Africa: Appetite for ESG issuances on the rise

The COVID-19 pandemic has sparked a renewed interest in sustainable investing strategies worldwide. Investors are increasingly looking to protect the financial value of their assets while also contributing to solving global challenges. According to the latest trends reported by the Global Sustainable Investment Alliance, sustainable investments have surged in popularity, now accounting for over 39 trillion US dollars across five major global markets, marking a 34% increase in just two years. Omar Diallo, CEO of Aeon Investments, joined CNBC Africa to discuss the growing appetite for ESG (Environmental, Social, and Governance) issuances, particularly in Africa. Diallo pointed out that the increasing trend towards structural credit investments at the expense of traditional fixed income investments is also visible in Africa. The attractive yield provided by structural credit is a key driver for this shift, coupled with enhanced regulatory protections that these investments offer. Investors are increasingly considering factors beyond just risk and return, with ESG considerations playing a crucial role in decision-making. They are now looking for investments that not only provide economic returns but also contribute positively to the environment and society. This shift towards sustainable investing is crucial in the face of the ongoing climate crisis. Despite the growth in the global bond market, with aggregated issues surpassing the one trillion mark in the late 2020s, only a mere 0.1% of these issuances are directed towards sub-Saharan Africa. Diallo highlighted several barriers that need to be addressed to incentivize more investments in the region. He mentioned psychological barriers surrounding taking on debt, as well as the need for critical mass in bond issuances. Structural credit investments could provide a solution by allowing smaller entities like SMEs to access the bond market. Educating stakeholders about the benefits of debt and leveraging technology to bundle smaller loans into larger securities could further drive investments in Africa. The role of asset owners, such as pension and social security funds, is pivotal in greening the continent's financial systems. By prioritizing sustainable investments and holding themselves accountable from an ESG standpoint, these large investors can steer the market towards more responsible and green practices. Diallo emphasized the importance of regulatory protections in enhancing transparency and investor safeguards. He cited efforts in the US and Europe since the global financial crisis, where regulatory measures have focused on disclosure, climate risk factors, and investor protection through alignment of interests. Looking ahead, Diallo noted that 2022 is poised to continue the momentum of ESG issuances seen in the previous year. While it is challenging to predict the exact split of these investments in Africa, the market is projected to grow by another 20%, with potentially around 800 million to a billion earmarked for the continent. As sustainable investing gains traction globally, Africa stands to benefit from aligning its financial systems with ESG principles and bridging existing gaps in regulatory frameworks and investor awareness.