African funds with dedicated environmental, social and governance (ESG) mandates could hold JSE-listed equities worth up to R500 billion over the medium term as the focus on sustainability intensifies, according to a research report by SBG Securities.
This shows that corporates with strong ESG credentials will be well placed to attract global capital.
ESG-related fund flows have accelerated in developed markets in recent years, with inflows into European ESG funds growing by as much as 160% year on year in 2019.
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This is being driven by concerns about climate change, the evolution of investor ideologies, and growing investor interest in generating returns while benefiting society and the environment.
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The Covid-19 crisis has added impetus to this trend in 2020.
SBG Securities, a member of the Standard Bank Group, conducted a survey amongst African fund managers and found that the continent is expected to follow Europe’s lead in the years ahead.
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In the medium term, Africa-based ESG-dedicated funds are expected to hold 2.5% to 3% of total equities under management on the JSE. This implies a local ESG equities market of between R400 billion and R500 billion.
Africa’s capital markets are in the early stages of the sustainability theme, and shares in companies that make ESG a strategic imperative and risk-management tool are expected to benefit from strong investor demand in the years ahead, according to the report.
This competitive advantage in attracting capital is already evident.
For instance, South Africa-listed stocks currently account for about 6.1% of the MSCI Emerging Markets ESG Leaders index by weighting, versus just 3.7% of the MSCI Emerging Markets index.
In addition to the expected inflows into ESG equities, SBG Securities anticipates that impact investment projects worth about R570 billion will be brought out to tender via public-private partnership (PPP) structures.
This alternative asset class will likely gain in prominence as African governments work more closely with the private sector on infrastructure developments.
PPP structures offer governments an effective way to postpone public sector capital expenditure – at a time when sovereign debt levels are elevated – by ‘crowding in’ the private sector.
The survey of African investment managers found that, data availability is the biggest challenge for ESG investing.
The development of standardised global ESG reporting metrics, with the backing of major audit firms, will help to mitigate this challenge. Several global and local regulatory initiatives are already underway in that regard.
In Africa, ‘governance’ is ranked as the most important ESG pillar to investors. This is followed by the ‘social’ pillar, given the continent’s immense developmental challenges.