esg in africa investment: too little or too late? graham sinclair

Monday, November 11, 13

TOO LITTLE OR TOO LATE? Reality Checks for ESG in Investment in Africa in 2013

Graham Sinclair @esgarchitect

[email protected]/in/grahamsinclairSkype: graham_sinclair+27.81.87.87.332 RSA+1.484.802.9908 USA+1.802.332.6887 SkypeIn


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www.sincosinco.com@SinCoESG

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Sustainable Investment Consulting

• SinCo - sustainable investment consulting - is a specialist sustainable investment advisory boutique formed in February 2007. We have no other focus, we have no conflicts of interest. We build investment conviction and competence for our clients using ESG factors in investment ecosystems.

• SinCo has a track record of building robust answers to tough questions in sustainable investment. Our clients have included institutional investors, UN agencies and international NGOs, think tanks and foundations and stock exchanges.

SinCo designs ESG architecture for long term sustainable investment

that matters.

Discussing the impact and future of the PRI with Kofi Annan in The Netherlands, May 2008.

Debating the progress of ESG in Africa and the role of private equity at the JSE in South Africa, August 2012.

With fellow CSR Africa keynote and sustainability legend, Gro Harlem Brundtland in Nigeria, May 2012.


AfricaSIF.org is a new, strategic step in facilitating investment in Africa that purposefully integrates environmental, social and governance (ESG) factors.

Africa Sustainable Investment Forum is an independent, Pan-African, not-for-profit network, knowledgebase and advocate promoting investment in sustainable development across the continent. Launched in June 2010, the AfricaSIF.org Project is run by volunteers building a network of institutions and individuals promoting sustainable investment in Africa by investors in public, private and philanthropy sectors across asset classes, countries and stakeholders from our platform at www.africasif.org.

AfricaSIF.org defines "sustainable investment" as "an approach to investment in any asset class in Africa where environmental, social and governance (ESG) factors are proactively integrated at any stage of the investment life cycle."

You are invited to join our all-volunteer AfricaSIF.org project leadership team, or sign up as an individual member, or join your organization as an institutional member from 2014. Join us at africasif.org/support.

4Prepared by SinCo [sincosinco.com] for Thomson Reuters Trading Africa 2013. Author: Graham Sinclair. Copyright SinCo 2013.


http://www.africasif.org

http://www.africasif.org

Mega-trends driving growth in ESG1. More beneficial owners - you and me as members of funds - and the trustees stewarding retirement funds, are

asking more questions. Institutional investment is a competitive global industry. professionals manage portfolios across asset classes, project and company types; financing/investing in stages of companies/projects business cycles.

2. Increasing materiality of environmental, social and governance (ESG) factors is driving investors, and their end-clients, to integrate sustainability concepts. US$13.6 trillion globally, US$229 billion in Africa according to AfricaSIF.org estimates, are self-reported investments proactively using ESG in investment policy or process. FT this week reports both Morgan Stanley and Goldman Sachs have launched "impact investment" portfolios. Positive/best-in-class screening stands at just over $1.0 trillion, while impact investing ($89 billion) and sustainability-themed investments ($83 billion) are comparatively small.

3. Increasing quality of coverage of ESG flowing from professional ratings agencies offers (and responds to calls for) sharper focus. With more coverage, is the opportunity to use of new ESG valuation models. Pursuit of "sustainability alpha" continues; ESG benchmarking and performance attribution growing.

4. Improving African investment context is attracting capital. The long term investment in Africa hypothesis may benefit from making the sustainable investment case for the positive outcomes, or reduction in negative impacts, from integrating more, not less material factors including ESG. New research studies are mostly ex-Africa, but are making the case for sustainable investment has a more developed investment thesis, for example, research studies reflect that 1) companies with high ESG scores are found to have less company specific risk OR 2) corporations with better ESG ratings are found to have lower cost of debt and higher credit ratings.

