Tightrope that is profit, environment

 Charles Darwin famously said “It is not the strongest of species that survive, nor the most intelligent that survives. It is the one that is most adaptable to change.” With the global economy on a tailspin from one crisis to another, the world has had no choice but to continually adapt to changing times.

The dialogue during the heights of Covid was around job security, loss of revenues, food shortages, heightened cost of living, hygiene and the rising cost of medical care.

Now the current global crisis adds on to the troubles of the world economies. The inflationary machine has already switched into higher gear across Africa.

In Kenya, the price of wheat has already increased owing to the Russia-Ukraine crisis. A two-kilogramme bag of wheat flour sells for between Sh150 and Sh172 compared to less than Sh140 in February. The crisis in Ukraine will have a significant impact on food prices across the African continent.

To put this into perspective, Kenya spent around $440 million on importing wheat in 2019 and the Kenyan government allocated $545 million for all food and agriculture-related spending in the 2021/2022 budget during the Covid pandemic. Now demand for essentials and prices will be strained further due to the Ukraine-Russia crisis. When the majority of the Kenyan population spend over 40 percent of their income on food, these types of price shocks are all the more severe. So, is changing diet a solution? Shifting away from imported wheat and towards local cereal-based foods has many economic, social, nutritional, and environmental benefits.

Manufacturers of cooking oil are buying palm oil at between US $1,760 and $1,980 per tonne owing to the escalation of the Ukraine-Russia crisis. This product was priced at $700 per tonne before onset of Covid pandemic in March 2020. Rising fuel prices are also going to have a choking impact on the global economy, not just Kenya. Can we have local solutions to some of the imposing issues and if so, will the solutions be responsibly produced?

Increasing awareness

Over the years, increasing awareness and attention has been given to how environmental, social and corporate governance (ESG) issues impact investment decisions.

Kenya is not new to such discussions. Earlier, some national projects including the standard gauge railway has also been under the magnifying glass of stakeholders. The most contentious and controversial environmental effect of the standard gauge railway was that part of its route cut through Nairobi National Park, the preserved and much-celebrated wildlife sanctuary on the peripheries of the city. The terms of the financial loans from China and wider debt sustainability for the project are still points of contention. Additionally, concerns that mired land compensation indicated the massive controversy around the project’s broader governance.

Likewise, when it comes to corporates or individuals investing, socially responsible investors have moved away from purely concentrating on financial performance and short-term gains and are adopting a view on the longer-term sustainability of the business practices. In an increasingly complex world, individuals are faced with many questions about the meaning of investments.

The concept of socially responsible investments is particularly relevant. Social responsible investments (SRI) in finance is an approach that consists of systematically streamlining or mainstreaming factors linked to environmental social and governance (ESG) criteria alongside financial criteria. A growing number of asset management firms and fund managers across the world are gradually carrying out a two-pronged analysis when investing for clients by looking at the financial criteria, profitability, business model, competitiveness, alongside the ESG criteria.

Now that global markets can be accessed for investments, many global fund managers actively invested client funds in products backed by Russian government bonds and shares of State-backed energy giants while claiming to be committed to the highest environmental, social and governance principles. Today, this can be questioned as the Kremlin’s military is reportedly responsible for death and destruction.

“The lesson for ESG investors is to act before war breaks out and not to be afraid to denounce and divest from companies and countries that are serial human-rights violators,” said Kiran Aziz, Investment Head at KLP, Norway’s largest pension fund. Responsible investing is an attitude that clearly recognises the significance to the investor of ESG factors and of the long-term health and stability of the market as a whole. The emphasis on these offers opportunities and challenges for asset managers. For example, institutional investors are identifying and realising the potential for ESG factors - such as climate risk and poor human rights performance - to affect the valuation and financial performance of the companies they invest in.

Naturally, there are fears that excessive focus on ESG could harm a company’s effectiveness and competitiveness. One question which arises in the minds of most investors is that, if a firm places too much emphasis into ESG objectives, do they risk losing focus on growth, market share, and profits?

Danone’s Chief Executive and Chairman Emmanuel Faber served the leadership role for four years. During his time at the helm of the organisation, his focus on environmental focus made him a celebrated hero among environmentalists and climate activists. In March 2021, Faber stepped down whilst facing pressure from activist investors who suggested Faber “did not manage to strike the right balance between shareholder value creation and sustainability.”

Ernst and Young

Steve Ivermee, managing partner of Ernst and Young said: “We’re seeing this tension develop now, with some company stakeholders pushing for companies to move faster, while others are calling for a stronger focus on immediate returns.”

 Usually, if a company emphasises too much on ESG, it may possibly be unable to compete with companies from regions with less rigorous standards. However, when companies do not focus enough on ESG, they risk losing the support of employees, customers, investors and other stakeholders. In regions with stringent regulatory measures, companies may risk losing their licenses.

The demand for such governance information worldwide has led to many countries including Kenya, espousing ESG disclosure and reporting requirements, especially for listed companies. Organisations listed on the Nairobi Securities Exchange now have a framework to guide reporting on environmental social and governance issues alongside the tradition of reportable financials.

This follows launch of an ESG Disclosures Guidance Manual at the end of November last year. The manual offers listed companies direction and guidance on how they can “collect, analyse, and publicly disclose important ESG information”, in alignment with international reporting standards, including the Global Reporting Initiative 2018.

This manual aims to facilitate the ease of comparing ESG performance amongst listed companies by providing a set of guidelines for reporting. Transparency due to the disclosures is expected to help in strengthening integrity in the capitals market. ESG investing practices is gaining momentum globally, mainly driven by investors, the majority of companies still have no clear understanding of the value of ESG.

Ritesh Barot is a business and financial analyst, humanitarian, conservationist, occasional artist, recipient of OGW honour. [email protected]