As an African firm, we often encounter questions about the relevance of Environmental, Social, and Governance (“ESG”) principles in the African context. To address this, it is essential to understand what ESG represents and what it aims to achieve. ESG has a dual focus, known as double materiality. On one hand, it aims to incorporate non-financial factors into strategic decisions to enhance or protect corporate value, focusing on understanding, disclosing, and mitigating impacts on profit. This aspect of ESG is widely accepted in financial markets, acknowledging that factors like climate-related impacts, for example effects of flooding and droughts, can significantly affect a company’s profits and must be taken into account and disclosed. On the other hand, ESG also examines the impacts of corporate behaviour on stakeholders and the environment (for example plastics or greenhouse gases released into the environment), seeking to understand, disclose, and mitigate impacts on people and the planet. While this aspect is less widely recognised in financial markets, the perception is changing.

In the African context it is unsurprising that there may be resistance to the part of ESG that scrutinises corporate impact in the double materiality enquiry, especially when it comes to aspects like climate change and its impact on the planet. Africa’s carbon emissions, only an estimated 4% of global emissions, seems immaterial when compared to those of developed nations. Africans have the lowest emissions of citizens living on all continents on a per capita basis. Yet African countries are under the same pressures to steer away from the use of fossil fuels to develop their economies. Africans have the equivalent real access to electricity that United States citizens had in the 1890s, with more than 40% of the continent still living without access to electricity. Ensuring modern energy for all while keeping pace with rising energy demand remains a primary focus for African governments. If the broader context of the climate emergency is not taken into account and if the opportunities presented by the transition to a green economy are ignored, one can understand how ESG can be perceived as prioritising the environment at the expense of energy security and poverty reduction in Africa.

Climate mitigation efforts can be challenging for African leaders due to budget allocation competing with the urgent need for essential services like healthcare and education, along with tempting opportunities in high-carbon sectors promising economic growth. But, despite its minimal contribution to global warming, Africa faces the brunt of the climate impact. The Climate Vulnerability Index identified sub-Saharan Africa as home to 9 of the world’s top 10 most vulnerable countries. Even with global efforts to limit warming to 2°C, climate adaptation costs in Africa could reach USD50-billion annually by 2050, raising questions about the “polluter pays” principle and developed countries’ contributions under the Paris Agreement. Beyond climate change, ESG considerations encompass a range of critical issues, including widespread corruption challenges, particularly in sub-Saharan Africa, where transparency and governance scores are low. South Africa has the world’s highest income inequality, while other African nations like Namibia, Zambia, and Mozambique also struggle with high Gini coefficients. As Africa experiences significant population growth, with the United Nations (“UN”) projecting a billion more people by 2050, there is pressure on the continent’s natural resources. Effective and sustainable management by African states is crucial to prevent adverse global consequences.

However, ESG also offers opportunities amid these challenges. Africa’s critical minerals and renewable energy resources have the potential to contribute significantly to a greener future. Protecting Africa’s rich biodiversity aligns with global climate mitigation efforts. International agreements and ESG-driven investments can support sustainable enterprises in Africa, encouraging ESG alignment. African countries can leverage their natural resources to finance a green transition and achieve the UN Sustainable Development Goals. Establishing modern legal frameworks, implementing environmental tax policies, and ensuring good governance are crucial. African legislators have already started integrating ESG principles into their laws and regulations.

ENS, November 2023