ESG anyone? — Lionesses of Africa

By the Lionesses of Africa Operations Dept

March 10th was a big day in Europe. On that day the EU Sustainable Finance Disclosure Regulations came into force, requiring “…investment funds to show how sustainability risks are incorporated into their investment decisions. This applies not only to fund managers, financial advisers and many other regulated firms in the EU, but also to non-EU [finance] managers marketing into the EU.

The EU is determined that ‘Greenwashing’ will not happen in ESG (Environmental, Social and Governance). ‘Greenwashing’ is the act of pretending some project, company or fundraising activity is Green whilst the reality is somewhat different…such as reported in the FT (here):

In the headlong dash to sell green bonds, some issuers have raised eyebrows [might not seem it, but that is FT-speak for “you gotta be kidding me!!”]. Saudi Electricity Company, a state-owned monopoly in the oil-rich Gulf country, raised €1.3bn from a green bond…to invest in the installation of smart meters across its grid (yet it creates electricity from oil)…In 2018, Mexico’s government decided to mothball a new airport…intended to be more energy-efficient, that was funded by green bonds. Although the project was cancelled (no cash was returned)…investors just have to take Mexico’s word that the proceeds are being used for environmentally friendly purposes.” These are just two examples, but look out for other examples in our day-to-day life such as ‘CFC Free!’ (CFC’s are banned anyway); ‘All Natural’ (er…so is Arsenic, Uranium, Mercury, and many other ‘natural’ occurring products, but not necessarily ‘green’) and so on.

Through these new regulations the EU is showing that it is determined to stamp out ESG-washing before it becomes commonplace. But why stop at the finance world? This is all they can do! The EU controls their financial world, individual national governments control their corporate world. It is impossible for the EU to dictate in this manner to EU corporates. This is one of the interesting issues within the EU, whereby centralized/decentralized imbalances create large issues or unintended consequences. A good example of this is where the monetary side is controlled by the EU through the ECB, but taxes are controlled by the individual national governments which causes huge problems when trying to cool or boost the block’s economy.

So how will the EU counter the imbalance this time? Will companies be able to hide their true colours behind a wall of accounting and empty platitudes? Will the EU Asset Management world be able to claim that the world’s companies are not helping them? Who will police this, who will know and finally, will anyone care – after all we have had PPP (People’, ‘Planet’ and ‘Prosperity’) for decades, and in 2006 many of the world’s largest Asset Managers even embraced ESG with BlackRock, Vanguard and Amundi signing a commitment in the form of the ‘Principles for Responsible Investment’. But doesn’t that just show the difficulty – this was signed in 2006 and since then many more firms have joined, yet here we are now in 2020 thinking that this move from the EU will make things happen. Let’s hope, because if it does work, in spite of the fact that most of these major Asset Management houses invest in listed companies, not MSME’s, their actions will filter through into our world.

The interesting part of the regulations and perhaps why ‘this time it’s different’ is that all finance houses, be they banks, funds, asset managers, lenders, have to chose a camp, they cannot sit on the fence and hope investors don’t notice. Are they ‘sustainable’ or are they not…are their products sustainable or not? This might not sound important, but in choosing that your (for example) PE fund is ‘sustainable’, you have to prove this actually is true through ‘tough disclosure requirements’. This will make it very difficult to have both ‘Greenwashing’ or ‘ESG-washing’.

This reporting will not be easy and will require a great deal of extra work for fund managers. For a start it has so far been very difficult to arrive at a common standard of measurement. When Tesla ranks simultaneously at the top of one sustainability index (MSCI) yet at the bottom of another (an ESG ranking devised by FTSE), one can be forgiven for not knowing which way to turn as an investor, let alone a company!

However, these are regulations, not commitments, so in changing the rules for the EU Finance world, this does have massive knock on consequences for the rest of the world. EU domiciled finance (or marketing their fund within the EU) does not obviously limit itself to investing just within Europe, so wherever it goes, such as whenever we discuss an investment in Africa with a European finance house or fund, they will have questions around ESG and because of this, SDG values. Every company that wants finance from such houses will now have to show and prove what it does. Yes, Lionesses, more tick boxes (don’t you just love them!), but here is a chance to assist this essential move in the world of investing by preparing ourselves.

