+27 71 448 3496

Africa could be a frontier for ESG investing

Share Article
Fuelled by an assortment of investor demand and regulatory pressure, ESG assets under management (AuM) have skyrocketed - with the Global Sustainable Investment Alliance putting AuM at USD35-trillion in 2020, up from USD30.6-trillion in 2018, and USD22.8-trillion in 2016. Image credit: Leon Louw for WhyAfrica

Africa could be a frontier for ESG investing

Africa’s capital markets are reputed to be challenging for foreign institutions to navigate. Despite this, the region could be the next frontier for ESG (environmental, social, governance) investing.

By Catherine Tinavapi

African economies along with many other frontier and emerging markets suffered from heavy foreign investor outflows during the initial stages of Covid-19.

Despite recovering somewhat since then, the recent flurry of macro headwinds is limiting foreign investment into Sub-Saharan Africa (SSA). In many of the smaller SSA countries, the local equity markets are thinly traded and broadly un-tapped although this could potentially give forward-looking international investors first mover advantage and the ability to identify market mispricing opportunities.

While African fixed income has historically been traded by local investors such as pension funds and insurance companies, global institutions are starting to take an interest.

However, many are sitting on the side-lines owing to concerns about inflation and the impact which interest rate hikes could have on the region. Nonetheless, investing into Africa is not always a straightforward undertaking.

For some of the largest institutions, the risk-reward benefits of investing into the smaller, more illiquid African economies do not make sense primarily because their sizeable capital allocations risk saturating the local market.

Tough headwinds throw SSA off-balance

There are also several logistical and operational challenges which investors need to be cognisant of when building up exposures in the region, not least of which is the propensity for certain markets to impose currency controls and Foreign Exchange (FX) restrictions.

Take Nigeria, where thin FX liquidity is a persistent challenge for foreign investors repatriating their funds. In this market the mandatory conditions of FX allocation now include the bundling of spot and forward deals.

Intermediaries and foreign investors whose risk management frameworks do not allow FX forward deals in Nigeria have limited access to repatriation funds in the market.

This is a risk which continues today. Additionally, investors in African capital markets have occasionally found themselves being blind-sided by the authorities making sudden changes to tax rules or regulation – often with little forewarning. All of these risks need to be carefully considered by investors in Africa.

Chasing the ESG opportunity in Africa

Fuelled by an assortment of investor demand and regulatory pressure, ESG assets under management (AuM) have skyrocketed – with the Global Sustainable Investment Alliance putting AuM at USD35-trillion in 2020, up from USD30.6-trillion in 2018, and USD22.8-trillion in 2016.[1]

As capital continues to accumulate in ESG funds, Africa is likely to be a major beneficiary – especially as many countries in the region have strengthened their sustainable bond markets. For instance, Ghana announced in 2021 that it was considering issuing USD2-billion worth of green and social bonds with proceeds being deployed to fund development programmes.[2]

Other African markets are also following in the footsteps of Europe and parts of Asia and North America by forcing listed companies to disclose information about their ESG. While African markets are giving serious thought to ESG issues, governance continues to be an Achilles heel in certain countries. In the absence of strong governance, companies are at risk of not meeting their ‘E’ and ‘S’ objectives.

If ESG in African markets is to thrive, then governance is something which needs to be urgently improved upon in many countries. In addition, globally there are potential flaws in the scoring systems at ESG analytics companies.

This is because some of the methodologies used to score companies and markets on ESG are not harmonised – frequently leading to anomalous results. It is therefore not unheard of for competing analytics’ firms to award contradictory ratings or scores to identical companies and markets. If the momentum behind ESG investing is to keep growing, these data deficiencies need fixing.

Working with the right custodian makes all the difference

Clients are looking to rationalise their operations, especially in complex markets such as Africa. This is because engaging with multiple agent banks in the same region creates challenges for investors and intermediaries, as they will need to oversee a plethora of due diligence processes.

Moreover, clients will also receive information from agent banks in a number of different formats. Notwithstanding the cost implications, these complex set-ups increase the likelihood of errors at the client level. In response, more banks and brokers are looking to simplify their agent bank relationships by consolidating the number of sub-custodians they use and appointing vendors on a regional – as opposed to an individual market – basis.

So, what are the advantages of this streamlined approach? By leveraging a global provider operating out of a regional hub, clients only need to perform due diligence on one vendor, instead of visiting multiple agent banks in different markets.

Other benefits to the client include having a simplified settlement instruction process; standardised reporting and consolidated billing all of which facilitate cost savings, efficiencies and simplicity.

