Sustainable investing in Africa must place priority on the social aspect
ESG has tended to emphasise the environment and governance while playing down the impact on communities
The concept of environmental, social & governance (ESG) entails three factors that have been overlooked in measuring firms’ compliance with these criteria. Environmental responsibility speaks to energy usage, carbon footprint and waste management systems. Social responsibility refers to the relationship between companies and labour, and the firms’ commitment human rights, diversity and inclusivity. Governance is generally restricted to corporate governance in the form of business ethics and involving shareholders in business decisions, and a commitment to transparency. This is essentially the definition of ESG presented by Goby’s ESG Reporting Matrix, and Social Intelligence’s exploration of ESG frameworks.
ESG reporting has become increasingly mainstream since the concept first took root in the 2000s. Instrumental was the launch of the FTSE4Good Index Series, whose objective was for UK pension funds to consider social, ethical, or environmental (SSE) issues in making investment decisions. ESG issues were first formally mentioned in the 2006 UN Principles for Responsible Investing (PRI) Report. ESG criteria were to be voluntarily incorporated into the financial evaluations of companies to further develop sustainable investing. Additionally, climate activists and the UN sustainable development goals created pressure for more sustainable capitalism.
In September 2020 about 60 companies, including HP, Bank of America, Nestlé, Royal Dutch Shell and African Rainbow Minerals, signed up to the International Business Council (IBC)’s Stakeholder Capitalism Metrics. According to the World Economic Forum and KPMG, these metrics are a set of voluntary universal disclosures standards that enable companies to “benchmark their progress on sustainability issues, thereby improving decision-making and enhancing transparency and accountability regarding the shared and sustainable value companies create”. That addresses, to some extent, the problem of the lack of a universal and comparable ESG framework. It may also deepen the harmonisation and convergence of these frameworks and principles.
While this all sounds good, it raises three important questions. First, is it possible for firms to truly move beyond the profit motive towards being a progressive means for building a healthier, more environmentally sustainable and prosperous societies? Second, is ESG at risk of becoming mere corporate rhetoric, tantamount to talking the talk without walking the walk, otherwise known as “greenwashing”? Third, can ESG help reduce negative externalities typically imposed by firms on communities by incentivising firms to internalise social and environmental costs?
The bulk of the ESG discourse tends to revolve around “E” and “G”. Despite the overemphasis on the “E” the EU’s recently released Sustainable Finance Disclosure Regulation scrapped the inclusion of deforestation after intense lobbying. Yet the prevention of deforestation is critical to meaningful climate action. BlackRock was recently accused of inconsistency in its approach to ESG due to its investments in a company that has allegedly engaged in land grabs, in addition to adhering to poor environmental standards. This came after BlackRock led “an investor rebellion” at P&G about concerns that it was not living up to its environmental obligations. The implication of greenwashing by firms and asset managers is that without credible commitment to the spirit of ESG requirements its impetus for good is likely to dissipate.
If ESG is to nudge firms towards becoming progressive actors, the “G” must be expanded to include the role of business in building institutions that ensure a stable macro-political and economic environment.
An expansion of the “S” is necessary with respect to both the transparency of firms’ supply chains and the effects of their activities on the health and wellbeing of people near sites of extraction or production. In other words, do the human rights targets of multinationals have an impact on the transparency of their supply chains? In 2019 the Washington Post exposed the continued existence of child labour within the supply chains of some of the biggest chocolate producers, despite these firms having pledged not to use cocoa harvested using child labour. These are among the negative consequences which firms tend to pass on to communities and that undermines the spirit of ESG .
The lack of focus on the “S” — social governance — which is vital for the creation of a stable economic climate for firms to operate, is arguably most apparent on the African continent. This can be seen, for instance, in the ongoing conflict in Cabo Delgado, Mozambique. The weakness of effective governance institutions, combined with local grievances about the allocation of resources by the state and the existence of valuable natural gas resources, resulted in a series of attacks by insurgents. Into this explosive situation private security forces have entered the fray. This has ultimately forced Total to evacuate its employees.
A plethora of factors contribute to the problem beyond the obvious limitations of existing corporate ESG frameworks, including weak institutions, deficient legislation and enforcement, corruption, a comparative lack of local shareholding in corporates operating on the continent, and in many cases a populace that is ill-equipped to demand best-practice enforcement by companies.
The proposed expansion of the ESG concept is therefore particularly relevant to the extractive industries operating in African countries. There are already frameworks which attempt to position mining companies as development partners as opposed to being solely focused on shareholder interests and the bottom line. Among these are the AU’s Africa Mining Vision, AU’s AMV-inspired African Mineral Governance Framework, the Extractive Industries Transparency Initiative and responsible sourcing initiatives such as the Kimberley Process. All of these aim to promote transparency and accountability. However, the implementation of many of these has been limited.
Within an expanded ESG framework corporate and state institutions would have a responsibility to ensure that in creating shareholder value their activities do not have negative effects on the wellbeing of host communities. At least partially, firms would address these communities’ concerns through attaining free, prior and informed consent ahead of operations starting. They would then also shoulder a responsibility to prepare communities for life after mining through restoring the land and related programmes.
Expanding the scope of ESG is critical if global attempts to mainstream the concept into core business considerations are to be credible and effective. It is especially important as African countries endowed with resources required for a low-carbon future continue to struggle with weak governance. While the continent possesses an abundance of mineral resources, we have seen weak institutions and poor governance turn what should be a blessing into a curse, leading to unstable and fragile mining jurisdictions. Companies being involved in reducing negative externalities through co-operation with the state, civil society organisations and communities, will contribute to the development of inclusive institutions. This, in turn, will create a stable economic environment for sustainable growth and increased investment.
• Obisie-Orlu is a researcher in the natural resource governance programme at Good Governance Africa.
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