White paper - ESG Perspectives on Africa Nordea Savings & Asset Management Sasja Beslik , Head of Responsible Investment & Governance
ContentRenaissance of the continent 3The African miracle - Result of a combination of factors 5Increased African role in Global economy 7The China-India factor 9Keeping up the momentum - Investment Perspectives 11Different businesses have different ESG concerns 13”Despite this, there are reasons for optimism” 14
Renaissance of the continentChina and India as emerging new powers in the world economy has dominated much of the newscoverage in the past two years. Unfortunately, this singular focus has over-shadowed an equallynewsworthy subject, the spectacular economic and political renaissance of the African continent.
Once described as the ‘hopeless continent’ Africa is now attracting theattention of both the newly emerging Southern powers and the traditionalWestern trading partners.
The African miracle - Result of a combination of factorsThis rapid economic transformation has been to increase production and market their goods ataided by the significant progress in governance the local and international levels. This domesticreform and a reduction in armed conflicts. Peace dynamism has in turn contributed to significantin large parts of Africa has brought with it the growth in the number of Africans who viewopportunity for development and democrati- themselves as middle class.zation is gaining momentum. With increased opportunities for employmentThe new African miracle cannot be attributed to and rising income, large numbers of Africansa single factor but is the result of a combination have become the new consumers, further spur-of internal and external considerations. ring on the domestic economy. Indeed, average incomes in sub-Saharan Africa have grown stea-Global demand for Africa’s energy and natu- dily since 2000. The average annual growth rateral resources has increased dramatically, thus in sub-Saharan Africa increased from 3.7 perpermitting many countries to start diversifying cent in 1996–2000 to 6.3 per cent in 2003–2007.their economies for the first time in decades and The latest edition of the World Economic.to invest in the strategic infrastructure neces-sary for raising productivity and growth. Many Outlook 2010 puts sub-Saharan Africa growthAfrican governments have put in place for 2008 and 2009 at 5.5 and 2.1 per cent re-appropriate macroeconomic, structural and spectively, and the latest projected growth ratessocial policies, which have contributed to are for 5.0 and 5.5 per cent for 2010 and 2011improved GDP growth rates. respectively. More than one-third of Africans live in countries that had grown by more than 4Moreover, rising commodity prices, increased per cent annually for 10 years, and 18 countriesinvestment in vital infrastructure by China and are classified by the World Bank as ‘diversifiedIndia and access to information by ordinary citi- and sustained growers’.zens thanks to the mobile phone revolution, haveopened up new opportunities for rural producers ESG PERSPECTIVES ON AFRICA 5
With their ‘can do’ attitude, a new generation of Africans istransforming social and political relationships in a manner notseen before.
Increased African role in Global economySignificant efforts are being made byAfrican The flag bearers of this new renaissance aregovernments to reverse the productivity decline to be found in the private sector, the informalin agriculture by instituting enabling policies and economy, African diasporas organizations andinvesting in vital infrastructure. A similar effort social movements based in the church, humanis being made to reverse the decline in higher rights organizations, women’s movements andeducation and to expand access to basic local government.education. These groups are united behind one thing: howApart from the policy dimension, one of the to dismantle the “disabling state” and replace itmost significant reasons for Africa’s renewal has with a state which is not only protector andbeen the emergence of an internet- and mobile supporter, but also enabler and liberator.phone-savvy citizenry, empowered by increasedaccess to information about their own countryand the world beyond, and ready to challenge orbypass stifling institutional barriers, formal andinformal, to their economic success. ESG PERSPECTIVES ON AFRICA 7
China alone now accounts for over 11 per cent of Africa’s externaltrade and is the region’s largest source of imports.
The China-India factorWhile Europe and the United States remain As the successful development experience ofimportant trading partners, Africa’s economic China and Asian industrializing countries hasengagement is beginning to shift towards Asia shown, a competent state has a vital role to playand other developing countries. Trade between in guiding national development, nurturing theChina and Africa grew from a mere US$6.5 private economic actors by providing incentivesbillion 1999 to over US$120 billion in 2010. for them to grow and export, re-engineeringSimilarly, India’s trade with Africa surged from business processes, enhancing the investmentUS$941 million in 1991 to more than US$25 climate for both domestic and foreign invest-billion in 2008. ment, investing in human capital and delivering adequate public services.Besides China and India, other emerging eco-nomies (such as Brazil, South Korea, Malaysia, Maintaining momentum would also entailVietnam and Turkey) have become increasingly supporting the legal and financial institutionalactive in many African countries, a clear indica- framework of the economy. The legal systemtion that North-South relations are being super- must uphold order, act as a check on governmentseded by South-East, even Africa- South-East and protect property rights, human rights andrelations, with profound implications for Africa’s contract rights. The financial system mustdevelopment. promote household savings and channel them into productive enterprises. These are some ofCentral to sustaining Africa’s growth moment- the ingredients that have gone into Africa’sum is the development of strong and effective recent growth miracle and are necessary tostate institutional structures (from central to sustain it.local level) that will advance the growth anddemocratization agenda in the context of a The continent has changed forever and there iscommon national vision. An effective state is no going back.a prerequisite for a well-functioning market. ESG PERSPECTIVES ON AFRICA 9
A strong ESG record can help companies win international customers,build stronger brands, reduce costs and improve performance.
