Invest in ESG during the downturn

By Richard Laing | Published: 01 October, 2009

Sub-Saharan Africa, home to a larger proportion of poor people than any other region, is rated the most difficult continent in the world in terms of ease of doing business. Corruption, burdensome bureaucracy, inefficient capital markets, lack of access to reliable power, and the effects of diseases such as HIV/Aids, tuberculosis and malaria make many of the region’s economies highly challenging for entrepreneurs and growing businesses.

The global downturn is being felt in Africa too. Exports have declined and capital remains in short supply. Many investors who were, at last, looking towards the continent a couple of years ago are turning away from Africa. This flight of capital means that the very businesses on which economic growth and ultimate poverty eradication depend are starved of growth finance.

Yet there are reasons for optimism. African economies are growing. Not as much as is needed, but there is still a positive trend, with the IMF still predicting 4.1 percent GDP growth in sub-Saharan Africa for 2010. And something else is beginning to happen: growing numbers of African companies are preparing for the upturn by investing in building strong environmental, social and governance practices which will give them a commercial advantage in the future.

CDC, the largest private equity funds investor in the region, sees a trend in Africa towards active management of ESG matters. There is a growing determination to resolve these seemingly intractable issues and to shake off the poor reputation of many African companies. Why? Because having good ESG practices builds competitive advantage and value in the business. A strong ESG record helps companies win international customers, build stronger brands, reduce costs and improve performance. It allows companies to operate to international standards and attract potential buyers if the owners choose to sell.

But do not under-estimate the scale of the task. Across sub-Saharan Africa poor business management is a major barrier to growth. In many countries, while laws are in place, they are ineffectively enforced as there is a shortage of enforcement officials. This results in lax corporate governance standards.

In addition, there is a shortage of expertise on environmental and health and safety issues. Due to recessionary pressures, many companies have cut back in this area and some businesses may be tempted to cut corners on ESG matters.

In sub-Saharan Africa, HIV infection rates are between 15 and 20 percent for some countries, including Zambia, Namibia and South Africa. Across the region, more healthcare professionals are needed to educate communities and provide treatment for employees and their families. The introduction of HIV programmes by some businesses has increased awareness and prevention. Again, self-interest is a helpful motivator here: a healthy workforce drives success. However, further work is needed to encourage best practice with respect to the battle against HIV, malaria and tuberculosis. This would have a huge social and economic impact.

The economic and ethical case for high ESG standards is strong but the real challenge is how to implement measures in a straightforward, efficient and unbureaucratic way. Commitments to ESG need to be integrated across an entire organisation and appropriate monitoring procedures should be put in place to measure their effectiveness. Patience is needed too. Improving ESG performance is a journey. It takes time.

International ESG best practices are evolving and CDC is working with other development finance institutions to lead by example and support improvements in the world’s poorest countries. While sub-Saharan Africa remains a tough environment, there is a desire to improve ESG practices and a growing realisation that this, in turn, will help to improve business performance and value and also stimulate economic growth.

The sheer scale of what needs to be done may seem overwhelming. But unless more African businesses act now, progress will be set back even further. Strong ESG practices build real value and make commercial sense.

Rating ESG risks – examples of how to categorise companies from the environmental perspective

Richard Laing is chief executive of CDC Group plc

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