Sustainability in African companies | From Compliance to Value
In my last Reflection, I gave examples of African companies that have stepped up to provide essential items for their countries and neighbouring countries during the Covid-19 pandemic. To maintain this momentum, both during and after this crisis, African companies will need to invest in scaling up and improving their standards of operations. This would mean, in addition to the usual technical, commercial and financial requirements for any successful business, making Sustainability an integral part of their decision-making and operations. I use the term Sustainability broadly to mean a company’s commitment to responsible environmental, social and governance (ESG) standards, systems and processes.
For many African companies, their Sustainability story so far has largely been one of compliance or philanthropy. They have reacted to ESG standards imposed on them by investors and lenders, or by international companies who demand certain requirements from suppliers. At the very minimum, this compliance factor will become more prominent in a post-pandemic world. The outperformance of ESG funds during the pandemic and the alliance of politicians, business leaders and society calling for a green recovery will likely push the investment community even more towards companies that adhere to ESG standards. For African companies, a large proportion of these investors will be Development Finance Institutions. Therefore, if companies want access to capital, now and in the future, they will have to be attentive to the larger Sustainability agenda.
Within this landscape, Sustainability has largely been used as a tool by investors and lenders to mitigate risks. For example, environmental risks such as inefficient water usage and the pollution of local water supplies; or social risks in the form of human and labour rights violations; or governance risks such as fraud and corruption. These risks, both collectively and individually, result in the loss of reputation, customers and market share.
In my experience, however, the benefits of Sustainability go far beyond risk mitigation. Sustainability is an effective tool for creating value. Sustainability initiatives can help drive profits through cost-savings, identifying innovation opportunities, improving productivity, access to new markets and customers, and improving a company’s reputation and brand value.
One way of achieving such value creation is by improving operational efficiency and resource management. The actions taken do not have to be big or expensive to have an impact and can still lower operating expenses and offer direct cost savings. A 2019 study conducted by the International Finance Corporation on South Africa’s agri-processing sector found low-cost water efficiency methods offered considerable cost-saving benefits. For example, a soft drink manufacturer invested ZAR140,000 (approx.USD 7,948) in a system to recover and reuse rinse water from the bottling plant and initiated a staff awareness campaign. They reduced their water consumption by 27% and reduced their wastewater production by 61%. The payback period on this intervention was less than three years. Therefore, in addition to improving their bottom line, the soft drink manufacturer is also contributing to preserving water supplies in a country that has notoriously strained water resources – it is a win-win situation.
Over and above the business-specific benefits, African companies have a key role to play in contributing to the development and long-term prosperity of the continent. The UN estimates that by the end of 2020, the Covid-19 pandemic will likely push an additional 19.3 million people into poverty in Africa. African companies can play a significant role to avoid or manage such an outcome – by creating jobs; providing essential goods and services; and, when they turn a profit, paying taxes which support the provision of public goods and services such as healthcare, infrastructure and education.
To play this key role, however, African companies will need to step up, scale up and, possibly, scale out beyond their borders. In doing so, they will also need to meet the Sustainability demands and expectations of a wide range of stakeholders – investors, customers, employees, governments, and civil society. These stakeholders are increasingly becoming more powerful and influential on how businesses run their operations and deliver their projects.
Achieving profits and integrating Sustainability principles and practices are not mutually exclusive – they can in fact be mutually reinforcing. Sustainability is not just the right thing to do, it is also the smart thing to do. In the Reflections that follow, I will delve deeper into how Sustainability will create value for African companies. I will also invite guests to share their views on how African companies can step up, scale up and scale out – sustainably.