Top three ESG trends for companies operating in Africa in 2021

January 2021

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As the world enters a new phase of the COVID-19 pandemic, we’ve begun to experience a seismic shift from crisis management to much-welcomed implementation of mitigation measures, with the roll out of COVID-19 vaccines. 2020 highlighted the need for sustainable pandemic-responsive resilience frameworks at a company, country, and global institution level to ensure preparedness, if, or when, another crisis of such magnitude descends. It also accelerated a number of key environmental, social and governance (ESG) trends as various stakeholders sought to not only mitigate the worst effects of the pandemic, but to lay the foundation for a sustainable recovery in 2021 and beyond.
While African governments frantically sought to protect their fragile healthcare systems and global financial institutions worked to devise adaptive bailout plans, investors were casting a critical eye across their portfolios’ ability to pass the pandemic stress test. The latter led to an intensified focus on using ESG factors as a lens through which to map risks and identify new opportunities. As focus on ESG principles within investments acts as a catalyst for economic growth across Africa, we are seeing more developed frameworks for ensuring that ESG risks drive change, as is the case in Nigeria and South Africa, albeit with slow progress.

Although global investments in assets under management in exchange traded funds (ETFs) aligned to ESG principles saw exponential growth to over USD 174 billion at the end of 2020—a near 200 percent increase from the previous year—and around 14 percent of ESG ETFs made its way to Africa-targeted projects, it is hard to say what percentage of this is truly ESG-integrated and how much is “greenwashing.” However, with the emergence more funds, such as the Sustainable Development Goals-aligned United Nations Principles of Responsible Investment with its combined USD 100 trillion assets under management, it is evident that ESG investing will be a more permanent and integrated fixture.
With a post-pandemic future in sight, this article addresses three ESG trends – increasing regulatory requirements for investments, the need for integration of biological diversity conservation considerations when addressing environmental concerns, and management of the social impact of COVID-19 on employees’ mental health and wellbeing – that will significantly impact investors, governments and businesses across Africa this year. This list is not exhaustive; other trends such as the nexus between artificial intelligence and ESG as well as ESG data quality and efficacy are expected to gain traction. However, the trends that we have identified will have immediate and far-reaching implications for companies’ triple bottom line this year.

Prescience and agility required to navigate regulatory changes

The regulatory environment serves as a major barrier to ESG investing in Africa. Although there is a deficit in regional regulatory capabilities in this area, new market entrants, portfolio companies and firms with decades-long history in Africa are experiencing external pressure to adopt international regulations and utilise ESG data, ratings and related services in order to adhere to international best practice as a way in which to reduce ‘greenwashing’. Although regulatory guidance on ESG is not the same as a binding legislation—like that being considered within the EU—investors are placing importance on these Western guidelines as a means to de-risk and safeguard their investments and ensure appropriate allocation of capital. Benchmarking against Western regulations, particularly with the green transition in Europe and the shift in US energy and climate change priorities under the Biden administration, will only gather pace.

European companies operating in Africa will start to feel the impact of significant amendments to key ESG regulations (MiFID II, UCITS, AIFMD, IDD, and Solvency II) made in 2020. The European Green Deal, which delineates plans for member states to be climate-neutral by 2050, includes regulations and taxonomy around carbon emissions associated with goods imported to the EU. For example, under the Green Deal, companies could be presented with a carbon tax bill to offset their carbon footprint. Firms across Africa will experience immediate impacts once carbon taxation from EU regulators comes into effect in 2022. With 31 percent of Africa’s exports going to the EU, monitoring the ever-growing regulatory climate will need to take precedence if African exporters wish to future-proof such partnerships. Furthermore, African companies operating in industries that have a large greenhouse gas footprint, whose parent company is domiciled in Europe, will need to quickly respond to regulations aimed at accelerating the EU’s energy transition.

