1. White paper - ESG Perspectives on Africa
Nordea Savings & Asset Management
Sasja Beslik , Head of Responsible Investment & Governance
2. Content
Renaissance of the continent 3
The African miracle - Result of a combination of factors 5
Increased African role in Global economy 7
The China-India factor 9
Keeping up the momentum - Investment Perspectives 11
Different businesses have different ESG concerns 13
”Despite this, there are reasons for optimism” 14
3. Renaissance of the continent
China and India as emerging new powers in the world economy has dominated much of the news
coverage in the past two years. Unfortunately, this singular focus has over-shadowed an equally
newsworthy subject, the spectacular economic and political renaissance of the African continent.
4. Once described as the ‘hopeless continent’ Africa is now attracting the
attention of both the newly emerging Southern powers and the traditional
Western trading partners.
5. The African miracle - Result of a combination of factors
This rapid economic transformation has been to increase production and market their goods at
aided by the significant progress in governance the local and international levels. This domestic
reform and a reduction in armed conflicts. Peace dynamism has in turn contributed to significant
in large parts of Africa has brought with it the growth in the number of Africans who view
opportunity for development and democrati- themselves as middle class.
zation is gaining momentum.
With increased opportunities for employment
The new African miracle cannot be attributed to and rising income, large numbers of Africans
a 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 rate
ral resources has increased dramatically, thus in sub-Saharan Africa increased from 3.7 per
permitting 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 growth
African 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 rates
social policies, which have contributed to are for 5.0 and 5.5 per cent for 2010 and 2011
improved GDP growth rates. respectively. More than one-third of Africans
live in countries that had grown by more than 4
Moreover, rising commodity prices, increased per cent annually for 10 years, and 18 countries
investment in vital infrastructure by China and are classified by the World Bank as ‘diversified
India and access to information by ordinary citi- and sustained growers’.
zens thanks to the mobile phone revolution, have
opened up new opportunities for rural producers
ESG PERSPECTIVES ON AFRICA 5
6. With their ‘can do’ attitude, a new generation of Africans is
transforming social and political relationships in a manner not
seen before.
7. Increased African role in Global economy
Significant efforts are being made byAfrican The flag bearers of this new renaissance are
governments to reverse the productivity decline to be found in the private sector, the informal
in agriculture by instituting enabling policies and economy, African diasporas organizations and
investing in vital infrastructure. A similar effort social movements based in the church, human
is being made to reverse the decline in higher rights organizations, women’s movements and
education and to expand access to basic local government.
education.
These groups are united behind one thing: how
Apart from the policy dimension, one of the to dismantle the “disabling state” and replace it
most significant reasons for Africa’s renewal has with a state which is not only protector and
been the emergence of an internet- and mobile supporter, but also enabler and liberator.
phone-savvy citizenry, empowered by increased
access to information about their own country
and the world beyond, and ready to challenge or
bypass stifling institutional barriers, formal and
informal, to their economic success.
ESG PERSPECTIVES ON AFRICA 7
8. China alone now accounts for over 11 per cent of Africa’s external
trade and is the region’s largest source of imports.
9. The China-India factor
While Europe and the United States remain As the successful development experience of
important trading partners, Africa’s economic China and Asian industrializing countries has
engagement is beginning to shift towards Asia shown, a competent state has a vital role to play
and other developing countries. Trade between in guiding national development, nurturing the
China and Africa grew from a mere US$6.5 private economic actors by providing incentives
billion 1999 to over US$120 billion in 2010. for them to grow and export, re-engineering
Similarly, India’s trade with Africa surged from business processes, enhancing the investment
US$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 entail
Vietnam and Turkey) have become increasingly supporting the legal and financial institutional
active in many African countries, a clear indica- framework of the economy. The legal system
tion that North-South relations are being super- must uphold order, act as a check on government
seded by South-East, even Africa- South-East and protect property rights, human rights and
relations, with profound implications for Africa’s contract rights. The financial system must
development. promote household savings and channel them
into productive enterprises. These are some of
Central to sustaining Africa’s growth moment- the ingredients that have gone into Africa’s
um is the development of strong and effective recent growth miracle and are necessary to
state institutional structures (from central to sustain it.
local level) that will advance the growth and
democratization agenda in the context of a The continent has changed forever and there is
common national vision. An effective state is no going back.
a prerequisite for a well-functioning market.