Are you female owned, run and managed; are you female founded; how many employees do you have and how many of these are women; how many women do you have in your management, on your board; how much plastic do you use in your supply chain; how much plastic do you remove from the streets, or reuse in manufacturing; what chemicals do you use in your production process and how do you remove this waste; how do you contribute to the SDG’s; employment conditions, maternity leave etc?

These and many more questions will be thrown at us in the coming years as the world becomes more accustomed to confirming or  conforming to ESG. It is also not just from investors and banks, one of the other major changes we are seeing that was exacerbated by the Covid crises was a move from major multinational corporations to  ensure ‘sustainable procurement, as seen here from the global and massive (Female founded and managed) leader in procurement and supply chain solutions, GEP:

Procurement leaders will have to take spend decisions based not just on the cost criteria but also on how those decisions will impact society, the environment and their brand image. They’ll need to incorporate social, environmental and ethical dimensions into procurement and in the process, also meet their corporate social responsibility goals.

So even our customers will ask more questions about our own ESG measurements (don’t forget massive global companies such as GEP will have the same questions from their investors and customers), these have to be measured. So what can we ‘at the coal-face’ (there’s a term that will disappear!) do about this, to position ourselves, to ensure we have the measurements should there be a knock on the door?

Where do we start? Firstly don’t try to reinvent yourself. Always stick to your purpose as we wrote here, but here is a snapshot of what investors are looking at (thanks to Visual Capitalist, here):

Top themes of interest

Powered by these personal beliefs, which categories are attracting investors? It turns out many investors are very interested in including environment-related themes into their portfolios.

  • Plastic reduction: 46%

  • Climate change: 46%

  • Community development”: 42%

  • Circular economy: 39%

  • Sustainable Development Goals: 36%

  • Multicultural diversity: 30%

  • Gender diversity: 30%

  • Faith based values: 24%

There is no doubt that the SDG’s will be a driving force for our membership (SDG5 being the obvious one, but our inspirational members cover all of the SDG’s between them). What is important is that we learn to measure.

When we measure, we learn; and when we learn, we develop. 

It has been found for example, through measuring that seagrass meadows are particularly good at taking carbon dioxide and converting this into plant matter. Who would have known – for years this plant has been ignored and often removed to clear areas for fishing (not realizing sadly that the fish were there for the seagrass and the food held within that area). But because people measured and then published this information the world started to wake up to this amazing plant. Research by Carlos Duarte, a marine ecologist at King Abdullah University in Saudi Arabia, has shown that one hectare of seagrass can soak up as much carbon dioxide each year as 15 hectares of rainforest (here is the article from The Economist). 

But that’s not all (seen here from the Smithsonian), following this there was an investigation of the strange balls created by the movement of the tides around the seagrass, pulling together the dead ‘leaves’ and then washed up on beaches as shown in our photo this weekend. This plant is Mother Nature’s very own plastic removal system! As the tide moves, so it creates whirlpool type movements at the base of the plants that produce these Rugby shaped balls (as seen in our photo this week). Within them there are caught a massive amounts of plastic and micro-plastic and imprisoned. Once measured the world realized. If something so small and so innocuous can do this, if we only found out because of measuring and investigation, this shows the power of knowledge. Now we know, we can rescue and replant this miracle plant creating huge swathes of ocean floor that becomes a carbon-dioxide sink and plastic removal hoover!

So look again at your business and start to measure and record, because one day soon you will need this information. Better to be prepared, to have seen the results, to have replanted or regrown your own ‘seagrass’ in areas where it had become a bit bare. Better to do this now than to wake up one morning, oblivious to what is going on in the world, and find Larry Fink, the CEO and Founder of BlackRock (Assets Under Management US$8.6 Trillion) knocking at your door, hoping to ask you a few questions…

Stay safe.

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