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By Chinwendu Obienyi
Environmental, Social and Governance (ESG) strategies are increasingly becoming a consideration among corporates, governments and investors worldwide.
This comes on the back of the global turmoil set off by the Coronavirus (COVID-19) pandemic in 2020, which saw many economies on lockdown, forcing organisations to adapt through the use of technology.
This has been further compounded by the ongoing climate disasters, social unrest and the Russia-Ukraine war.
Despite many economies recovering from the pandemic, evidence of heavy foreign investor outflows and diminishing inflows, especially in African countries, cannot be overlooked.
In many smaller Sub-Saharan African countries, local equity markets still remain thinly traded and broadly untapped. Also, both the fixed income and equity markets have been hitherto dominated by local participants. It should, however, be noted that this could potentially give forward-looking international investors a first-mover advantage and the ability to identify market mispricing opportunities.
In light of this, some global institutions are starting to take some keen interest, while others continue to sit on the side-lines owing to concerns about inflation and the potential impact of interest rate hikes. These institutions are seeking ways in which they can drive investments in the private sector to tackle environmental and social challenges given the devastating impact of climate change, inequality, conflict and insecurity on our world today vis-à-vis the need for responsible corporate behavior to reshape thoughts around the future of investment practices and ensure they align with ESG imperatives. While there is clear evidence that such investments can boost corporate value and economic growth, there are concerns around issues such as unclear and dispersed criteria for sustainable investments, the low quality of non-financial data, lack of disclosure and resource misallocation risks. These obstacles are critical for many countries in Asia, the Pacific and Africa whose stages of development have not yet reached those of more developed countries.
In Nigeria, the revised Nigerian Capital Market Masterplan (CMMP) strongly underlines the need to create awareness and actively deploy educational and advocacy campaigns to promote ESG-compliant products. This initiative has been identified to be of high priority, demanding immediate implementation and remains a core objective of the Securities and Exchange Commission (SEC).
ESG uses environmental (E), social (S) and governance (G) factors and data to assess the sustainability of a company and the impact that it has on its environment, stakeholders and the community in which it operates. Fueled by an assortment of investor demand and regulatory pressure, ESG assets under management (AuM) have skyrocketed – with the Global Sustainable Investment Alliance putting AuM at $35 trillion in 2020, up from $30.6 trillion in 2018, and $22.8 trillion. Recent reports even project that ESG assets could reach $50 trillion within the next few years.
There is, therefore, a need for Nigeria to tap into ESG. The capital markets are evolving, with exchanges and regulators globally introducing new guidelines and initiatives to promote ESG integration and investing. For instance, stock exchanges are promoting ESG reporting and disclosures through the adoption of the United Nations Sustainable Stock Exchanges initiative (SSEI), which encourages companies to disclose ESG-related information.
In Nigeria, NGX is leading the way in adopting ESG principles, having established a strong ESG framework centered on four core pillars: Marketplace, Workplace, Community, and Environment. As the multi-asset exchange dedicated to promoting Africa’s sustainable development, NGX acknowledges the significance of ESG elements in fostering enduring and sustainable growth. The exchange has put various initiatives into action across these fundamental pillars.
Although Nigeria issued two green bonds worth N10.69 billion and N15 billion in 2017 and 2019 respectively, but both suffered poor implementation, and this appears to be an Achilles heel in certain countries.
Consequently, in the absence of good governance, corporates are at risk of not meeting their “E” and “S” objectives. If ESG in Nigeria is to thrive, governance must be urgently improved given the critical role Nigeria occupies in driving positive changes through the focused promotion of ESG and sustainable finance in its financial markets.
Stakeholders’ view
At a recent ESG workshop, SEC reiterated its commitment to champion the promotion of sustainable financing through formulating the necessary rules and regulations. It noted that it is working with other stakeholders to promote advocacy and encourage more dialogue with a view to creating the required enabling environment for assessing the progress achieved and overcoming the challenges that persist.
The Commission’s Director-General, Lamido Yuguda, revealed that its rules on green bonds facilitated three issuances, thereby providing the essential funding for green projects in sectors such as power, water and agriculture, and building the foundation for more to come. He said that SEC also developed comprehensive sustainable finance guidelines and disclosure requirements for capital market operators, aligning them with the wider Nigerian Sustainable Finance Principles. He stated that in respect to this, SEC anticipates continued growth in the sustainable finance environment and in particular, within the Nigerian bond market.
“This will present a significant opportunity for the Nigerian capital market to expand its product offerings, and provide more long-term financing for businesses while protecting the environment, reducing inequality, promoting security and fostering national economic prosperity”, Yuguda said.
Additionally, Jude Chiemeka, the Divisional Head of Capital Markets at Nigerian Exchange Limited (NGX), emphasized the significance of adhering to ESG (Environmental, Social, and Governance) standards and the democratisation of data as key factors in drawing investments and enriching the trading activity in Nigeria’s capital market.
Chiemeka, recognising NGX’s membership in the Sustainable Stock Exchanges Initiative, provided guidance to investors, encouraging them to carefully consider companies that align with ESG principles and provide transparent and comprehensive disclosures. Underscoring the substantial connection between ESG disclosures and corporate performance, Chiemeka remarked, “Companies listed on The Exchange that exhibit robust ESG compliance often gain access to increased capital, attract a wider spectrum of investors, and may even secure funding from global markets. The NGX Premium Board showcases enterprises that uphold international gold standards in corporate governance and fulfill NGX’s most rigorous benchmarks for capitalization and liquidity.
Conforming to these standards signifies not only prestige but also serves as an indicator of sustainable growth, rendering these businesses more attractive to both domestic and international investors.”
For her part, the Chief Executive Officer, NGX RegCo, Tinuade Awe, urged companies to incorporate Environmental, Social, and Governance (ESG) considerations into their overarching business strategies, emphasizing the importance of listed companies aligning their ESG reporting with their business objectives, data management, and governance practices.
Explaining how companies can integrate ESG factors into their financial reporting, she noted that businesses aiming to engage in ESG reporting must establish a clear ESG strategy that aligns with their business goals. She urged these companies to seek expert guidance and systematically monitor ESG-related data to facilitate accurate reporting. According to her, this approach is pivotal in encouraging prompt adoption of ESG reporting among NGX-listed firms.
Conclusion
In light of the rapidly evolving global ESG landscape, there is a necessity for a deliberate partnership between public and private sector stakeholders in Nigeria as this would enable them to embrace their shared responsibility in building a sustainable future via investments from the ESG space.
