disclosures of ESG factors for proper assessment of companies and financial institutions. Governments can also provide economic incentives to promote long-term infrastructure investments and facilitate public-private partnerships to develop suitable financial instruments for sustainable development. Additionally, given the relevance of the Environmental (E) component in ESG, African governments should review existing environmental laws and regulations with a renewed focus on implementation and enforcement, to reinforce commitment to the Paris Agreement and Climate Action.

Regional institutional investors, particularly pension funds, insurance companies and sovereign wealth funds, can also play a crucial role in the adoption of ESG investing. These investors could act as a catalyst for financing infrastructure assets given their access to large amounts of capital and inclination towards long-term investments. However, a robust classification system for sustainable investments must be clearly defined within the regional context to ensure applicability. This requires coordination between governments and key financial sector stakeholders, to not only gain alignment and endorsement regionally but also compel global acceptance. This deliberate and uniform approach would ultimately create a pathway for foreign institutional investors to participate in Africa’s development through ESG investing.

Africa is blessed with the human and natural resources to finally emerge as a key contributor to the global economy. According to UN projections, its population is expected to grow from 1.3 billion in 2020 to 2.5 billion by 2050, representing 25% of the world’s population. Many of the continents’ abundant mineral resources are essential for the innovative and renewable technologies in high global demand.

Certainly, Africa’s economy is relevant, as it presents a significant opportunity for foreign investments and a promising level of productivity for its young and growing population. However, its leaders cannot afford to be complacent. Governments and financial institutions across the continent must take the requisite steps to capitalize on the availability of sustainable finance globally to tackle the infrastructure investment gap and ‘build back better’.

Iyahen is a sustainability expert and the Founder & CEO of Optimal Greening, a Nigerian-based and African-focused Environmental Sustainability company.