5. Where is the there, there? Africa has some historical support in PE because of first assets coming from DFIs, so that 50% investment dollars in private equity in Sub-Saharan Africa is DFI-linked US$12 / US$25bn in 2011. Is it all “greenwashing” or “blue-washing”? The 2009 bump in PRI signatories following the GEPF mandate in RSA produced more hype than reality; some Africa funds are better than others.

THE 3rd ANNUAL TRADING AFRICA SUMMIT 6 - 7 NOVEMBER 2013

Prepared by SinCo [sincosinco.com] for Thomson Reuters Trading Africa 2013. Author: Graham Sinclair. Copyright SinCo 2013.


Drivers for ESG in investment in Africa1. The primary drivers identified by institutional investors in 2010-2011:

1. Good investment returns (a record of premium from ESG integration)

2. Explicit and tangible ESG benefits/impact

3. More information

4. Government/regulator incentives

5. Demands from clients/investor mandate/shareholder pressure.

2. Further exposition of the ESG as value driver and developing the sustainability hypothesis “More capital available to pursue ESG mandates…Increased returns, higher exit values, due to ESG…There has to be a business by business basis to try and get help to improve attractiveness. Standards don't really help, but increased awareness on governance and more board training would help. Also being realistic about what can be achieved.” – composite verbatim comments [Sustainable Investment in Sub-Saharan Africa by SinCo + RisCura commissioned by IFC, July 2011].

3. Five recommendations to grow ESG in Sub-Saharan Africa through 2020: 1. Key influencers to drive messaging 2.Streamline ESG reporting 3.Leverage local knowledge 4.Make the sustainable investment case 5.Keep score




Availability of ESG growing, in Africa also



Source: Thomson Reuters Asset4, November 2013


ESG codes are global



Codes of ESG are global


Biodiversity.

Micro-finance, micro-insurance.

Gender Diversity.

Emissions of greenhouse gases.

HIV/AIDS.

Broad-Based Black Economic Empowerment

Product Health, Safety and Nutrition Issues.

Human and Indigenous Peoples Rights.

Jobs creation [“decent paying” jobs].

Water scarcity or sanitation.

Environmental Management

Employee Relations, Safety and Worker Rights.

Infrastructure Development.

Corporate Governance.

0 38 75 113 150

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37

16

15

31

17

16

12

8

23

18

5

11

15

37

32

20

17

27

22

16

15

21

24

13

12

12

9

44

31

29

24

21

21

18

17

16

13

12

8

6

6

Performance impact of ESG Factors 3-10 Years [n= 97 investors (51 PE investors) + 46 stakeholders;

Private Equity - Very ImportantInvestors (excluding PE) - Very ImportantStakeholders - Very Important

Source: SinCo analysis 2011; SinCo+RisCura data; 2011 © International Finance Corporation (IFC)



What are the ESG issues impacting the 10 year investment case


The role for sustainable investors in Africa: DFI PE LPPROPARCO 2012 report on Private Equity investments in real economy. "Committed to promoting the highest environmental and social standards". EUR2.6bn, up 24% vs 2010.

1. People connected to telcoms

2. Jobs created

3. Pollution behaviour and reductions in greenhouse gases

4. Increased taxes paid

5. Access to finance

6. Projects improving environment and society

7. Shipping tonsSOURCE: Proparco, 2013




What ESG issues? Mining sectorPlatinum Rock drill operator at Lonmin mine coaching investors. PHOTOCREDIT: SinCo archive, September 2013



Sustainability News & ESG Special Reports




The role for sustainable investors in Africa: Chinese lessons"To ensure that companies properly address ESG issues, investors should understand their investees’ internal control policies and systems and work with them to strengthen their controls to prevent future crises...investors in China should”

1. Pay close attention to local news reports of companies that are fined for violating standards. Problems identified at local levels may indicate wider problems throughout the corporation, even if they are not picked up by national media. Proactively track social media for ESG-related news reports.

