ESG in Africa Investment: Too Little or Too Late? Graham Sinclair

TOO LITTLE OR TOO LATE?
Reality Checks for ESG in Investment in Africa in 2013
Graham Sinclair
@esgarchitect

graham.sinclair@sincosinco.com
Linkedin.com/in/grahamsinclair
Skype: graham_sinclair
+27.81.87.87.332 RSA
+1.484.802.9908 USA
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Monday, November 11, 13

SinCo designs ESG
architecture for long term
sustainable investment
that matters.
•
With fellow CSR Africa keynote and sustainability legend,
Gro Harlem Brundtland in Nigeria, May 2012.

SinCo - sustainable
investment consulting - is a
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build investment conviction
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Sustainable
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Consulting

Discussing the impact and future of the PRI with Koﬁ
Annan in The Netherlands, May 2008.

•

Debating the progress of ESG in Africa and the role of
private equity at the JSE in South Africa, August 2012.


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4

Prepared by SinCo [sincosinco.com] for Thomson Reuters Trading Africa 2013. Author: Graham Sinclair. Copyright SinCo 2013.

THE 3rd ANNUAL TRADING AFRICA SUMMIT 6 - 7 NOVEMBER 2013

Mega-trends driving growth in ESG
1.

More beneficial owners - you and me as members of funds - and the trustees stewarding retirement funds, are
asking more questions. Institutional investment is a competitive global industry. professionals manage portfolios
across asset classes, project and company types; financing/investing in stages of companies/projects business
cycles.

2.

Increasing materiality of environmental, social and governance (ESG) factors is driving investors, and their endclients, to integrate sustainability concepts. US$13.6 trillion globally, US$229 billion in Africa according to
AfricaSIF.org estimates, are self-reported investments proactively using ESG in investment policy or process. FT
this week reports both Morgan Stanley and Goldman Sachs have launched "impact investment" portfolios.
Positive/best-in-class screening stands at just over $1.0 trillion, while impact investing ($89 billion) and
sustainability-themed investments ($83 billion) are comparatively small.

3.

Increasing quality of coverage of ESG flowing from professional ratings agencies offers (and responds to calls
for) sharper focus. With more coverage, is the opportunity to use of new ESG valuation models. Pursuit of
"sustainability alpha" continues; ESG benchmarking and performance attribution growing.

4.

Improving African investment context is attracting capital. The long term investment in Africa hypothesis
may benefit from making the sustainable investment case for the positive outcomes, or reduction in negative
impacts, from integrating more, not less material factors including ESG. New research studies are mostly ex-Africa,
but are making the case for sustainable investment has a more developed investment thesis, for example,
research studies reflect that 1) companies with high ESG scores are found to have less company specific risk OR
2) corporations with better ESG ratings are found to have lower cost of debt and higher credit ratings.

5.

Where is the there, there? Africa has some historical support in PE because of first assets coming from DFIs,
so that 50% investment dollars in private equity in Sub-Saharan Africa is DFI-linked US$12 / US$25bn in 2011. Is
it all “greenwashing” or “blue-washing”? The 2009 bump in PRI signatories following the GEPF mandate in RSA
produced more hype than reality; some Africa funds are better than others.




Drivers for ESG in investment in Africa
1.

The primary drivers identified by institutional investors in 2010-2011:
1.

Good investment returns (a record of premium from ESG integration)

2.

Explicit and tangible ESG beneﬁts/impact

3.

More information

4.

Government/regulator incentives

5.

Demands from clients/investor mandate/shareholder pressure.

2.

Further exposition of the ESG as value driver and developing the sustainability hypothesis “More

3.

Five recommendations to grow ESG in Sub-Saharan Africa through 2020: 1. Key influencers to drive messaging
2.Streamline ESG reporting 3.Leverage local knowledge 4.Make the sustainable investment case 5.Keep score

capital available to pursue ESG mandates…Increased returns, higher exit values, due to ESG…There has to be a
business by business basis to try and get help to improve attractiveness. Standards don't really help, but increased
awareness on governance and more board training would help. Also being realistic about what can be achieved.” –
composite verbatim comments [Sustainable Investment in Sub-Saharan Africa by SinCo + RisCura commissioned by
IFC, July 2011].




Availability of ESG growing, in Africa also

Source: Thomson Reuters Asset4, November 2013



ESG of ESG are global
Codes codesare global




What are the ESG issues impacting theYears [n= 97 investors (51 PE investors) +case
10 year investment 46 stakeholders;
Performance impact of ESG Factors 3-10
Biodiversity.

6

Micro-finance, micro-insurance.

6

Gender Diversity.

9

15

12

8

11

12

Emissions of greenhouse gases.

12

HIV/AIDS.

5

13

13

18
24

Broad-Based Black Economic Empowerment

16

Product Health, Safety and Nutrition Issues.

17

Human and Indigenous Peoples Rights.