Keeping up the momentum - Investment PerspectivesStrong environment, social and governance Despite these challenges, there is a growing(ESG) practices build real value and make determination to resolve seemingly intractablecommercial sense. These practices are especially issues and shake off the poor reputation of manyimportant for businesses in Africa, particularly African companies.in sub-Saharan Africa, which is rated by some asthe most difficult continent in the world in terms We have seen a trend in Africa towards activeof ease of doing business, and is home to a larger management of ESG practices. In particular,proportion of poor people than any other region. there is recognition that having good ESG practices builds competitive advantage and valueCorruption, bureaucracy, inefficient capital in the business. It also encourages companies tomarkets, poor infrastructure (especially the lack operate to international standards and ownersof access to reliable power), and the effects of recognize that this is essential if they are todiseases such as HIV/AIDS, tuberculosis and attract potential buyers when they choose to sell.malaria make many of the region’s economieshighly challenging for entrepreneurs andgrowing businesses. ESG PERSPECTIVES ON AFRICA 11
While we are seeing an increase in businesses introducing ESGpractices, this is not true of all businesses.
Different businesses have different ESG concernsThose with high environmental concerns Across sub-Saharan Africa poor businessinclude ones which have large factories, are management is a major barrier to growth. Ininvolved in oil and gas extraction, large-scale many countries, while laws are in place, they areagribusiness, forestry, construction, new ineffectively enforced as there is a shortage ofinfrastructure projects and resource intensive enforcement officials. This results in lax corpo-industries, such as cement plants. rate governance standards.There are also high ESG concerns in businesses There is also a shortage of expertise onthat use low skilled workers, such as textile environmental and health and safety issues.production, those which operate in countries withweak employment legislation, that involve In sub-Saharan Africa, HIV infection ratesworkers handling hazardous substances and are between 15% and 20% for some countries,last but not least, businesses which can pose including Zambia, Namibia and South Africa.health and safety dangers for consumers, such Across the region more healthcare professionalsas food producers. From the business integrity are needed to educate communities and provideand corporate governance perspectives, there are treatment for employees and their families.risks and opportunities for improvement across The introduction of HIV programmes by somemost sectors. Many fund managers investing in businesses has increased awareness and preven-businesses in Africa are now demanding a strong tion but further work is needed to encourage bestcommitment to responsible investment practice with respect to the battle against HIV,principles. malaria and tuberculosis. ESG PERSPECTIVES ON AFRICA 13
”Despite this, there are reasons for optimism”Self-interest is a helpful motivator here. African economies are growing – the IMFA healthy workforce means a more efficient is still predicting 4.1 per cent GDP growth inworkforce, which can help businesses, grow and sub-Saharan Africa for 2010. Not as much asachieve long term success. This one measure the region needs, but this is still a positive trendcould make an enormous social and economic and we hope this growth encourages investmentimpact. To further compound ESG challenges, back to Africa.the global financial downturn is being felt byAfrican businesses. Exports have declined, by We are also seeing a growing number of Africanaround 15 per cent in South Africa, and capital companies preparing for the upturn by investingremains in short supply. Many equity investors in building strong ESG practices, giving them awho were finally looking to invest in the conti- commercial advantage in the future.nent are turning away. Debt capital is scarce. As international ESG best practices continueThis flight of capital means that the very to evolve and more organisations sign up to in-businesses on which economic growth and vestment standards, such as the UN’s Principlesultimate poverty eradication depend, are starved for Responsible Investing, more African busi-of growth finance. Due to recessionary nesses will become better aware of how topressures, many companies have cut back on improve ESG. While sub-Saharan Africacosts and some businesses may be tempted to remains a tough business environment, there iscut corners on ESG matters, which will have a desire to improve ESG practices and adetrimental problems for the business in the growing realization that this, in turn, will helplong term. to improve business performance and value and ultimately help stimulate economic growth, thereby reducing poverty.14 ESG PERSPECTIVES ON AFRICA
Published by: Nordea Investment FundsGraphic Design: Lina Johansson/SenseDesign Photos: iStockphoto June 2011