Countries, such as South Africa, that have developed and/or passed a carbon tax bill will be better equipped to meet EU standards. Although South Africa’s Carbon Tax Act (2019) is still in its first phase until the end of 2022, with minimal market impact anticipated, companies will need to ensure that their level of preparedness is set to address higher national tax rates and EU taxonomy. Other countries, such as Uganda, Kenya and Zambia have addressed ESG risk exposures to through indirect instruments such as taxes imposed on energy-inefficient technologies. While in Zimbabwe and Mauritius, taxes on fossil fuels act as a mechanism for reducing carbon emissions and aligning corporate and national operations with global targets for fossil fuel abatement.

In response to leaving the EU and its regulatory institutions that oversaw the implementation and compliance of environmental laws, the UK government set out a new post-Brexit environmental legislation—the UK Environment Bill (2020). Part of this legislation addresses the tropical forest footprint for large companies exposed to at-risk forest supply chains. As a result, detailed reporting requirements for companies must be carried out to ensure no illegal deforestation is part of their supply chain. This directly impacts forest-risk commodities coming out of Africa; timber goods from countries such as Central African Republic, Democratic Republic of Congo (DRC) and Liberia, are often implicated in illegal deforestation and environmental abuses. We expect this piece of legislation to return to the House of Commons this year and be enacted, placing more stringent supply chain management and reporting requirements on UK companies sourcing timber products.

As pressure grows on companies to report on their material sustainability and climate-related financial risks, there will also be a growing need for clear and consistent reporting. Advocacy through a range of avenues, such as the release of a consultation paper by the World Economic Forum entitled ‘Toward Common Metrics and Consistent Reporting of Sustainable Value Creation’, which laid the foundation for standardisation of ESG reporting across sectors, coupled with bottom-up pressure, will trigger a greater demand from stakeholders for better and more transparent sustainability disclosures as well as regulatory convergence. Companies that are slow in adopting and effectively implementing international best practice will increasingly lose any existing competitive edge they may have as these regulatory reforms gain traction locally and internationally.

Going beyond Carbon Emissions – Pushing the ‘E’ to improve biodiversity

Within the investment landscape, climate change has dominated ESG considerations and the race towards a sustainable future. The signing of the Paris Agreement—the first ever universal legally binding agreement – by some 190 countries that committed to limiting global warming to below 2oC, with a target of 1.5oC, was a significant achievement. The way in which the world operated now required stakeholders to adopt a climate lens to their operations, with a focus on emissions as a mitigation measure.

Fuels such as coal have been named as one of the key contributors to climate impacts—as the carbon intensive commodity is a major producer of greenhouse gases (GHG). Coal-fired power plants in countries like South Africa continue to dominate the energy supply sector, as the demand for coal across Africa saw consumption grow by 3.9 percent, according to a British Petroleum (BP) statistical review of Africa’s energy market in 2018. Although GHG emissions and carbon intensive energy sources continue to drive the discussion around environmental concerns, companies are now taking stock of the environment through a wider lens. This includes water usage as well as water and air quality. However, one environmental trend that foreign companies and investors operating on the continent will be increasingly scrutinising (and scrutinised for) is protecting and preserving biodiversity.

Biodiversity: Turning Investors into Conservationists

Global biodiversity protection strategies will take precedence as attention on the conservation of natural habitats increases amongst not only the government institutions, but also amongst investors and asset managers. Africa’s economic growth, driven by the intensification of agricultural productivity, industrialisation, and investment in infrastructure and renewable energy, will place pressure on natural resources if development strategies coincide with ESG guidelines that favour improving conservation and growth of natural assets to meet biodiversity commitments. These commitments have been captured in the African Union’s ‘Agenda 2063: The Africa We Want’, which aims to establish prosperity in the region through sustainable inclusive growth, stability and governance. As such, leveraging biodiversity conservation as a contributor to African countries gross domestic product through natural capital accounting and investing, offers room for synergies across global and regional ESG criteria and national economic growth.

