Miscellaneous

Environmental, Social, and Governance (ESG) Scoring Important for Investors

Globally ESG has become a fixture of corporate earnings calls. The term is now referred to in approximately a fifth of all calls. ESG scores — which rank companies based on their reputation and impact relating to environmental (E), social (S), and governance (G) issues — are used by investors and others to monitor how companies are navigating global issues and guide investment decisions. However, they are often subject to inaccuracies, as they depend heavily on companies’ self-reported data. Little standardization among ratings has also led critics to question their value. Although ESG may not seem to be of importance to African companies seeking investment, it is essential to keep in mind that foreign investors are often subject to ESG scores by their own shareholders and therefore apply measurements to the enterprises they consider for investment.

The UN Intergovernmental Panel on Climate Change has warned that further rises in emissions after 2025 puts a 1.5°C warming scenario out of reach, increasing the physical risks from climate change, including droughts, floods, and wildfires. Investors are also exposed to transition challenges resulting from regulatory changes. According to a UNCTAD report (World Investment Report 2022), in response to climate, social and other sustainability risks, financial markets continued their move towards sustainable finance in 2021. UNCTAD estimates the total value of sustainable financial products at $5.2 trillion, up by 63% from 2020. This includes $2.7 trillion of sustainable funds and $2.5 trillion of sustainable bonds (including green, social and mixed-sustainability bonds)