Five Ways to Improve Sustainable Finance for African Businesses
Although financial profits will always remain the cornerstone of a successful business, a report in 2019 by the UN Global Compact showed that 92% of CEOs surveyed believed that sustainability – or Environmental, Social and Governance (ESG) standards and practices – will be important to the future success of their business. This has also been demonstrated by statements from organisations such as the US Business Roundtable and global investment giants like Blackrock. This is hardly surprising given the momentum behind global movements like the United Nations’ Sustainable Development Goals (SDGs) and the Paris Agreement on climate change. There is also an increasing recognition that sustainable investments can weather and occasionally increase their value during financial storms.
Prior to the Covid-19 pandemic the will to incorporate sustainability into businesses was increasing. However, the current challenges posed by Covid-19 mean that most businesses will be focused on more immediate issues such as liquidity and profitability. We may, therefore, see a temporary dip in businesses’ focus on sustainability.
Nonetheless, the increased focus on sustainability has led to an increase in the availability of sustainable finance – finance for projects that make ESG considerations a priority. In 2019, $465 billion in sustainable finances was raised globally, an increase of 78% from the previous year. Despite this increase, only 3% of this amount was linked to the Middle East and Africa. Sustainable finance is one of the key sources of investments to meet the SDGs. The low uptake or availability of sustainable finance in Africa is, therefore, concerning given that minimal progress has been made in achieving the SDGs and, in some instances, there has been a complete stagnation. More than half of the global poor – those who earn under $1.90 per day – are in Africa and all African regions, except North Africa, are unlikely to meet the SDGs.
The financing gap to implement the SDGs currently stands at around $2.5trillion, of which about $1.3trillion relates to Africa alone. The effects of this gap are made worse by the fact that global sustainable finance has largely focused on the environment and on managing climate change impacts. I believe as a result of the pandemic, investors will now not only scrutinise how a company responds to environmental challenges but also socio-economic challenges, and the importance of the social and governance aspects of ESG will gain equal importance alongside environmental aspects. The question, however, is how quickly can this happen, especially in a Covid-19 environment?
There is already a concerning impact of Covid-19 on available finance. Since the beginning of the pandemic, over $83billion has been withdrawn from emerging markets and the UN Conference on Trade and Development also announced that foreign direct investment flows are set to drop by 30-40% in 2020 and 2021. This reduction in financing – compounded by the devastating health, social and socio-economic impacts caused by Covid-19 – will further exacerbate Africa’s development challenges.
Therefore, there is a pressing need to leverage the expertise and resources of both the public and private sectors to generate the sustainable financing required to meet the SDGs, and at the same time ensure that African businesses survive the Covid-19 pandemic. The following five steps will support African businesses:
01 – Financial institutions need to develop favourable financing models focused on financial return, the sustainable impact of the business and, more importantly, tailored to the local circumstances, capabilities, size and phase of the businesses. Consideration should also be given to immediate and affordable short term/working capital financing to assist businesses through this period.
02 – Governments need to re-look at their country’s regulatory and business environments to ensure these are not only managing but proactively incentivising positive ESG impacts – for example, favourable tax regimes for sustainable financing and projects.
03 – Multi-stakeholder partnerships (Government, Private Sector, Development Agencies) to work on impact-based plans for specific countries, regions or sectors, to increase the level of sustainable financing available. For example, the application of “special economic zone” principles to develop sectors, such as agriculture, that make the greatest contribution to socio-economic development.
04 – Adopt a portfolio approach by bringing together linked or related projects for financing purposes to manage risks and provide the scale and diversification required for institutional investors to increase the amount of financing they make available.
05 – Increase business awareness on the benefits of sustainable finance by providing information on available sustainable financing options and how these can be accessed.
There is very little time left to achieve the SDGs and the impact of Covid-19 has increased the urgency. African businesses have a role to play, but they need access to finance that enables them to survive and grow in a manner that advances sustainability goals.
About the author: Reshma Shah is the founder and CEO of Intestrat Services Ltd and a Partner at Kina Advisory Limited.
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