2. Actively follow companies’ responses to ESG-related accusations, and work with other investors to influence company actions by using networks. Closely monitor warning and blacklists, and inform your investees that you are doing so.

3. Work with local and/or global NGOs active on ESG issues in order to identify poor-performing companies.Investors cannot depend on the local media, since the media is not as critical or investigative as media in other countries, and many news stories may not be published as a result of corporate or political influence.

4. Visit local branches of investee companies, set-up a local staff presence, and foster a relationship with the management of investee companies through face-to-face meetings.

SOURCE: Sustainable Investment in China | What Investors Need to Know About the Top ESG Challenges in China, September 2011. BSR’s work with Sumitomo Trust and Banking’s “China Good Company” stock fund.




The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2013: “understanding of asset prices...relies in part on fluctuations in risk and risk attitudes, and in part on behavioral biases and market frictions.“ The brightest minds have different views of how future valuations look. Alternative asset classes and strategies map both the predictive math, the flow of information embedded in the price at a point in time. ESG is in there.

What investment beliefs describe your investment in Africa philosophy of asset pricing? And wait, there’s more. State Street Center for Applied Research paper based on 3,300 interviews with policymakers, investment professionals and investment consumers The Influential Investor (2012) findings include i) Investors are not acting in their own best interest, ii) investment consumers are becoming more aware of the system’s instability.

Eugene F. Fama, Lars Peter Hansen, Robert J. Shiller




Reality Checks for ESG in Investment in Africa in 20131. Tomorrow is another country. All future sustainability thinking and investment integrating ESG will evolve in the

context of more assets based in Asia, increased investment and consumption demand from frontier and emerging economies, savers stretched to defer consumption for investment, and multimedia channels for communication in all directions.

2. Too Little or Too Late? What is said versus what is actually done about making ESG in investment happen in Africa, and how slowly the market is growing.

1. Too Little? the small "ESG branded" size of the market with around 1% of assets in Africa branded for ESG issues (eg ABC Low Carbon Fund or XYZ Impact Fund) AND small demand for ESG research and thin reporting by investment managers on ESG performance attribution, relative to positioning by institutional investors' claims of ESG. Relative to the addressable market of professionally managed money - BCG reports global AuM grew to record $62.4 trillion in 2012.

2. Too Late? Realities of African economies and investment practice that have failed to proactively advocate for ESG, and now we sit with economies that look much like traditional economies (investors care first about profit, not Africa's legacy)

1. The social license to operate of many industries is weak and societies have huge inequities (investment impact of Marikana). One billion consumers face harder route to the middle class.

2. Natural environment in Africa has already paid a huge price for exploitation. The planet as a whole is going to blow thru the limits suggested to prevent long term serious changes in climate. Africa with agriculture and tourism based industries, much to suffer from freak climate patterns.

3. Carbon budget will all used up in 21 years, PWC reports using carbon figures outlined UN’s Intergovernmental Panel on Climate Change (IPCC) September 2013 report, threatening to cause global warming of more than double the threshold deemed safe by the United Nations.




TOO LITTLE OR TOO LATE? Reality Checks for ESG in Investment in Africa in 2013

Graham Sinclair @esgarchitect

[email protected]/in/grahamsinclairSkype: graham_sinclair+27.81.87.87.332 RSA+1.484.802.9908 USA+1.802.332.6887 SkypeIn














Indemnity

This ESG research by SinCo includes funds, firms and initiatives that may be clients of SinCo, or the parent of, or affiliated with, a client of SinCo. SinCo ESG research reports, articles and profiles have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. While we have exercised due care in compiling the information, we make no warranty, express or implied, regarding the accuracy, completeness or usefulness of the information and assume no liability with respect to the consequences of relying on the information for investment or other purposes. In particular, SinCo ESG research is not intended to constitute an offer, solicitation or advice to buy or sell securities.

Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall SinCo have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits) or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited.

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esg in africa investment: too little or too late? graham sinclair

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