Tuesday 1 March 2022
Managing the Environmental, Social and Governance (ESG) risks in emerging economies is serious work. Not merely because one requires trained, experienced, hands-on teams to ascertain and intelligently explore the legal, social and environmental implications of investments, but also because the investment community places a high premium on mitigating potential reputational risks.
I worked in ESG and impact investing throughout East, West and Southern Africa for twelve years. My own ESG ‘baptism by fire’ came when my company became the subject of a salacious campaign by an international aid organization, and we were forced to prove our adherence to international ESG standards. Before this crisis, I had never heard of or been held accountable for such standards. In our case, and in those days of 2010-2015, the ubiquitous standard applied by most investors during diligence on portfolio companies like ours was the IFC’s 8 Performance Standards. Not only were we expected to know, understand and apply the IFC performance standards, but perhaps more challenging was the translation of the standards – written in places like Bonn, London, New York – and implemented in places like rural Uganda, Rwanda, Tanzania.
Applying the IFC performance standards in East Africa was an important, educational, challenging, and ultimately, auspicious opportunity. It sent me down a path that has influenced my career in all the most important ways, ever since. And when I decided to return to the United States, in early 2018, I did so foolishly confident that my hard-earned experience with ESG in the global South would be held at a premium.
One of the things I realized upon returning to the US and diving into meetings with Private Equity funds to discuss how I could support their ESG management efforts was that, by and large, there are very few such efforts. Blank stares and shy smiles aside, US funds are not perceived to be taking on the same intensity of risk as that of their counterparts invested in places like Africa and Latin America; and therefore, ESG is not front of mind. After more than a decade of working with companies and investment funds in African and Latin American markets, my mind was sufficiently blown.
What struck me, in the wake of discussions with private equity and venture capital leaders along the West Coast and throughout Silicon Valley was that they did not approach the investment conversation with the same level of ESG savvy or maturity as my investment colleagues in the global South and throughout most of Europe. And for good reason. For decades, investors have viewed companies in the global South as carrying disproportionate risk. As a result, these subjects of investor review have developed impressive, advanced, cutting edge, empirically robust methods of conveying ESG risk mitigation and value addition.
In 2017, I represented my Africa-based ESG consulting firm at the AVCA (African Venture Capital and Private Equity Association) conference in New York. The theme of the conference was how African funds could more effectively harness the growing appetite for investable opportunities by American investors. As the American investment community had limited Africa-focused experience, this was a chance for leaders from Africa to help educate a new investor base. When I took my chance to raise the question around what we, as African funds and supporters of funds can do to more effectively make our governance case to investors in the global North, Aleksander Bakic from O'Melveny & Myers LLP made a point that has rung in my mind ever since. His response was that, on the contrary, African funds, by virtue of their location and perceived risk profile, have developed rather impressive and advanced ESG management, tracking and reporting methods over the years, because of especially acute concerns around governance and corruption. His position was that portfolio companies in other parts of the world had much to learn from their colleagues running funds and companies in the global South.
Due to historically harsh criticism and skepticism, African and Latin American companies and investors have developed far more advanced and mature mechanisms of ESG management, communication, measurement and assessment than their counterparts in capital markets of the global North. Capital market funds and companies would do well to learn from their colleagues in the global South, when pushed to account for their ESG exposure and to communicate their ESG value add opportunities.
Fast forward to early 2021, when my business partner and I were approached by a US based lender, not yet required to adhere to ESG standards but sensing such requirements on the horizon and electing to get ahead of the curve. This lender found itself hearing about ESG, tangentially, from peers and colleagues and elected to create a framework, of their choosing, to declare and define their ESG approach. What a pleasure. What a freedom and a luxury to be in such a position. Their enlightened view on ESG readiness was commendable. And the absence of any requirements to this effect until then, was suspect. How could it be that, in 2011, an African forestry company was held to the highest international ESG standards and in 2021, a full decade later, a North American lender of capital was only beginning to think about it, and of their own volition?
One take away from this scenario is that we apply a more critical eye to investments in the global South, than we do to investments in the global North, due to our perceptions of risk. That’s rather obvious. A deeper read reveals the unique and powerful skills, readiness, acumen and savvy being developed amongst portfolio companies in the global South, particularly those receiving international investment capital. In much the same way as Malcolm Gladwell argues, in his book David and Goliath, that often our perceived disadvantage ends up developing or revealing a strong advantage, so too does the rigor applied to investments in the global South, result in a staggering level of maturity, readiness, discernment and strength around ESG compliance and value addition.
Where capital market companies and funds want to build their ESG capacity, it may behoove them to look South for the skills and experience in navigating these critical conversations.