Debate: How will Covid-19 affect ESG?
Covid-19 has challenged businesses in Africa, but does it provide an opportunity to build back better in terms of environmental, social and governance issues? A panel of financial experts came together in October to debate the topic.
The Covid-19 pandemic has exposed major inequalities in African societies, but the upheaval provides the continent with the opportunity to improve its environmental, social and governance (ESG) metrics. Our sister publication, African Banker, in association with events organiser Afsic and sponsor Standard Bank, held a webinar in October with a panel of financial experts led by Dr Desné Masie, head of strategic advisory and business intelligence at IC Publications, which examined the latest ESG trends.
Nigel Beck, executive head of sustainable finance at the Standard Bank Group
Most institutional investors and asset managers are moving in this direction. You’re also starting to see intergenerational wealth transfer – the transfer of wealth to impact-conscious millennials. These millennials certainly want a financial return but they also want to see a positive environmental and social return. There has obviously been a diversification of financial products. Everybody is familiar with green bonds, traditionally they have been the dominant category, but what we’re starting to see is a diversification into social bonds, sustainable bonds, sustainability linked loans, and green loans. We have seen green loans and sustainability linked loans grow probably about 200% year on year.
Shameela Soobramoney, chief sustainability officer at the Johannesburg Stock Exchange
Our primary aim is to create that enabling environment in which better disclosure and practices in relation to sustainability can grow and flourish with that underlying premise that this is the core to good governance and therefore long-term resilience and better investment propositions. We’ve started to help create the enabling disclosure environment with products and services to help enable people to start investing.
We have our flagship effort which is our responsible investment index, the first of its kind in the world to actually assess companies on ESG principles. In addition we have our sustainability index that includes green bonds, social bonds. and sustainability bonds. If you look at the green bonds as an example, generally they have been over-subscribed at launch between three and five times, proving that there is a substantial demand for these products. We’ve just listed the first ESG exchange-traded fund on the JSE which brings in the retail market.
Ed Higenbottam, MD at Verdant Capital
The industry has broadened over the last few years to work in segments which are aligned much more broadly to sustainable development goals. It is worth touching on why this asset class has performed so strongly over the last 20 years and had a positive impact on people who needed that benefit. The biggest single enabler of investing in impact funds is how mainstream retirement funds and retirement accounts have changed. Some retirement account managers enable you to change your allocations daily; some allow you to change monthly. You have a menu of different funds around the world – bond,
equity, emerging markets, developed markets – and within that sort of menu of different funds you can choose impact funds targeted at the values that are important to you.
Another factor is that impact investing funds’ returns have been very solid. There is generally much lower volatility than investing in the stock market and generally they’re uncorrelated to all other asset classes. Impact investing is now much more mainstream and if you think about the top 20 financial institutions globally, they have all set up or acquired impact funds.
Finally, if you look within the investing itself, it has evolved. Whereas previously you might have been offered a microfinance fund or a women’s empowerment fund, now there’s so many different choices of impact funds which can be linked to specific sustainable development goals such as “wash” – which is water and sanitation funds - which of course is very topical at the moment with the Covid-19 crisis.
When one looks at impact investing a lot of people think about investing in Nicaragua or Cambodia or Vietnam, or less affluent parts of Africa. But a lot of the impact funds today are now focusing on less fortunate communities within the first world, in the US or within Western Europe, and that’s a key trend.
Josien Piek, head of EMEA at GRESB
We were founded 10 years ago by two of the largest pension funds in the Netherlands and a large UK pension institution, and at the outset we had a focus on real estate. The rationale was that although there was a mass of financial data, there was a lack of any standardised ESG data. So GRESB got their ESG questionnaires and harmonised them, then they asked some academics from Maastricht University to improve the list of questions, and then they innovated. They said let’s get them to report to us in a database.
At that point it was just real estate portfolios that were reporting into one database but if you fast forward to today we have $5.3 trillion in real estate and infrastructure value data, and it is used by more than 100 institutional and financial investors to make decisions that are leading to a more sustainable real asset industry. The beauty is that once you have data coming together in that way, you can do two things. You can start comparing, so we benchmark and everyone competes to be the best, and you can start aggregating. What we’re seeing right now on the investor side is an incredible hunger for good ESG data.
Kome Johnson-Azuara, associate VP for Investments at the Africa Finance Corporation
In the African context our mandate requires a more holistic and deliberate approach to providing financing solutions. Infrastructure developments are designed to be here for years to come, so we’ve taken a more deliberate approach and are investing more sustainably. In our internal strategy for long-term environmental and social governance, we’ve set the bar high in a lot of ways for the companies we invest in, ensuring that we are respectful and mindful of the impact our projects will have.
We’ve done a lot in ESG and risk and compliance. One of the highlights I want to raise is our participation in the Global Innovation Lab for Climate Finance. AFC has been a member of that think-tank group for over five years and they create innovative products and solutions.
In terms of blended financing, we have recently supported Green Street Africa to aggregate various solar projects to support public use, be it hospitals or schools. It’s not possible to offer blended financing if the cost of your capital is too high. You see a lot of institutions on the continent, at least within the private sector, struggling when they try to do PPP projects because the cost of capital is high. We have spent quite a bit of time working with various institutions to be able to provide blended financing solutions.
The AFD, the French development institution, has a €100m [$118m] climate finance facility, the Green Climate Fund, which was established in 2010 specifically to drive a global reduction of carbon emissions through both mitigation and adaptation projects, with a target of at least 50% of its funding going to the least developed states and African states.
Last year we worked with the Green Climate Fund and the African Development Bank to support the solar programme in Nigeria. As of the end of 2019 I believe we had 9% of our portfolio specifically in climate finance projects like the 420 MW megawatt hydropower project in Cameroon and also the 6 MW wind farm in Djibouti. Just last month we launched a CHF150m [$165m] green bond. ■
“We have seen green loans and sustainability linked loans grow probably about 200% year on year.”