18

21

Water scarcity or sanitation.

21

16
22

17

27

24

31

17

29

Infrastructure Development.

12

16

21

Employee Relations, Safety and Worker Rights.

8

15

Jobs creation [“decent paying” jobs].

Environmental Management

23

20

31

Corporate Governance.

16
32

44
0

Private Equity - Very Important
Investors (excluding PE) - Very Important
Stakeholders - Very Important

15

37
37

38

34
75

113

Source: SinCo analysis 2011; SinCo+RisCura data; 2011 © International Finance Corporation (IFC)



150


The role for sustainable investors in Africa: DFI PE LP
PROPARCO 2012 report on Private Equity investments in real economy.
"Committed to promoting the highest environmental and social standards".
EUR2.6bn, up 24% vs 2010.
1. People connected to telcoms
2. Jobs created
3. Pollution behaviour and reductions in greenhouse gases
4. Increased taxes paid
5. Access to ﬁnance
6. Projects improving environment and society
7. Shipping tons
SOURCE: Proparco, 2013




What ESG issues?

Mining sector

Platinum Rock drill operator at Lonmin mine coaching investors. PHOTOCREDIT: SinCo archive, September 2013


Sustainability News & ESG Special Reports




The role for sustainable investors in Africa: Chinese lessons
"To ensure that companies properly address ESG issues, investors should understand their investees’ internal
control policies and systems and work with them to strengthen their controls to prevent future
crises...investors in China should”
1.

Pay close attention to local news reports of companies that are fined for violating standards.
Problems identified at local levels may indicate wider problems throughout the corporation, even if
they are not picked up by national media. Proactively track social media for ESG-related news
reports.

2.

Actively follow companies’ responses to ESG-related accusations, and work with other
investors to influence company actions by using networks. Closely monitor warning and blacklists,
and inform your investees that you are doing so.

3.

Work with local and/or global NGOs active on ESG issues in order to identify poor-performing
companies.Investors cannot depend on the local media, since the media is not as critical or
investigative as media in other countries, and many news stories may not be published as a result
of corporate or political influence.

4.

Visit local branches of investee companies, set-up a local staff presence, and foster a
relationship with the management of investee companies through face-to-face meetings.

SOURCE: Sustainable Investment in China | What Investors Need to Know About the Top ESG Challenges in China, September 2011. BSR’s
work with Sumitomo Trust and Banking’s “China Good Company” stock fund.




The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2013: “understanding of asset
prices...relies in part on fluctuations in risk and risk attitudes, and in part on behavioral biases and market frictions.“
The brightest minds have different views of how future valuations look. Alternative asset classes and strategies map
both the predictive math, the flow of information embedded in the price at a point in time. ESG is in there.
What investment beliefs describe your investment in Africa philosophy of asset pricing? And wait, there’s more.
State Street Center for Applied Research paper based on 3,300 interviews with policymakers, investment
professionals and investment consumers The Influential Investor (2012) findings include i) Investors are not acting in
their own best interest, ii) investment consumers are becoming more aware of the system’s instability.
Eugene F. Fama, Lars Peter Hansen, Robert J. Shiller



Reality Checks for ESG in Investment in Africa in 2013
1.

Tomorrow is another country. All future sustainability thinking and investment integrating ESG will evolve in the
context of more assets based in Asia, increased investment and consumption demand from frontier and emerging
economies, savers stretched to defer consumption for investment, and multimedia channels for communication in
all directions.

2.

Too Little or Too Late? What is said versus what is actually done about making ESG in investment happen in
Africa, and how slowly the market is growing.
1.

Too Little? the small "ESG branded" size of the market with around 1% of assets in Africa branded for
ESG issues (eg ABC Low Carbon Fund or XYZ Impact Fund) AND small demand for ESG research and
thin reporting by investment managers on ESG performance attribution, relative to positioning by
institutional investors' claims of ESG. Relative to the addressable market of professionally managed money
- BCG reports global AuM grew to record $62.4 trillion in 2012.

2.

Too Late? Realities of African economies and investment practice that have failed to proactively advocate
for ESG, and now we sit with economies that look much like traditional economies (investors care first
about profit, not Africa's legacy)
1.

The social license to operate of many industries is weak and societies have huge inequities
(investment impact of Marikana). One billion consumers face harder route to the middle class.

2.

Natural environment in Africa has already paid a huge price for exploitation. The planet as
a whole is going to blow thru the limits suggested to prevent long term serious changes in climate.
Africa with agriculture and tourism based industries, much to suffer from freak climate patterns.

3.

Carbon budget will all used up in 21 years, PWC reports using carbon figures outlined UN’s
Intergovernmental Panel on Climate Change (IPCC) September 2013 report, threatening to cause
global warming of more than double the threshold deemed safe by the United Nations.



sustainable investment consulting

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ESG in Africa Investment: Too Little or Too Late? Graham Sinclair

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