Through a more entrenched relationship with a single agent bank, clients will be able to forge closer strategic partnerships thereby supporting growth and encouraging innovation.

African markets show enormous potential as investors increasingly chase ESG opportunities. Despite this, there are challenges. Many frontier markets including those in Africa do pose risks (i.e., FX risk) and these need to be considered.

To navigate African markets, it is vital clients rethink how they manage their sub-custody networks. Many are already doing so, evidenced by the tacit shift towards consolidation over the last few years.

Catherine Tinavapi Head of Market Information and Advocacy for Africa and Middle East at Standard Chartered Bank Africa & Middle East.

WhyAfrica does research and reports about natural resources within the primary sectors of African economies, and the infrastructure, equipment and engineering methods needed to extract and utilise these resources in an efficient, responsible, sustainable, ethic and environmentally friendly way, so that it will benefit the people of Africa.

Furthermore, WhyAfrica promotes Africa as an investment and travel destination, analyses the continent’s business environment and investment opportunities, and reports on how the political economy of African countries affects its development.         

WhyAfrica provides you with business intelligence that matters. Africa is our business, and we want it to be yours too. To subscribe to WhyAfrica’s free newsletter or digital magazine, and for more news on Africa, visit the website at www.whyafrica.co.za or send a direct message. WhyAfrica launched its first ever digital magazine in November 2021.

The company will undertake its annual road trip through South Africa, Zimbabwe, Zambia, the DRC, Malawi, Tanzania and Kenya in 2023. If you are interested in sponsorship or advertising opportunities, please contact me at leon@whyafrica.co.za. We have a wide range of different packages and combo deals to give your company the greatest exposure to a rapidly growing, African readership.  

The 2022 Southern Africa Road trip issue of WhyAfrica’s magazine is now available in print. The magazine was distributed in South Africa, Namibia, Zambia, Zimbabwe, and Botswana during WhyAfrica’s 2022 Southern Africa Overland Road Trip, the company’s new and innovative platform. WhyAfrica has expanded its product range and now offers its readers, followers, advertisers, subscribers and partners the following:

  • Daily 24/7 online articles on WhyAfrica’s website (FREE)
  • Daily updates on WhyAfrica’s social media platforms (FREE)
  • Newsletters delivered to a handpicked audience every two weeks (FREE)
  • Two printed magazine per year distributed at large events and during our road trips across Africa featuring original, in-depth articles (FREE) with great, on-site photographs by the WhyAfrica team (FOR SALE UPON REQUEST)
  • Four digital magazines per year (FREE)
  • Live updates, video clips, articles, and podcasts during and after WhyAfrica’s annual road trips (Southern Africa in 2022, East Africa in 2023 and West Africa in 2024) (FREE)
  • Sponsorship and advertising opportunities for the annual WhyAfrica Overland Road Trips (PAID FOR)
  • A library where companies doing business in Africa can display scientific or research papers (PAID FOR)
  • A product section where companies doing business in Africa can display new offerings or services (PAID FOR)
  • Media partnerships with, and a presence at, most of the major conferences and exhibitions in the African mining, energy, agriculture, infrastructure, water management, ESG, environmental management, tourism, development, and conservation sectors (FREE)
  • WhyAfrica connects potential investors with new ventures in Africa and suppliers and service providers with existing companies in Africa (PAID FOR)
  • WhyAfrica assists companies in generating content focused on the wider African business community (PAID FOR)
  • Partnerships with companies doing business in Africa (PAID FOR)
  • Partnerships with companies thinking about expanding into Africa (PAID FOR)
  • In 2023 subscribers will have access to our in-depth articles about the African political economy, research, and country reports about the countries we visit on our road trips, and trends in the sectors that we cover (PAID FOR)
  • A WhyAfrica book is in the pipeline and if all goes according to plan, should be published towards the end of 2023 (PAID FOR)
  • The WhyAfrica consultancy arm assists and advises companies doing business in Africa through utilising our extensive global business network (PAID FOR)

Become part of the WhyAfrica community. Tell us your story. Expand your footprint across Africa and partner with us to make the most of your African experience.           

[1] Investment Week (July 21, 2021) ESG assets on track to exceed $50 trn by 2025

[2] Bloomberg (July 5, 2021) Ghana mulls Africa’s first social bonds with $2 billion sale

Share Article


AgricultureEnvironmental Management & Climate ChangeEnergyESGInfrastructureMiningPolitical EconomyTourism and ConservationWater Management