Multilateral regulatory frameworks have also widened their remit of sustainability risks to include biodiversity. These include the Convention on Biological Diversity’s post-2020 global biodiversity framework and the EU’s Biodiversity Strategy for 2030, which require corporate disclosure and risk management to address biodiversity and deforestation— in central African countries, such Cameroon, Gabon, Central African Republic and DRC, deforestation is severe. As discussed earlier, legislation such as the UK Environmental Bill (2020) will also force UK-domiciled, Africa-focused forest-specific companies to meet these regulatory frameworks.

Yet, there lies an argument for African nations around prioritisation: climate protection versus natural protection. We see a direct correlation between growth in large infrastructure development across Africa, particularly as a response to meet the growing demand for clean energy, placing pressure on the carbon-rich habitats of native wildlife. These large infrastructure projects, such as wind turbines or rare earth mines, if not developed with a holistic approach to the environment, can be catastrophic. Senegal’s recent Taiba N’Diaye wind farm required a large stretch of forest to be removed, with potential threats to wildlife, while in South Africa, advocacy group BirdLife South Africa successfully halted a wind farm project in Groot Winterhoekberg mountains that would have threatened endangered birds.
In countries like South Africa, where coal is still prevalent, the argument for climate protection as a tool for ecological safeguarding has merit. In countries like Mali, renewable energy has its social merit, as it offers a way out of poverty through citizen participation and ownership. Large renewable energy companies will have to partner with local entities if they wish to mitigate risks to biodiversity. As local communities become more involved, decentralised power supply options will become more essential and more ecologically responsive.

The most visible examples of the nexus between business and biodiversity has been through wildlife conservation. Mining operators Guinea Bauxite Company and the Guinea Alumina Corporation have already implemented biodiversity strategies as a measure to mitigate biodiversity risks whilst facilitating growth corridors to stimulate economic development, job creation, public revenue and poverty alleviation. As bauxite reserves overlap with chimpanzee habitats, these two companies have collaborated to establish international best practice standards and address cumulative direct and indirect impacts. To mitigate these impacts, both companies have laid out plans to set aside a portion of their concessions to avoid sensitive chimpanzee habitats, and to share a midstream corridor, such as the 140-kilometre railway, rather than constructing individual export corridors.

The case for private sector partnerships to conserve biodiversity is not a new one – similar projects have been prevalent within the mining sector for decades. Such partnerships and consideration of biodiversity risks within companies’ operations will see not only improved biodiversity conservation outcomes and impacts, but improved stakeholder relations and ‘license to operate,’ on the one hand, and increased credibility of a company’s operations’ impact on the environment. Management strategies that conserve and work towards biodiversity restoration offset the negative impacts on the ecosystem by reducing non-climatic stresses such as over-exploitation and loss of habitat. We forecast a greater adoption of biodiversity conservation measures within corporate culture, echoing investors’ priorities.

Prioritising Mental Health and Wellbeing

ESG-minded investments often include health and wellbeing factors, but with greater emphasis typically placed on physical health. With an estimated 12 percent of sub-Saharan Africa’s population prescribed as having a mental illness—depression, anxiety, bipolar, eating disorders, schizophrenia, and alcohol and drug use disorders — there is significant risk of this figure increasing due to the COVID-19 pandemic and efforts to curb its spread. Mental health issues have been compounded by factors such as cultural stigma, low awareness of mental health conditions and the perception that mental illnesses are untreatable. This is reflected in national health budgets, with many countries allocating less than 1 percent to mental health. In the past, Nigeria had allocated around 3 percent of its healthcare budget, whereas Kenya has traditionally allocated 0.05 percent of their national healthcare budget to mental health.
As the pandemic pushes the limits of people’s emotional states, companies are now more cognisant of the links between the success of their operations and employee mental health and wellbeing. In countries where government support is insufficient to meet the growing needs of those affected by the crisis, the private sector often stood in as the buffer to the social impacts. Investors and companies should take stock of mental health and wellbeing as an integral ESG factor, as a deficit in mental health considerations can lead to lost productivity. A global mental health and sustainable development report estimated the cost of this loss has been estimated to be 4.7 billion days and USD 1.15 trillion a year.

