Global investors are increasingly incorporating ESG (environmental, social, governance) into their portfolio decision-making processes, and this is being onboarded by some of the major economies in Africa, who are now pushing ahead with their own ambitious ESG reforms. Conscious of how these changing dynamics are affecting both their clients and the markets in which they are exposed to, network managers are integrating ESG reviews into their agent bank risk assessments and monitoring.
African markets hinge towards ESG
According to a Bloomberg Intelligence report, global ESG assets are projected to surge past $41 trillion in 2022 and $50 trillion by 2025 – which corresponds to roughly one third of all industry AuM (assets under management).1 So what exactly is driving these inflows? While ESG assets underperformed their peers in 2021, returns have historically been strong relative to non-ESG assets. For instance, Fidelity data shows there is a positive correlation between dividend growth and ESG quality, with companies which boast strong sustainability ratings having generated dividend growth of more than 5% over the last five years.2
“While investors have always chased alpha, many also want their returns to be sustainable. This is particularly true among younger investors,” according to Gunsel Topbas, Citi’s Head of Securities Services for EMEA Emerging Markets. Risk management considerations are having a major influence on the growth of ESG investing too. In particular, investors have expressed concern about so-called “stranded asset risk” – a scenario whereby assets are vulnerable to price depreciation or insolvency due to their carbon intensive properties. This is prompting more investors to rebalance their portfolios towards ESG-linked assets.
A handful of African markets have taken note of the growing investor appetite for ESG, evidenced by the increasing number of green bond issuances on the continent. Although green bonds in Africa comprise just a fraction of the $500 billion + global market, Topbas says activity is on the rise in SSA. “South Africa issued its first green bond back in 2017, with use of proceeds being invested into projects aligned with Cape Town’s sustainability goals to adapt and mitigate climate change. Similarly, Nigeria also has a successful track record of issuing green bonds – while the Nigerian Stock Exchange signed a memorandum of understanding with the Luxembourg Stock Exchange to promote the cross-listing and trading of green bonds between both markets,” says Topbas.
Issuances are also buoyant in North Africa. “In 2017, Morocco issued a €135 Million green bond aimed at boosting renewable energy within the country. In 2020, Egypt issued a 5-year, $750 million green bond, with proceeds used to finance or refi nance green projects in sectors such as clean transportation, water and waste,” says Topbas.
Strengthening ESG standards in Africa
Alarmed by how ubiquitous greenwashing has become in capital markets, global regulators and FMIs (financial market infrastructures) are starting to impose ESG reporting obligations on listed companies (and institutional investors). African markets are no exception here. In Nigeria, the Securities and Exchange Commission (SEC) approved Nigerian Stock Exchange’s Sustainability and ESG Disclosure Guidelines for listed companies in 2018. The guidelines include a phased in approach to integrating sustainability and ESG into organisations’ operations, indicators to be considered for annual disclosures and relevant timelines. The guidelines further make sustainability and ESG reporting mandatory for companies listed on the Premium Board of the Exchange. ESG disclosure rules are also being imposed on corporates listed on both the Egyptian Stock Exchange and the Johannesburg Stock Exchange with the latter pledging to meet net zero emissions targets by 2050.
Network managers – a subtle paradigm shift on ESG emerges
As more underlying clients apply ESG to their investment decisions and core operations, global custodians and brokers are having to respond. In many cases, the fund administration arms of major banks are developing ESG reporting toolkits and data analytics to support institutions with their various ESG disclosure requirements. Topbas shared that intermediaries are strengthening and digitalising their proxy voting solutions enabling investors to gain better insights into the voting process – a vital enabler for ESG. So does ESG feature in the agent bank selection process?
“The reality is network managers are not ESG specialists. However, most – if not all – leading banks including Citi are building a dedicated, centralised team of ESG experts conducting rigorous, holistic due diligences on their banking partners and suppliers across multiple markets including here in Africa,” says Topbas. While network managers will not be leading on these enterprise-wide due diligences, they do have a complementary role to play by undertaking high level reviews of agent banks and FMIs’ ESG policies during their periodic risk assessments and ongoing monitoring - and then sharing the conclusions with dedicated ESG SMEs within their businesses. “Such data will be useful in shaping banks’ wider ESG policies,” continues Topbas.
Already, the Association for Financial Markets in Europe (AFME) Due Diligence Questionnaire (DDQ) – a standardised due diligence template distributed to agent banks by global custodians and brokers – contains a number of comprehensive ESG questions. Among other things, these questions cover agent banks’ adherence to internationally accepted best practices such as the UN Global Compact and ILO standards; commitment to diversity and inclusion; and details about corporate social responsibility.3
“With the DDQ undergoing changes this year, I anticipate we may see more ESG questions added in. This is something which agent banks and FMIs in Africa will need to be prepared for,” according to Topbas.
ESG is here to stay for the long-run
ESG is now a pivotal constituent of the investment process -along with returns and risk management. Countrieseverywhere have recognised this and are striving to developliquid ESG markets and best practices governing them. Whilethe EU and parts of Asia are making excellent progress onESG, Africa is not far behind.
At the same time, network managers – conscious of the importance being assigned to ESG by beneficial owners – are now focusing on the issue in greater depth during their initial due diligence assessments and periodic reviews. If agent banks in Africa (and globally) are to retain wallet share and win sub-custody mandates, then they will need to fully demonstrate a commitment to ESG.
1 Bloomberg (January 24, 2022) ESG may surpass $41 trillion assets in 2022 but not without challenges, finds Bloomberg Intelligence
2 Morningstar (August 11, 2021) Do ESG stocks outperform?
3 AFME DDQ Section 3.9 Corporate Social Responsibility
