ESG investing has become topical over the past few years, with primary emphasis on the E (environmental) and G (governance) elements. Since the impact of the pandemic, investor attention has been sharpened to focus on the S (Social) of the acronym. In the past, investments have, for the most part, been made in terms of risk and reward. Now a third dimension of oversight has been added – that of impact. Once largely the preserve of direct private-market investments, impact investing has moved from a niche approach to a significant market segment. Hand in hand with this has been the evolution of ESG related regulation, which has matured from soft law recommendations to, in some cases, hard law obligations.
ESG is not a new phenomenon; initiatives have been around for many years, but much of it was just lip service or what has been termed ‘green washing’. More recently there has been an on-the-ground willingness to ensure that the ESG agenda is adhered to and, as such, ESG is becoming an important driver of deal activity, particularly with increasing evidence that a strong ESG proposition can create value for investors.
Locally, there has been an uptick in ESG reporting by exchange listed companies. In September, Mediclinic reported that it had secured a sustainability-linked loan, with the linking of ESG targets to the cost of debt, while Sasol announced that it had raised its emissions reduction targets for 2030 to 30% from 10%. Earlier this year, in response to increasing aversion to fossil fuels by investors, Anglo American divested its local coal interests to shareholders through a new entity, Thungela Resources.
ESG factors are likely to become an important part of the assessment and valuation of potential merger and acquisition opportunities, particularly in Africa. The lack of transparency in disclosure may impact on the relative valuation of the company, with ESG now also considered a risk factor, alongside reputational risk. Adhering to ESG is no longer just an option – if companies are to retain not only investors, but also suppliers and customers, they will have to ensure that they meet the necessary standards. The articles in this feature give insightful information on ESG in deal making and financial markets, and introduces some of the specialists in this space.
The dynamics of grouping the three ESG elements together has created interesting discussions, particularly where these elements do not necessarily align. As the feature was being finalised, the 2021 United Nations Climate Change Conference (COP26) was taking place in Glasgow. But the belief of some ESG investors that one plan fits all is, unfortunately, not realistic. For the African continent, the transition to renewable and clean energy sources will take longer, with government priorities focused on alleviating poverty and providing access to affordable energy.
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