ESG PERSPECTIVES ON AFRICA 9
10. A strong ESG record can help companies win international customers,
build stronger brands, reduce costs and improve performance.
11. Keeping up the momentum - Investment Perspectives
Strong environment, social and governance Despite these challenges, there is a growing
(ESG) practices build real value and make determination to resolve seemingly intractable
commercial sense. These practices are especially issues and shake off the poor reputation of many
important for businesses in Africa, particularly African companies.
in sub-Saharan Africa, which is rated by some as
the most difficult continent in the world in terms We have seen a trend in Africa towards active
of 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 value
Corruption, bureaucracy, inefficient capital in the business. It also encourages companies to
markets, poor infrastructure (especially the lack operate to international standards and owners
of access to reliable power), and the effects of recognize that this is essential if they are to
diseases such as HIV/AIDS, tuberculosis and attract potential buyers when they choose to sell.
malaria make many of the region’s economies
highly challenging for entrepreneurs and
growing businesses.
ESG PERSPECTIVES ON AFRICA 11
12. While we are seeing an increase in businesses introducing ESG
practices, this is not true of all businesses.
13. Different businesses have different ESG concerns
Those with high environmental concerns Across sub-Saharan Africa poor business
include ones which have large factories, are management is a major barrier to growth. In
involved in oil and gas extraction, large-scale many countries, while laws are in place, they are
agribusiness, forestry, construction, new ineffectively enforced as there is a shortage of
infrastructure 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 on
that use low skilled workers, such as textile environmental and health and safety issues.
production, those which operate in countries with
weak employment legislation, that involve In sub-Saharan Africa, HIV infection rates
workers 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 professionals
as food producers. From the business integrity are needed to educate communities and provide
and corporate governance perspectives, there are treatment for employees and their families.
risks and opportunities for improvement across The introduction of HIV programmes by some
most 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 best
commitment to responsible investment practice with respect to the battle against HIV,
principles. malaria and tuberculosis.
ESG PERSPECTIVES ON AFRICA 13
14. ”Despite this, there are reasons for optimism”
Self-interest is a helpful motivator here. African economies are growing – the IMF
A healthy workforce means a more efficient is still predicting 4.1 per cent GDP growth in
workforce, which can help businesses, grow and sub-Saharan Africa for 2010. Not as much as
achieve long term success. This one measure the region needs, but this is still a positive trend
could make an enormous social and economic and we hope this growth encourages investment
impact. To further compound ESG challenges, back to Africa.
the global financial downturn is being felt by
African businesses. Exports have declined, by We are also seeing a growing number of African
around 15 per cent in South Africa, and capital companies preparing for the upturn by investing
remains in short supply. Many equity investors in building strong ESG practices, giving them a
who 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 continue
This 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 Principles
ultimate poverty eradication depend, are starved for Responsible Investing, more African busi-
of growth finance. Due to recessionary nesses will become better aware of how to
pressures, many companies have cut back on improve ESG. While sub-Saharan Africa
costs and some businesses may be tempted to remains a tough business environment, there is
cut corners on ESG matters, which will have a desire to improve ESG practices and a
detrimental problems for the business in the growing realization that this, in turn, will help
long term. to improve business performance and value and
ultimately help stimulate economic growth,
thereby reducing poverty.
14 ESG PERSPECTIVES ON AFRICA
15.
16. Published by: Nordea Investment Funds
Graphic Design: Lina Johansson/SenseDesign
Photos: iStockphoto
June 2011
