By Funmi Dele-Giwa, General Counsel & Head, GRC at MFS Africa<\/p>\n
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If you\u2019re reading this, there\u2019s a very good chance you\u2019re already familiar with the acronym ESG. Standing for \u201cenvironmental\u201d, \u201csocial\u201d, and \u201cgovernance\u201d, it\u2019s a constantly evolving standard that emphasises the importance of doing business in a way that positively impacts the environment, society and stakeholders. In essence, it\u2019s the idea that companies can grow and profit while doing good and it encourages businesses to be more transparent about how they add to or create value for their society, community and\/or stakeholders.<\/p>\n
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While ESG has its critics (on both sides of the aisle), it\u2019s philosophy has gained near-universal acceptance in investor circles. In fact,\u00a0a 2022 study<\/a>\u00a0by asset management firm Capital Group found that 89% of investors consider ESG issues in their investment approaches. Additionally, there are around\u00a0US$2.5 trillion in ESG assets<\/a>\u00a0under fund management. And with rising interest rates putting a dampener on investment (including in Africa), scoring well on those metrics may become more important than ever.<\/p>\n <\/p>\n But for African fintechs the case for ESG goes beyond becoming investable. Implemented properly, the principles behind ESG make a great deal of business sense. As an illustration of how much of a boost it can be to a business, a\u00a0study by accounting firm Moore Global<\/a>\u00a0found that companies with strong ESG principles saw their profits grow 9.1% in the three years between 2019 and 2022. In other words, the fintechs that get ESG right won\u2019t just have an easier time attracting investment, they\u2019ll also be better poised for growth, sustainability and profitability.<\/p>\n <\/p>\n Why ESG works<\/p>\n <\/p>\n Before looking into how African fintechs can put together the kind of ESG frameworks that encourage growth and investment, it\u2019s worth taking a deeper look at why it makes good business sense (outside of the already strong investment case) to invest in ESG.<\/p>\n <\/p>\n One of the most powerful is the African environmental context. According to the\u00a0Africa Development Bank<\/a>, for example, Africa is the continent most vulnerable to climate change. Any fintech that understands this and works to ensure that its operations are sustainable isn\u2019t just helping mitigate the effects of climate change on the planet, it\u2019s also helping ensure a future environment in which it\u2019s more likely to survive and thrive.<\/p>\n <\/p>\n Of course, ESG isn\u2019t just about the environment. Its second social pillar has an equally important role to play. For fintechs this can look like ensuring that they hire diversely, support MSMEs, and contribute positively to employment in areas where it’s needed most. But perhaps even more importantly, it also includes financial inclusion.<\/p>\n <\/p>\n Choosing to hire diversely has obvious societal benefits: for example it means that previously marginalised groups are able to participate in the economy at much higher levels. But it also comes with significant business benefits. And the higher up the organisation those hires climb, the greater the accrued benefits are. According to the\u00a0Boston Consulting Group<\/a>, companies with above average diversity in their management team report 19% higher innovation revenues than those with lower diversity.<\/p>\n <\/p>\n Supporting micro, small, and medium-sized businesses also benefits fintechs. For starters, they make up a large customer base (particularly for B2B-focused fintechs) on the continent. In sub-Saharan Africa, there are approximately\u00a044 million SMEs<\/a>. These enterprises not only serve as the engine of many economies across the African continent, but they also represent a segment historically ignored and under-served by the more traditional financial services players. By providing products and services which speak directly to the pain points of micro and small enterprises, fintechs can not only tap into a fast growing and profitable segment, but can have a positive impact on the overall economic development and prosperity in the country in which they operate.<\/p>\n <\/p>\n