In South Africa, only 15 percent of the population with mental health conditions receive treatment and, according to the UK Government, in Ethiopia it is estimated that, “25 million Ethiopians suffer some form of mental health disorder, while less than 10 percent receive any form of treatment.” Local, independent verification of these estimates is challenging. Yet, it is undoubted that the compound effects of the pandemic places a heavy toll on the mental health of communities due to the complexities around measuring social metrics that could assist more companies in meeting the health and wellbeing needs of their employees. However, there are examples emerging that could have shown progress, albeit slow.

Anglo American’s global employee and community response to COVID-19, WeCare, focused on how the programme can support its employees to prevent, respond to and recover from the health, social and economic effects of the pandemic. It distinguishes physical health from mental health, with the latter having a framework to evaluate employees wellbeing, stamp out the stigma around health and mental health issues (including the stigma against those who have tested positive for COVID-19), and give employees a ‘Managing Your Mind’ toolkit to help employees stay connected and in good mental health.

The pandemic highlighted everyone’s susceptibility to mental health degradation. However, women, now forced to navigate a more complex work-life reality, have greatly struggled to find a new balance between their participation in the labour market and the burden of care. This challenge is worsened for those living under the threat of domestic violence and/or those having to care for frail elderly relatives on a full-time basis. This gender disparity exacerbates the problem of mental health and wellbeing as women often occupy often low- or unpaid working conditions, and are vulnerable to exploitation. Hence, if companies expect productive labour participation in light of the stress that comes with living and working during the pandemic, investment into the wellbeing and mental health of employees will ultimately result in wins for the company. The leviathan of Africa telecommunications, Safaricom, invested in company-wide mental health initiatives, such as a resource page for Mental Health services, including their own Safaricom 24/7 mental health hotline, with 98 percent of their workforce covered by initiatives to promote mental health.

Unlike environmental issues which have been easier to measure, social issues around employee wellbeing have not been assessed in equal measures. However, as the pandemic stretches into 2021, it exacerbates strains already placed on a human capital to perform. As such, the Africa Centre for Disease Control and Prevention issued its, ‘Guidance for mental health and psychosocial support during the COVID-19 pandemic’, providing practical steps to improve overall mental health and wellbeing by reducing stress, anxiety, stigma and psychological disorders associated with COVID-19.
Ensuring employee wellbeing is paramount. If employees are unhappy, stressed, and overworked, the company suffers from a lack of productivity that can have significant negative impact on the business. The pandemic has cast a spotlight on the importance of adopting a more comprehensive approach to employee health and wellness.

Moving from reflection to meaningful response

The current pandemic has highlighted the important role that a healthy environment – physical and workplace – plays in individual, community, corporate and national growth and development. As research links biodiversity degradation with the emergence of new viruses, including COVID-19, how corporates and governments operate becomes more pressing for sustaining a healthy world. Several companies have already started to respond to this realisation and see it as ‘mission-critical’ to shift their business models to not only address sustainability risk, but proactively seek out commercial opportunities; it’s become a case of disrupt your own operating model or be disrupted. Several countries have taken up the challenge and have begun to reform their legislative and regulatory frameworks as well as enforcement mechanisms, as part of their commitment to achieving the SDGs.

2020 gave us all time to reflect on effective policies and corporate strategies needed for this new era. For investors and companies operating in Africa, monitoring, anticipating and rapidly responding to changes in the ESG regulatory requirements; considering and mitigating a wider range of environmental risks; and pro-actively building a supportive and inclusive corporate culture will strengthen efforts towards long-term sustainability, health and resilience.

AML January insight ESG
AML January insight ESG