Africa, the land of ESG investments

In Europe, investors tend to see Africa as an underdeveloped continent that needs a helping hand from wealthy nations. New figures show that this is not the case. In terms of ESG investing, Africa can very much compete with say North America and is ahead of other regions.

Capital News Africa: From the Trading Floor – Week 8-2022

Research firm Preqin published a very interesting graph. According to the data, more than 40% of Africa’s assets under management (AuM) are invested sustainably, or in the jargon, under ESG criteria. This is a fantastic score. Europe had a higher share with more than 50% of its AuM under ESG criteria. But North America did not have such a high ESG share as Africa.

Africa is also ahead of Latin America & Caribbean (Share of ESG investments: circa 35%), Asia (less than 25%) and the Middle East (less than 10%). Unfortunately, Preqin did not comment further on the numbers in its report.

Criteria developed in developed countries

ESG is an abbreviation that stands for environmental (E), social (S) and governance (G) criteria that are respected in sustainable investing. In the European Union, respecting ESG criteria has become a standard no fund initiator or investor can ignore.

We at Capital News Africa are skeptical of these criteria when they are applied to Africa. This is because they were developed in the affluent countries of Europe and North America. The specific needs of companies, project initiators and investors active in Africa are, therefore, not considered. The criteria also remind us of a paternalistic attitude that Europe had of Africa. That mindset is outdated.

Talking with a forked tongue

But paternalism is not the issue of this editorial. What concerns us is that European investors demand that companies and project initiators in Africa comply with their ESG criteria. They don’t seem to care what additional effort and cost such compliance requires. Indeed, it seems not to matter to them that the criteria may not make sense in an African context.

Even so, the Preqin figures reflect that African companies and project initiators are doing their best to uphold western ESG criteria. Sadly to no avail. US private equity funds have largely withdrawn from Africa, and capital from European investors has become scarce. We feel, therefore, that western investors are talking to Africans with a forked tongue.

Adherence to western ESG standards in Africa has not led to more growth capital from western investors. African governments should draw the right conclusion from this and greatly lessen their dependence on such investors. Instead, they should work harder to mobilize the capital available on the continent to finance economic growth. As we have said repeatedly, this is only possible if Africa further develops its capital markets. There is where the supply of capital and demand for it should meet.