Discussions on attracting much-needed investment to Africa have generally focused on non-African sources: foreign companies, multilateral financial institutions and non-African institutional investors. Yet much more attention is now being given to investment funds based on the continent itself.
As the size of African pension and social security funds grows, they have the potential to support more African businesses and projects. They can ensure that they are maximizing the benefits of this investment by integrating environmental, social and governance (ESG) principles into their investment criteria. This can not only provide a more ethical investment, but can also help generate more sustainable long-term returns.
ESG strategies allow investors to generate healthy rates of return while helping to tackle environmental issues such as climate change and air and water pollution. They can also help support economic development that promotes a higher standard of living by investing in companies that pay their employees a living wage, while providing sick pay and other benefits. The governance side of the equation refers both to good corporate governance but also to good state governance, with the companies benefiting from any investment having to commit to a transparent and legal interaction with the representatives of the government.
Evaluation of performances
The ESG criteria adopted by different funds vary considerably. For many, identifying appropriate investment targets is difficult because, unlike financial reporting, different companies use many different methodologies to assess their ESG performance.
Investment funds tend to use ratings checklists to assess each company against a series of criteria. These dashboards are often developed in-house, although some funds use those compiled by third-party organizations. Rating systems allow them to invest in companies that meet their criteria and also encourage companies that do not meet the required standards to progress on a range of measures.
Bloomberg research predicts that the value of ESG investments will reach nearly $50 billion by 2025, or one-third of all global assets under management. This is partly due to customer demand, but also because numerous studies have concluded that such strategies promote stable financial performance for companies.
The impact of ESG policies introduced by non-African investment funds and banks is already being felt on the continent, as developers struggle to secure financing for potential African coal mines, from power plants to coal and oilfield projects. However, although the African Pension Supervisors Network is now trying to encourage funds on the continent to adopt ESG strategies, it is difficult to find precise figures on the proportion of ESG investments made in Africa by African funds.
Writing on the World Bank’s blog in January, Fiona Stewart, the Bank’s senior financial sector specialist in its Finance, Competitiveness and Innovation global practice, said the World Bank had begun benchmarking the ESG reporting practices of the biggest companies. African pension funds. He found that while all funds provide comprehensive information on their financial performance, only half offer statements on the importance of sustainability.
They provide limited information about their sustainable investing strategies – including how they are implemented – and very few disclose information about their attitudes to climate change. This is despite the UN’s call for ESG policies to be published in its Principles for Responsible Investment (PRI), launched in March 2006.
Research by Stewart and his colleagues found that “pension funds, as major asset owners in the region, are at the ‘top of the food chain’ and can be catalysts for ‘greening financial systems'”, but found that pension funds are not yet asking companies for ESG information.
“Also, what’s available might look like ‘greenwashing,’ with long reports that simply repeat a small number of data points,” Stewart wrote.
The researchers compiled a list of ESG information they expected from investment funds. South Africa performed best, with 74% of planned information provided by the country’s funds. At the bottom of the scale were Tanzania with 14%, and Namibia and Uganda with 16% each.
Examples of best practice include Botswana’s Public Service Pension Fund, Uganda’s National Social Security Fund and South Africa’s Sentinel Pension Fund. Sentinel says it includes ESG risk factors in its risk management systems to ensure they are identified and mitigated in current and future investment portfolios. The guidelines of its Investment Policy Statement are reviewed annually by the Investment Committee
South Africa in the lead
South Africa has for some time proven itself as a leader in ESG. In South Africa, the Institute of Directors South Africa (IDSA) launched its Code for Responsible Investing in South Africa (CRISA) in 2011, making it the second country after the United Kingdom to officially encourage institutional investors to integrate ESG principles into their investment decisions.
The fact that South Africa is something of an exception can be linked to its position as one of the most advanced financial markets on the continent, but also to its own history. As part of government efforts to help overcome the legacy of apartheid, companies have been required to publish details of their strategies to increase the number of non-white employees, including in boardrooms and at other leadership positions.
These Black Empowerment Strategies have been expanded to include reporting on the number of women and people with disabilities employed at all levels. In many cases, minimum targets have been set.
This has created a culture of producing non-financial annual reports that can easily be extended to other criteria. However, South Africa’s dependence on coal mining, consumption and export may explain the reluctance to publish climate change strategies by both companies and institutional investors.
In 2021, when the revised CRISA code was published, the IDSA said, “Responsible investing and management is increasingly finding applications across all asset classes and beyond public markets. Despite this, there remains a sense that action by the investment community is lagging behind in both urgency and scope.
Key changes to the revised code include the incorporation of good governance by the investment organization itself and the expansion of transparency required by players throughout the investment value chain.
The size of the funds is increasing
About 90% of the assets under management of pension funds and other institutional investors in Africa are concentrated in South Africa, Nigeria, Namibia and Botswana. Yet the size of funds is increasing across the continent.
Writing on his organization’s blog, Ndabe Mkhize, Chief Investment Officer of Eskom’s Pension and Provident Fund, argued that investing in infrastructure can provide investors with a means to achieve ESG and social security objectives. impact by promoting African development.
It also responds to market demand and offers strong and predictable returns over time, as “an achievable return on investment in infrastructure will be in the range of 12% to 16%, depending on factors such as leverage and risk,” he said.