Africa Finance Forum Blog

Currently the posts are filtered by: April 1
Reset this filter to see all posts.

Why ESG is here to stay in African investments

14.04.2014James Brice and Markus Reichardt

Africa is still touted as the next investment frontier and the figures bear it out: with over $50 billion foreign investments in 2012 according to UN figures it is the recipient of more foreign direct investment (FDI) than any other continent. Investors appear to view the developed world as over-regulated, and regions such as North Africa or parts of the Middle East too unstable. Africa's economic resurgence has its roots in small but real improvements in governance and transparency, more open societies empowered by social media, and economies leapfrogging directly to new technologies such as the mobile phone as a business tool. More than 720 million Africans have mobile phones and 167 million have access to the internet.

However, due to its low domestic savings rates Africa has to rely on foreign investments to fuel its growth and here two models have presented themselves:

  1. The Chinese 'ask no questions approach' which trades infrastructure investments for access to natural resources; and
  2. The conditional model espoused by the 'West' where investments seem to come with a range of conditions, especially in respect of environmental, social and governance performance.

While some observers have mistakenly framed the two options as a choice between two new forms of colonialism, it is worth looking dispassionately at some of these conditions - particularly those set out in 'global standards' developed by organisations such as the World Bank and the International Finance Corporation (IFC) - the largest source of development assistance in the world and the leading facilitators of infrastructure development funding globally. The most widely accepted of these standards - the 8 IFC Performance Standards and the sector-specific environmental health and safety guidelines supporting them - are remarkably simple in what they seek. In the case of their direct investments (including project and corporate finance provided through financial intermediaries), investors are required to identify and manage business risks and impacts so that development opportunities are enhanced.

Globally more than 500 asset & investment managers managing more than $30 trillion are signatories of investment codes such as Equator Principles which are based upon the IFC Performance standards and require disclosure of environmental & social risks and management responses to such risks. Together these institutions account for nearly 80% of global project finance and they include banks from Nigeria, South Africa, Morocco, Egypt, Togo and China's Industrial Bank.

The traditional Chinese investment model has over the years encountered sufficient and widespread opposition from African civil society in countries such as Namibia, Botswana and Zambia. This has led to social issues being approached more openly with more space given to opportunities for local labour and suppliers. Several surveys are underway by various Chinese-based institutions to measure and understand Africa's opinion of Chinese FDI. Chinese Banks now have to adopt a recently launched Green Credit Policy, and a draft CSR Policy for Outbound Investments in the Extractive Sector is due out in May.

So while it appears that Chinese investors in Africa are starting their ESG journey, this does not imply that 'First World' investors who placed an earlier emphasis on environmental, social and governance (ESG) issues have been more successful. Rather their approach to ESG issues has more often than not resulted in a compliance, "tick the box" approach, resulting in a "do the minimum" level of ESG interest.

This is why it is critical that as Africa continues to grow that project developers and foreign investors are guided by ESG standards towards achieving holistic risk management approaches. All these ESG guidelines are by their very nature generic and encourage interpretation in terms in terms of local context and sectoral expertise. Thus even Africa's biggest development finance institution - the African Development Bank (AfDB) approaches wildlife protection and anti-poaching measures not as measures to appease western sources of capital, but as its head, Donald Kaberuka explains, as part of its basis for sustainable economic growth. The issue, according to Kaberuka, concerns the survival of the ecosystems on which African economies and communities depend for tourism revenues. This makes wildlife protection a key issue for Africa's largest development bank and the projects it considers in pursuit of its mandate.

A project's failure to consider stormwater flow paths in built-up areas during extreme weather events can lead to catastrophic structural failures affecting projects such as shopping centers. Alternatively failure to openly engage with and compensate informal land users of areas being converted to formal farming can lead to consistent community conflict, road blockages and crop sabotage. Failure to explore the use of slightly more expensive but more eco-friendly inputs in a production process can lead to later impacts on cash costs when waste disposal charges or penalties mount. The list of issues to consider is potentially endless and such global ESG standards offer a widely accepted methodology deemed not only as reasonable for risk management purposes but also structurally encourage project proponents to explore more efficient, more sustainable alternatives.

In its search for sustainable economic growth, African communities and institutions must set aside fears of externally-imposed standards. Rather they should take advantage of the proven methodologies such standards, when diligently applied with local context and sectorial expertise, can make on project timelines, project risk profiles and improved economic returns for the investments fuelling Africa's economic resurgence.

James Brice, CEO, & Markus Reichardt, Principal, Environmental Business Strategies Pty Ltd: www.envirobiz.co.za.

Open Letter to Those Thinking of Applying for a New Banking License in Africa

07.04.2014Ignacio Mas

Dear prospective banker,

You have the luxury of building the first bank of the 21st century in Africa. No doubt you are thinking hard about how differently one would build a bank today than one would have done only twenty years ago. We hope your intention is to build a bank that serves everyone: the mass market and the poor, because they are the same thing. If so, may we suggest ten points we think you ought to consider.

1. Technology. That's the biggest area of change since the last round of licenses were given out, surely you can't ignore that. Go mobile: take advantage of the sense of immediacy that mobile phones can deliver to your customers and the drastic reduction in credit risk that real-time payments involve. No sense in distributing an alternative costly payment infrastructure by default, though some may want more. Do beware, though, of building mobile solutions that are too dependent on telco negotiation and goodwill for access, at some point they'll get you.

