Environmental, social and governance (ESG) considerations have become a business imperative for investees looking to attract sustainable finance, while ESG is used by investors as a means of better understanding material risk in their investments.
ESG is also used increasingly by both investees and investors as a benchmark for understanding the impacts they have on a broader range of stakeholders beyond their respective shareholder groups. These include customers, employees, suppliers and wider communities.
Africa will need significant sources of sustainable finance annually if the world is to achieve its global ambition of meeting the United Nations' Sustainable Development Goals by 2030, but the good news is that ESG-driven investment is an opportunity to unlock additional capital flows to sustainable enterprises in Africa that are able to demonstrate ESG alignment.
There are significant anticipated regulatory developments in the future that will drive ESG integration, as well as the transition from ESG as a soft law consideration to a hard law obligation.
This is anticipated both domestically within Africa as its regulatory regime matures, and also from offshore jurisdictions that are Africa's largest trading partners, such as the European Union, as a result of the progress being made in respect of the European Green Deal.
In particular, the anticipated EU directive on corporate sustainability due diligence is likely to have far-reaching consequences for African entities exporting into the EU and/or undertaking business with EU entities.
Similarly, depending on how the Carbon Border Adjustment Mechanism is framed, it too could have potentially far-reaching consequences for African entities that export into the EU. Such entities need to prepare for these extra-territorial regulatory developments.
Over the past few years, we have noticed an increased investment uptake on the continent for ESG-focused mandates, particularly in the renewable energy sector.
Material ESG issues have a substantial impact on industrial and business strategies, and they are increasingly required to be given an equal weighting to material financial concerns when evaluating and reporting on corporate performance and risk.
More recently, we have begun to witness a collective push towards ESG being mainstreamed onto most corporates' strategies and agendas.
Now, more than ever, companies are recognising the need to prepare for the implementation of a corporate strategy that is aligned with ESG best practice, ESG taxonomies and ESG disclosure requirements, as environmental and sustainability issues are impacting all industries across the world.
Africa is not sitting on the side-lines of the global shift towards a more sustainable global economy, but has the opportunity to be an integral part of this dynamic and fast-evolving global journey.
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