ESG (Environmental, Social, and Governance) and performance are closely linked in the investment world. As more investors are becoming aware of the impact of human activity on the environment and society, they are recognizing the need to consider these factors in their investment decisions.
Research has shown that companies that have strong ESG performance tend to have better financial performance over the long-term. This is due to several factors. For example, companies that have strong environmental performance tend to be more efficient in their use of resources and have lower costs, which can lead to better financial performance. Similarly, companies that have strong social performance tend to have better employee morale and retention, which can lead to higher productivity and better financial performance.
In Kenya and Africa, the relationship between ESG factors and financial performance is becoming increasingly important. This is because, as the continent continues to develop, the demands on natural resources and the pressure on the environment are increasing. As a result, companies that are able to manage their environmental and social risks effectively are likely to have better long-term financial performance.
However, the relationship between ESG factors and financial performance is not always straightforward. In some cases, companies may have to make short-term trade-offs in order to achieve long-term ESG goals. For example, a company may have to invest in new technologies or processes to reduce its environmental impact, which could lead to lower profits in the short-term. Similarly, a company may have to invest in employee training and development to improve its social performance, which could also lead to lower profits in the short-term.
The Business Case for ESG
ESG factors have traditionally been seen as non-financial metrics that are outside the scope of financial analysis. However, more and more investors and companies are recognizing that ESG factors can have a significant impact on financial performance.
For example, a study by MSCI found that companies with high ESG scores outperformed those with low ESG scores in terms of both stock price and return on equity. The study also found that companies with high ESG scores had lower volatility, which indicates that they may be more stable and better equipped to weather economic downturns.
In addition, a report by the Global Sustainable Investment Alliance found that sustainable investments accounted for over 36% of assets under management in Africa in 2021, up from just 1.3% in 2015. This indicates a growing recognition among investors that ESG factors can lead to better financial performance.
Recent Examples in Kenya and Africa
There are many recent examples of companies in Kenya and Africa that have recognized the business case for ESG and are implementing sustainable practices.
One example is Safaricom, a telecommunications company based in Kenya. Safaricom has made significant investments in renewable energy, including a 500 kW solar plant at its headquarters in Nairobi. The company has also implemented a number of social programs, including a maternal health program that provides expectant mothers with access to medical care and a mobile phone-based platform that allows farmers to access weather forecasts and market prices.
Safaricom’s sustainable practices have not only had a positive impact on the environment and society, but also on its financial performance. The company’s stock price has risen steadily over the past decade and it has consistently been one of the most profitable companies in Kenya.
Equity Group Holdings, a financial services company based in Kenya. Equity Group has made significant investments in renewable energy and has committed to reducing its carbon footprint. The company has also implemented a number of social programs, including a program that provides financial education and support to women entrepreneurs.
Like Safaricom, Equity Group’s sustainable practices have had a positive impact on its financial performance. The company’s stock price has risen steadily over the past decade and it has consistently been one of the most profitable banks in Kenya.
In South Africa, Woolworths Holdings, a retailer that has made significant investments in sustainable practices. Woolworths has implemented a number of initiatives to reduce its carbon footprint, including a program to reduce food waste and a commitment to using renewable energy in its stores. The company has also implemented a number of social programs, including a program to provide education and training to its employees.
Woolworths’ sustainable practices have not only had a positive impact on the environment and society, but also on its financial performance. The company’s stock price has risen steadily over the past decade and it has consistently been one of the most profitable retailers in South Africa.
Challenges and Opportunities
While there are many companies in Kenya and Africa that are recognizing the business case for ESG and implementing sustainable practices, there are also challenges to the widespread adoption of these practices.
One challenge is the lack of ESG reporting and disclosure in the region. Many companies do not report on their ESG practices, making it difficult for investors to evaluate their sustainability performance.
However, there are also opportunities to address these challenges. For example, there are a growing number of initiatives aimed at promoting ESG reporting and disclosure in Kenya and Africa. One such initiative is the Sustainable Stock Exchanges (SSE) initiative, which was launched by the United Nations in 2009. The SSE initiative encourages stock exchanges to promote sustainable business practices and ESG reporting among listed companies.
The Nairobi Securities Exchange (NSE) is a member of the SSE initiative and has taken a number of steps to promote ESG reporting among listed companies. In 2021, the NSE launched the Kenya Green Bond Program, which aims to support the issuance of green bonds by Kenyan companies. Green bonds are financial instruments that are used to finance projects with environmental benefits, such as renewable energy projects or energy efficiency projects.
The NSE has also partnered with the Global Reporting Initiative (GRI) to provide training and support to listed companies on ESG reporting. The GRI is an international organization that provides guidelines for sustainability reporting.
Another opportunity to promote sustainable business practices in Kenya and Africa is through impact investing. Impact investing is an investment approach that aims to generate both financial returns and positive social or environmental outcomes. Impact investors are increasingly interested in investing in companies that have a positive impact on society and the environment, and this can provide a source of funding for sustainable business practices.
In 2021, the African Private Equity and Venture Capital Association (AVCA) conducted a survey of private equity and venture capital investors in Africa. The survey found that 77% of investors believe that integrating ESG factors into their investment decisions can lead to better financial returns. This suggests that there is a growing recognition among investors that ESG factors can have a positive impact on financial performance.
Conclusion
The relationship between ESG factors and financial returns is becoming increasingly clear, and this trend is being felt in Kenya and Africa as well. There is mounting evidence that companies that prioritize ESG factors and adopt sustainable business practices can enjoy better financial performance than those that do not. This is due to a variety of factors, including reduced operating costs, increased productivity, improved customer loyalty, and reduced risk.
However, there are still challenges that need to be overcome in order to ensure widespread adoption of sustainable business practices in Kenya and Africa.
Despite these challenges, there are many opportunities to promote sustainable business practices in Kenya and Africa. Initiatives such as the SSE and impact investing are playing an increasingly important role in this regard. In addition, there is growing recognition among investors and businesses that ESG factors are important for long-term financial success.
Going forward, it is important for investors and businesses in Kenya and Africa to continue to prioritize ESG factors and adopt sustainable business practices. This will not only benefit the environment and society, but also the bottom line. By investing in sustainable businesses and supporting sustainable practices, investors and businesses can help to create a more resilient and prosperous future for all.