2. Cash in/out. Your business is digitized financial services but you won't make cash go away from your clients' lives. Rather than fighting cash, you need to infiltrate it so that people feel entirely comfortable crossing the physical-digital divide. The cheapest way of doing this is through extensive cash agent networks. Do recognize that cash agent networks are hungry beasts, though: the economics only makes sense at substantial transaction volumes. Go ahead and share the agents with others if you haven't got the scale on your own; you can differentiate in more interesting ways than mere availability of cash points.

3. Offerings. People's needs and aspirations are quite diverse, but you are not likely to have the distributed marketing wherewithal to offer a broad portfolio of tailored solutions. The better approach is to offer your customers a limited number of money management tools which they can each use in their own way. Don't try to solve their problems; give them the tools and let them solve their own problems. Think more Google than a vertically integrated bank. And don't mind so much whose financial products your customers consume as long as it's done through your interfaces and with your knowledge. Perhaps it's more like Amazon than Google.

4. Messaging. Talk about those things that worry people: reducing risk and stress in their lives, helping them stretch budgets, helping them achieve the things they want, helping them imagine a better future. Again, your job is not to discipline people, but to give them the tools they need to discipline themselves. Don't talk so much about savings (sacrifices) but of future payments/purchases (rewards). No patronizing, no moralizing. Can you be sure that you'd manage their meager income better than they do, if you were in their shoes? Listen to them, and care about their life stories.

5. Channels. You must do everything to position the mobile user interface as a self-service channel of choice. But don't be a purist here: don't give your clients the impression that you have left them to their own devices (literally!). Let them deal with humans when they wish to do so. You'll need a multi-touchpoint strategy to promote, sell and service your suite of financial services. Why not have some (cashless!) flagship shops on main street, appointed agents around market square and the bus station, a friendly call center. Invest heavily in training and monitoring these channels. These sales/service agents are probably going to be distinct to your cash agents, which will need to be much more numerous.

6. Business case. We have no new ideas here: profitability will likely come from credit and payments, as elsewhere and always. But recognize that to prime both you'll need to be successful at capturing people's savings. Observing how people manage their money and discipline themselves is the best way to gain actionable insights for credit scoring. And people will have a natural tendency to pay for things electronically only if they hold their money electronically. Savings is the engine that turns the other financial product cogs. You won't make money on empty accounts, no matter what.

7. Pricing. Don't obsess about offering lowest prices, and certainly don't hammer poor people with this message. They want quality, reassurance, flexibility - just like anybody else. Deliver useful services conveniently and in relevant small sizes, and you'll see how willing they are to pay for things that help them address their basic concerns. You will be more successful in relating the value they derive from your services to its cost if you offer transactional rather than flat charges.

8. Brand. Ultimately, if I was your client I hope I would see your services as a better way of managing my money and my finances, my aspirations and my insecurities. The brand needs to be that mixture of aspiration and reassurance: as a client, I now have more upside and less downside in my life. It has to be more than the sum of the individual products you offer. Brand is the most important asset you'll build up.

9. Partnerships. There is much value to be harnessed from being the one who controls access to people's pockets, the one who has the trusted infrastructure connecting any business to millions of customer account. Grass-roots microfinance organizations have long known that. Seek out national and local partners who can add value to your customer base in financial and non-financial ways: through group purchases and discounting, special business development and education programs, livelihood development, community finance groups, etc.

10. Scale. Embrace scale, for big is the need in Africa. But also because scale may be essential for success on a mobile-led strategy: digital payment services are premised on network effects, and agent networks are premised on economies of density (distributed volume). So: systems need to perform robustly at scale, processes need to be streamlined to avoid future bottlenecks, organizational structures need to help rather than stand in the way of growth and innovation. Your key role as a CEO should be to build platforms that are perceived by your staff as their friend rather than their enemy. If you make sure you build good internal systems, more of your staff will feel they can afford to be more customer-centric more of the time.

There are technically and commercially savvy ways of doing all of this. The developing world needs to draw inspiration from the first successful, truly mass-market bank.

Wishing you all the best, sincerely,

Ignacio Mas

Ignacio Mas is an independent consultant on mobile money and technology-enabled models for financial inclusion. He is also a Senior Research Fellow at the Saïd Business School at the University of Oxford, and a Senior Fellow at the Fletcher School's Center for Emerging Market Enterprises at Tufts University. Previously, he was Deputy Director of the Financial Services for the Poor program at the Bill & Melinda Gates Foundation, and Global Business Strategy Director at the Vodafone Group.

ABOUT THE AFF

What do renowned economists, financial sector practitioners, academics, and activists think about current issues of financial sector development in Africa? Find out on the blog - and share your point of view with us!

LATEST POSTS

Emerging Trends in Digital Delivery of Agri-financeH. Miller, Associate Consultant, Nathan Associates & G. Njoroge, Advisor, KPMG
Pension provision in Africa remains lowGerald Gondo, Business Development Executive, RisCura Africa
Capital requirement, bank competition and stability in...Jacob Oduor, Principal Research Economist, African Development Bank

LATEST COMMENTS