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Executive Perspectives

EXECUTIVE PERSPECTIVE: Investment rush to Africa must manage sustainability risks

Dr. James Gifford

30 Sep 2013

As the UN-supported Principles for Responsible Investment initiative begins its annual event in Cape Town on October 1st, its Executive Director Dr. James Gifford considers the sustainability challenges faced by investors in African companies


Africa’s economic renaissance continues apace, with investors rushing into the continent to profit from its dynamic emerging markets, its unrealised entrepreneurial energy and its vast natural resources. At a time in which many global economies are floundering, Africa has demonstrated robust economic growth; its companies are performing competitively, and its internal investors are confidently embracing an economically diverse future.

The conditions for this economic growth are being driven by a surge in democratic governance, reduced conflict, urbanisation, and a growing middle class. The World Economic Forum on Africa 2013 observed that almost 50% of African countries have reached middle-income status. The ensuing consumer group serves to generate more opportunities for employment and paves the way for economic diversification and dramatically increased investment over coming decades.

However, perhaps more than any other region of the world, Africa’s economic potential is shadowed by environmental, social and governance (ESG) risk: poor governance, immature legal systems, social inequality, vulnerable ecosystems and political and social conflict. All can pose serious perils to the continent’s businesses, and threaten their investors with material losses.

The most striking recent example is Lonmin. A breakdown in employee relations at the Johannesburg-based platinum miner culminated in the deaths of 44 employees and police at the Marikana mine in South Africa in August 2012. In the months following the incident, some 60% was wiped off the value of the company. The sector has yet to recover, with many investors steering well clear of companies exposed to the risk of labour conflict.

Social risks in sub-Saharan Africa are not restricted to poor employee relations. HIV/AIDS poses a major problem for companies in the region, while child and forced labour is a serious issue in some sectors and countries. Environmental risks also loom large. Urbanisation and industrialisation are placing enormous burdens on local environments and biodiversity. Water availability and quality poses a threat to agribusinesses, food and beverage companies, mining firms and thermal power plants. And corruption remains a challenge for businesses and investors in Africa, undermining business confidence and economic growth.

Barometer research shows sustainability risks can be managed

These risks can however be managed, and should not deter investors. Indeed, responsible investment into good companies is the best way to leverage Africa’s strong growth while mitigating the risks. The recent Africa Sustainability Barometer – produced by the UN Global Compact and This Is Africa – finds many examples of world-leading practice within corporate Africa.

The Barometer, based on public reporting from more 1,000 of Africa’s largest listed companies, highlights that South Africa leads not just Africa, but also the world, in terms of integrated reporting of sustainability and economic indicators – thanks in large part to the efforts of the Johannesburg Stock Exchange and its disclosure requirements. (Since the 2010 King Code for Corporate Governance, all companies listed on the JSE are required to integrate sustainability into their operations and report on their ESG performance).

The Barometer highlights African companies developing world-class HIV/AIDS diagnosis and treatment programmes for their employees. It notes the work of companies such as SAB Miller in developing water management programmes. And of retailers and food companies such as Pick n Pay of South Africa, and Illovo Sugar, Africa’s biggest sugar producer, who are working closely with their vendors to reduce risks in their supply chain.

Because leading companies operating in Africa are so aware of these risks, they are becoming increasingly adept at managing them. They can teach other companies globally, and their own investors a great deal about how to leverage growth while managing key risks.

Investors in general are increasingly understanding these ESG risks and opportunities and putting in processes to address them. This is a result of a growing consensus – reflected in the rapid growth of organisations like the Principles for Responsible Investment – that analysing and responding to ESG issues is in the long-term interests of investors and their investee companies alike.

Responsible investment is, essentially, about good risk management. It is about anticipating issues that may appear to be ‘non-financial’, but which have the potential to have material effects on company performance.

Mind the gaps

In order to integrate these issues, investors need data and information. While corporate ESG reporting has improved dramatically in Africa, there remain large gaps between what is reported and what is happening on the ground. This can be a source of competitive advantage for the more enlightened fund managers. One South African fund manager reported that their valuations can be adjusted by up to 30% up or down based on a deep due diligence on a range of ESG risks not normally reflected in typical financial models used by mainstream investors.

Once investors understand the risks and conclude that a company isn’t managing them well, what can they do about it? They can, of course, divest or decide not to invest. If the company is part of a broader portfolio strategy, they can underweight the company to reduce exposure to the risk. Or they can choose to engage with the company, helping them to understand what their leading sector peers are doing to address the risk.

Collaboration among investors is another key development in the industry, both in Africa and around the world. Diversified investors often hold only tiny stakes in individual companies. It is essential that if they are to monitor companies and encourage good behaviour, they need to work with their peers, other parts of the financial markets, and with policymakers. At the Principles for Responsible Investment, we provide a platform that brings together investors to pool their resources and influence and engage in informed dialogue with investee companies on issues such as corruption, water risk, and responsible business is conflict-affected regions, many of which concern African companies.

Crucially, responsible investment is about investing for the long-term. And nowhere is this more important than in Africa. Economic activity that has no regard for environmental sustainability, social coherence and stable, predictable governance will quickly destroy its own foundations, destroying shareholder value on the way – putting Africa’s economic renaissance at risk. It is the companies that are well governed, have trusted relationships with employees and communities and implement leading environmental practices that will prosper over the long term.  It is these companies who will deliver strong returns to their investors and support the development of a sustainable and successful African economy.

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