Let me start off with this unequivocal statement: Corporate neutrality is a luxury organisations can no longer afford.
In many ways, the Covid-19 pandemic further embedded economies, zooming in on the codependencies that exist between markets, governments, households, public resources, society and the environment.
As such, consumers and investors are increasingly interested in supporting businesses that move beyond periodic performances of an ethical code and are instead making measurable progress on environmental, social and governance targets that deliver value to communities and the environment they are operating in. The key word here is measurable.
In the past, companies gave back to society through self-imposed and self-regulated Corporate Social Responsibility (CSR) commitments, seen as charitable contributions to communities – a way to win hearts and minds.
However, the integration of Environmental, Social and Governance (ESG) principles into business models and strategies incorporates an accountability framework that tracks progress toward set goals and sector standards.
By tracking ESG criteria and reporting against them, businesses have been able to propel themselves forward even as regulation shifts and sustainable investing gains traction. In 2020, ESG funds raised $54.6 billion in new money from investors.
Over a quarter of assets under management are currently being invested according to ESG criteria including climate change mitigation, energy efficiency, labour standards, diversity, board diversity, narrowing pay gaps, etc. One of many reasons for this is changing demographics.
The Bank of America indicated that ESG assets could rise to $15 – $20 trillion within 20 years as demographics change. Investors, lenders and rating agencies are more interested in assessing a company’s performance, risks and overall value creation through financial and non-financial metrics.
The future belongs to companies who win the trust of communities by delivering sustained contributions to the sustainable development of host societies.
More and more, regulators are establishing frameworks to ensure compliance and consistent measurement standards of ESG impact. In Europe, public companies, asset managers, and pension funds are mandated by law to disclose ESG risks in their investment portfolios.
Some of the financial sector regulations being rolled out in the European Union are set to be harmonised globally and will impact supply chains in African countries.
Levels of ESG regulation vary across Africa. Nigeria’s Securities Exchange Council has published guidelines on sustainable financial principles for the Nigerian Capital Market requiring regulated entities to develop and embed ESG considerations into their operations and decision-making processes.
And in South Africa, arguably the continental leader in ESG implementation, the Financial Sector Conduct Authority issued a guidance note requiring retirement funds to write ESG accountability into investment policy statements in 2019.
This was followed by a move from South Africa’s Government Employees Pension Fund (GEPF) earlier this year, as it announced plans to invest $1.6 million in assets that focus on social inequality and environmental challenges.
According to the World Bank only half of the pension funds in Sub-Saharan Africa disclose information on the importance of sustainability to their investments. The move by the GEPF stands to set a precedent that could see more countries incorporating ESG criteria into financial sector regulation as a means to increase sustainable returns.
Now is the time to consider future trajectories – to counter risks and seek opportunities. In January 2020, the leading investment corporation, Black Rock, argued that sustainability and climate integrated portfolios can provide better risk-adjusted returns to consumers.
This reverberated through the ecosystem with ripples of alignment among major global asset managers. Despite this promising development, only six in ten CEOs in Africa are concerned about the transitory risks associated with climate change; 77 percent of their companies have not made a carbon-neutral commitment, worse than a global average of 71 percent.
Some of the most severe temperatures are predicted to occur on the continent, as are many of the transition risks associated with climate change which are amplified by the dependence of many economies on minerals, energy and mining.
Yet the climes are changing. This month, the Nigeria Sovereign Investment Authority (NSIA) and Dutch energy and commodity trader, Vitol, agreed to establish a joint venture establishment to invest $50 million into local projects targeted at offsetting carbon emissions.
While Africa’s carbon footprint remains considerably low compared to much of the developed world, there is still a need to make sure we are not left behind on the journey to net-zero.
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Hudson Sandler, a 30+ year old ESG and strategic communications firm help our clients navigate this changing environment, distilling what their businesses stand for and their purpose as well as communicating their contributions to the community and the wider environment to the stakeholders that need to hear it the most. Our ‘HS Sustain’ practice puts robust sustainability and ESG strategies at the heart of all our work ensuring that our clients do the same.
As we attempt to surmount an existing myriad of developmental challenges, ESG is a chance to course-correct. It is time to abandon the old guard and entrench new standards of practice.
Companies can no longer pay lip service to their responsibilities to the public, nor can they get away with making commitments that add no real value to the overall ecosystem. While generating shareholder value is still key, delivering value that can be shared by the community at large is now a critical imperative.
The embeddedness of our economies with our livelihoods means that businesses are responsible to the communities that host them. The shift from CSR to ESG is more than three letters.
There is a decision to be made to future-proof business by weighing sectoral risks and opportunities and abiding by a set of measurable criteria that help investors make well-informed decisions by analysing long-term impact.
Onyebuchi Ajufo, a partner at Hudson Sandler, writes from Lagos