Discussion on attracting much-needed investment into Africa has generally focused on non-African sources: foreign firms, multilateral financial institutions and non-African institutional investors. Yet far greater attention is now being paid to investment funds based within the continent itself.
As African pension and social security funds grow in size, they have the potential to support more African companies and projects. They can ensure that they maximise the benefits of this investment by building environmental, social and governance (ESG) principles into their investment criteria. This can not only provide more ethical investment but can also help generate more sustainable long-term returns.
ESG strategies allow investors to generate healthy rates of return while helping to tackle environmental problems such as climate change and air and water pollution. They can also help support economic development that promotes higher living standards by investing in companies that pay a living wage to their employees, while offering sick pay and other benefits. The governance side of the equation refers to both sound corporate governance but also good state governance, with corporate recipients of any investment required to commit to transparent and legal interaction with government officials.
The ESG criteria adopted by different funds vary widely. For many it is challenging to identify suitable investment targets because – unlike with financial reporting – different companies use many different methodologies to assess their ESG performance.
Investment funds tend to use ratings checklists to measure each company by a range of criteria. These scorecards are often developed in-house, although some funds make use of those compiled by third-party organisations. The ratings systems enable them to invest in companies that comply with their criteria, and also encourage companies that do not achieve the required standards to make progress on a range of metrics.
Research by Bloomberg has forecast that the value of ESG investment will reach almost $50bn by 2025, or a third of all global assets under management. This is partly because of customer demand but also because many studies have concluded that such strategies support stable corporate financial performance.
The impact of the ESG policies introduced by non-African investment funds and banks is already being felt on the continent, as developers have struggled to secure financing for potential African coal mining, coal-fired power plants and oil field projects. However, although the African Pension Supervisors Network is now attempting to encourage the continent’s funds to adopt ESG strategies, it is difficult to find accurate figures on the proportion of ESG-based investment undertaken in Africa by African funds.
Writing on the World Bank blog in January, Fiona Stewart, the Bank’s lead financial sector specialist in its Finance, Competitiveness and Innovation Global Practice, said that the World Bank has begun benchmarking the ESG reporting practices of the biggest African pension funds. It has found that while all funds provide full information on their financial performance, just half offer statements on the importance of sustainability.
They provide limited information on their sustainable investment strategies – including on how they are implemented – and very few disclose information on their attitudes to climate change. This is despite the UN calling for the publication of ESG policies in its Principles for Responsible Investment (PRI), which was launched in March 2006.
Research by Stewart and her colleagues found that “pension funds as the main asset owners in the region are at the ‘top of the food chain’ and can be catalysts for ‘greening the financial systems’” but found that pension funds do not yet ask companies for ESG information.
“Moreover, what is available could look to some like ‘greenwashing,’ with long reports that simply repeat a small number of data points”, wrote Stewart.
The researchers drew up a list of ESG information they expected investment funds to provide. South Africa performed best, with 74% of the anticipated information provided by the country’s funds. At the bottom end of the scale came Tanzania with 14%, and Namibia and Uganda, both with 16%.
Examples of best practice included the Botswana Public Officers Pension Fund, the National Social Security Fund Uganda and South Africa’s Sentinel Retirement Fund. Sentinel says that it includes ESG risk factors in its risk management systems to ensure that these are identified and mitigated in current and future investment portfolios. The guidelines in its investment policy statement are reviewed annually by the investment committee
South Africa leads the way
South Africa has for some time proven itself a leader on ESG. In South Africa, the Institute of Directors South Africa (IDSA) launched its Code for Responsible Investing in South Africa (CRISA) as long ago as 2011, making it the second country after the UK to officially encourage institutional investors to integrate ESG principles into their investment decisions.
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The fact that South Africa is something of an outlier may be related to its position as one of the most advanced financial markets on the continent but also because of its own history. As part of government efforts to help overcome the legacy of apartheid, companies were required to publish details of their strategies to increase the number of non-white employees, including in the boardroom and in other senior positions.
These black empowerment strategies were extended to include reporting on the number of female and disabled people employed at all levels. In many instances, minimum targets were set.
This created a culture of producing non-financial annual reports that can easily be extended to cover other criteria. However, South Africa’s dependence on the mining, consumption and export of coal may explain the reluctance to publish climate change strategies, both by companies and institutional investors.
In 2021, when the revised CRISA Code was published, the IDSA reported: “Responsible investment and stewardship are increasingly finding application across asset classes and beyond public markets. Despite this, there remains a sense that action from the investment community is lagging both in urgency and scope.”
The main changes in the revised code include the incorporation of sound governance by the investment organisation itself and expanding the transparency required by players across the investment value chain.
Size of funds grows
About 90% of the assets under management of pension funds and other institutional investors in Africa is concentrated in South Africa, Nigeria, Namibia and Botswana. Yet the size of funds is growing across the continent.
Writing on his organisation’s blog, Ndabe Mkhize, chief investment officer of the Eskom Pension and Provident Fund, has argued that infrastructure investment can provide a way for investors to meet ESG and impact investing goals by promoting African development.
It also satisfies market demand and offers strong and predictable returns over time, as “a feasible return on infrastructure equity investment will be in the region of 12% to 16%, depending on factors such as gearing and risk,” he says.