The consideration of environmental, social, and governance (ESG) factors in investing in sub-Saharan Africa is closely tied to sustainable development according to Fitch Ratings.
The approach to ESG investing in sub-Saharan Africa is closely linked to longer-term sustainable development benchmarks, Fitch Ratings says in a new report. This shapes how borrowers in the region frame sustainable investment opportunities and which types of issuers source financing through the international capital markets.
The historically significant role of development finance institutions as sources of capital into sub-Saharan Africa has shaped the way investment into the region is positioned. Core infrastructure financing needs can be described as contributing to sustainable development objectives, which are closely aligned with many ESG investment frameworks.
Electrification programmes, for example, increasingly include renewable energy generation, or housing estates developments designed to have less environmental impact. New investors, including bondholders, non-traditional bilateral lending countries, and commercial banks, have also made efforts to incorporate sustainability into their investment strategies in Africa.
Many of Africa’s economic centres and industries are exposed to physical climate change risks. Large cities, including Lagos in Nigeria and Cape Town in South Africa, are affected by rising sea levels. Droughts and floods as a result of changing rainfall patterns have direct economic costs to agriculture-dependent economies, and social costs related to individual livelihoods and food security.
Have you read?
Africa’s first sustainability-linked bond now available
A challenge for ESG investors in Africa is the dominance of extractive industries. Sub-Saharan Africa is home to some of the world’s largest reserves of oil and gas, coal, and metals and minerals. While investors in developed economies are increasingly excluding new investments into fossil fuels businesses, these sectors are sizeable contributors to GDP and export earnings.
Several African governments planning to issue green or sustainability bonds in the next year but it is unclear how the market will perceive these in the context of a largely commodity-dependent economies.