Despite the 17 lofty sustainable development goals (SDGs) established by the United Nations in 2015, supposedly to be achieved by 2030, much of the world has continued to suffer from the so-called ‘boiling frog syndrome,’ a metaphor used to describe how a problem situation will spiral and become catastrophic without action to address it.
Faced with an unprecedented global health crisis throughout 2020 and widespread wildfires, flooding and droughts in North America, large parts of Europe, China and Australia, many more people have suddenly noticed that previously localized issues increasingly now have a global dimension and cannot be dealt with on a local basis only. This realization is important, especially from a sub-Saharan African (SSA) perspective.
Whereas infectious diseases like Ebola, and issues like soil erosion and droughts, were mostly observed on the evening news in developed countries, there is now a growing commonality of issues between developed countries and frontier/emerging markets. And this increases the likelihood of these issues being addressed.
Drought-resistant crops and soil-enhancing fertilizer production are examples of challenges to be tackled by farmers in sub-Saharan and western European markets alike. Decarbonizing energy production is another layer of commonality. Recent success stories, like the speed of development of covid vaccines and the emergence of ‘RTS,S’ as the first Malaria vaccine, especially for African children, show the possibilities.
Before considering practical ESG investing implications for sub-Saharan African markets, it is helpful to think about a suitable framework to evaluate markets, industries and ultimately opportunities.
There are various schools of thought on this, but the BlackRock distinction between ‘sustainable solutions’ and ‘ESG integration’ is among the most practical frameworks currently being used by investors. While sustainable solutions, driven by investors’ target behavior, distinguishes between ‘avoid’ strategies and ‘advance’ strategies, ESG integration is geared toward achieving enhanced returns by incorporating ESG information derived, for instance, from climate models.
From an SSA perspective, this framework, if applied without cutting corners (greenwashing), will guide investment decisions in the following ways:
‘Avoid’ strategy. Requires investors to walk away from economically viable solutions which, until recently, often provided significant cost advantages. Examples include coal-fired power stations versus renewable energy sources, in particular solar power.
‘Advance’ strategy. This is a rich field to plow in SSA, since it targets specific social and environmental outcomes.
ESG integration. The idea is to use ESG data to supplement decision-making and to achieve enhanced risk-adjusted returns, disregarding the character of the underlying strategy, sustainable or not. Apart from targeted outcome-oriented impact funds, which fall mostly into the ‘advance’ bucket, integration entails the biggest potential, since it reduces the conflict potential and, therefore, smooths internal organizational acceptance. From an SSA investor perspective, it also avoids the lingering suspicion that investing in SSA is essentially charity or, at best, development aid.
So, where do investors look for that low-hanging fruit in SSA?
Adequate housing, particularly in often overlooked rural areas with core industries like mining or agriculture, is one area. An example is the EMPAKO affordable housing transaction Brigg Macadam is currently supporting in South Africa’s rural northwestern mining region, which is providing 140,000 quality homes and associated infrastructure. The project also entails substantive community components including schools, clinics and tribal offices. And the installation of more than 350,000 solar water heaters as part of this five-year development program will achieve estimated annual CO2 savings of 142,000 tons.
Another source is hard assets like schools and vocational training centers; on-campus student and teacher housing are gaining momentum too. Soft assets, like teacher qualification, adequate compensation and EdTech platforms to reach children in remote villages are key success elements.
Affordable and stable energy access is one of the biggest current impediments to job creation in the region, which will largely need to occur in manufacturing and the knowledge economy. However, in terms of the transformative impact, more mundane elements, like the ability for children to switch on the light to finish their homework after dark, should not be underestimated either.
Finally, infrastructure – in particular scalable digital infrastructure – will achieve the biggest productivity gains. In addition to capacity expansions, efficient operation of existing transportation infrastructure assets like ports will be equally important. This is evidenced in comparatively long processing times at major ports across the SSA region.
From an investor’s perspective, it is also important to keep an eye on inter-regional differences. Mobile subscription penetration stats can be an indication of where ESG investment opportunities can be found and sustainable impact made. However, while mobile subscriptions increased across the region, there are particular markets with entrenched oligopolistic structures keeping mobile data access prohibitively expensive for large parts of the population.
Enhancing competition, like in the case of Brigg Macadam’s Malawi Nyasa Mobile project, which aims to significantly reduce consumer prices – currently five times Western European levels – while significantly reducing the carbon footprint through the use of solar-powered mobile towers, is one example for the investment opportunities available.
The SSA sustainable investing opportunity is clearly present and capital allocators, in developed markets and African capital pools like pension funds, should revisit their strategies. Carving out a dedicated Africa sustainable investment strategy with a respective intra-regional differentiation would be an important first step for the private investor community.