Ilonka Oudenampsen looks at how investors are tackling ESG issues as Africa attracts increasing attention

With investors looking to diversify their portfolios, investing in Africa has been getting more attention lately, but how can pension funds be sure they are investing in the right companies?

Lately there has been a lot of appetite to invest in Africa, says Rami Sidani, joint manager of Schroders’ frontier markets fund. “We have launched a frontier fund which invests a good proportion in the sub-Saharan market and we have seen very strong demand, especially from European institutions and pension funds, specifically Scandinavian, which was a bit surprising.”

However, he adds that the size of investments coming from Europe remains relatively small compared to that of other countries. “The big investments, and that is what’s shaping the African continent at this stage, are coming from mostly China and India. For places like Nigeria it would be China and for places like Kenya and the rest of East Africa it would be mostly India.”

But as billions of dollars are invested in those countries, foreign investors should take responsibility in ensuring that the investments do not only generate good returns, but that the local population also benefits.

Good research into the companies invested in is also important to ensure no money goes missing. Western investors’ ideas about transparency and governance are not always regarded in the same way in Africa and it is crucial for European investors to make sure they know the companies they invest in.

Schroders only invests in listed equities: banks, breweries and cement, which Sidani calls the BBC of Africa. He believes that the local community will also benefit from the investments, as a lot of foreign money is also invested in infrastructure.

However, before looking at Environment, Social and Governance (ESG) issues, the first big hurdle is investment liquidity, according to F&C’s director for emerging equities, Urban Larson. Outside Egypt and South Africa, the markets that have liquidity would be Nigeria, Kenya and Mauritius, while there are also some other markets with a little liquidity.

Not only are there very few liquid stocks available, the markets can be opaque. Larson says: “These markets remind me a lot of Latin America 20 years ago, in that you do have some very good companies, you have a lot of good intentions and a very interesting story, but the disclosure often is not what it ought to be. There have been significant improvements in disclosure – particularly in the Nigerian banking sector - as regulators get tougher and companies figure out what investors want but there is still some way to go.”

Karina Litvack, head of governance and sustainable investment, adds that these issues are essentially about cleaning up the governance, in terms of the regulatory oversight and corporate practice. “In the ESG puzzle we have tended to focus firstly on the G, on the governance side, because without decent governance we don’t trust the company enough to even get in.” After establishing a degree of comfort, one can then start looking at what companies do in the area of environmental and social sustainability.

She believes there is more awareness to issues like poverty and environmental damage than Western investors might think, but the issues are approached in a manner that is different from the way a Western country might approach it in its home country.

Apart from that, F&C focuses a lot on engagement and the impact they can have on driving better practices. Litvack says: “Nigeria is a good example of a case where we not only talk directly to companies to try to drive better practices, but we also talk to the regulator. We feel that engagement needs to happen at two levels: it has to happen at a granular level in terms of our dialogue with companies, but it also has to happen at a more systemic level, so that the overall environment in which companies operate is a healthy one.”

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