The past two years have created various uncertainties that have caused investors to place more scrutiny on domiciling decisions; influenced by geopolitics in transition, the war in Ukraine, inflation rates and a looming recession. Such dynamics make it imperative for jurisdictions to strengthen their financial services ecosystems and create a business environment with sustainable economic prosperity in mind. Achieving this ambition will be a significant challenge for South Africa in particular.
On 24 February 2023, the Financial Action Task Force (FATF) effectively added South Africa to its "grey list" following a series of regional reviews. Found to be "partially complaint" with 15, and "non-compliant" with five of the 40 FATF recommendations or international standards for combatting AML and counter-terrorist financing, the FATF report led to one of Africa's largest economies joining an unofficial list of countries with questionable financial probity.
According to a 2021 IMF working paper, the cost of being on the "grey list" is calculated at 7.6% less GDP. Being in this position hinders cross-border trade and business for South Africa, complicates international financial operations and makes cross-border transactions more expensive.
In a recent interview by the country's President Cyril Ramaphosa, he stated that the country had made significant progress in addressing the recommended actions from the FATF through the establishment of an interdepartmental committee. The committee is supporting the relevant authorities to, among other things, demonstrate an increase in the investigation and prosecution of serious and complex money-laundering and terrorist financing, an increase in mutual legal assistance requests to other countries, an increase in the use of financial intelligence by law-enforcement agencies and the effective implementation of targeted financial sanctions. While this is a positive step towards regaining confidence among the investment community and other international finance centres (IFCs), the negative publicity will impact South Africa's reputation as a finance centre, resulting in reduced appetite for business relationships with the region.
In addition, in May, the South Africa Revenue Services (SARS) introduced stringent regulations increasing disclosures of worldwide assets; tightening reporting standards for those emigrating financially or wanting to use the RND10 million annual investment allowance.
The reaction from SARS for greater regulatory demands, combined with operating in an increasingly complex and volatile geopolitical environment, clearly indicate the importance of compliance and good governance.
For South Africa, this will mean being nimble; adapting to these evolving demands by making the necessary regulatory and compliance changes can only benefit the region and promote economic prosperity.
Another challenge faced by the African continent that impacts on its growth and prosperity is the natural environment. Mounting evidence shows Africa is the most vulnerable continent impacted by climate change. One can see a recent example of this impact in the devastation caused by the record-breaking rains which inundated KwaZulu-Natal Province during April last year. Scientists have since calculated that global heating increased the likelihood of the flooding. Evidence that increased weather and climate variability disrupts lives and economies.
Environmental issues remain a huge threat to South Africa and the wider continent, but there are some indications of green shoots ahead following landmark announcements made at 'Africa COP' or the COP27 climate summit last year. The 'loss and damage fund' – earmarked to rebuild the physical infrastructure of countries devastated by extreme weather – was one important step forward.
Many African economies are also directly and indirectly exposed to the transition risks associated with climate change, amplified by the dependence on minerals, energy and mining.
Attitudes towards sustainability are changing in the asset management space. PwC's asset managers and institutional investors survey results and report suggests that ESG assets are on pace to constitute 21.5% of total global AUM in less than five years, as attitudes significantly shift towards sustainability. They forecast an increase in ESG-related assets under management (AUM) to US$33.9 trillion by 2026, from US$18.4 trillion in 2021. The findings also asserts a move away from ESG-orientated investments and toward embedding ESG principles into asset management processes.
As the demand for ESG investment products rapidly increases, 30% of investors from the report said that they struggled to find attractive and adequate ESG investment opportunities.
So, how will African markets fare in the ESG space? Is there opportunity for the funds and capital markets sectors to work together to develop regulations and metrics that will govern Africa's financial landscape?
Given that many of the capital markets across the Africa region are small and still in a developmental stage, a regional approach may be the best one to take; countries working together on green taxonomies, green bond guidelines and reporting regulations that will align with international practice and reflect local market conditions.
But as the African continent works towards these ESG-oriented goals, collaborative alliances with IFCs such as Jersey will be beneficial. As an intermediator of over £1.4 trillion of global capital, Jersey has significant reach when it comes to shaping a sustainable economic future, in fact, it's set an ambitious vision to be a sustainable finance leader in the markets it serves by 2030, while delivering on its responsibility to support the transition to a more environmentally and socially sustainable global economy.
The extent to which ESG will inform domiciling decision-making for investors is yet to be realised,
but what is clear is that adherence to the highest international regulatory standards to enable good governance alongside a commitment to accelerate solutions which ultimately benefit the planet and us all, are both already proving vital for economic prosperity, a pathway for African investors and those working with Africa to consider.
Grey list is a short-hand term used by the FATF to describe Jurisdictions under Increased Monitoring. Countries on the 'grey list' are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing. When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring.
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