ESG, circular economy next business frontier

LOCAL firms need to pay attention to issues around Environmental Social Governance (ESG) and circular economy in order to be more attractive to investors, experts say.

This comes as the concept has become an indispensable element of discerning global investor’s decision making process prior to committing their money into any investments.

This came out at the Financing Climate Change adaptation conference hosted by the Business Weekly in conjunction with the Institute of Chartered Account Zimbabwe (ICAZ) and Financial Markets Indaba in Harare on Wednesday.

The symposium covered a number of topics that dealt with climate adaptation, particularly in the critical areas of energy, agriculture, infrastructure as well as the new area of interest and ESGs Circular economy is an emerging concept that encourages environmentally-friendly policies in businesses where the model of production and consumption involves reusing, refurbishing and recycling existing materials and products as long as possible in contrast to the traditional linear methods characterised by the “make and dispose’” idea.

Also, topical at the conference last week was the need to adopt ESG analysis, a fastgrowing concept that has become an increasingly important part of the investors decision making process.

Investors are now, more than ever before, incorporating ESG data into the investment process to gain a complete understanding of the companies in which they invest.

They are increasingly applying these non-financial factors as part of their analytical process to identify material risks and growth opportunities.

The world’s natural state continues to deplete given the use of fuels and mechanisms that lead to the emission of toxic greenhouse gases, which have been cited as major contributors to climate change.

This explains growing calls for firms to adopt circular economy practices, which promote climate change adaptation measures like using renewable energies and recyclable products.

African Sustainability Consultants chief sustainability consultant Tawanda Muzamwese said there was a need to ditch the traditional ways of production and consumption, which promoted the use of inputs that proved to be detrimental to the longevity of the natural state of the earth.
“We are used to what we call a linear economy, which is an economy that is used to
extract natural resources, (take, make, dispose) and this has been the main cause of our
problems.

“So when we begin to talk about the circular economy we are now talking about how we
can reuse certain products, where we bring some of these products back into the cycle
instead of making disposal,” said Mr Muzamwese.
   
Mr Muzamwese also said times had changed and investors were now keen than before to
scrutinise the environmental, social, and governance issues in an entity, particularly
those they had intentions to invest in.

“Traditionally, businesses have been focused on profitability (only), but now it has
shifted, financiers right now are no longer looking at the financial plausibility of your
business only, whether Government or private sector, one of the conditions for funding
is that the project should be environmentally and socially compliant,” added Mr
Muzamwese.

He also bemoaned companies and sections of the Government that have not taken
measures to curb issues around child labor and modern slavery.

“On the social side, many African countries have neglected the social aspect of projects,
some of the emerging issues include child labor, if our projects are using child labour it is
difficult to get finance, when we talk of ESG it means we are not going to allow child
labor throughout our value chain, it also means we are also going to promote gender
mainstreaming”.

ESG metrics are not commonly part of mandatory financial reporting, though companies
are increasingly making disclosures in their annual report or in a standalone
sustainability report.

Welcome Mavingire, the Managing Consultant of Intellego Investment Consultants
lauded the decision to extend the initiative to the private sector widening it from being
majorly a Government programme.

He weighed in on the conversation saying the ESG concept was almost similar to the
usual operation in securities where the quality of operations by companies are
interrogated.

“In capital markets, we have been talking about the quality of earnings of any company.
It’s still the same issue but putting the private sector at the forefront of this whole thing
changes the whole dimension.
   
“This previously used to be a government commitment but we now see it shift to say the
private sector must be on the forefront. I think it changes the mindset across the whole
investment arena because when everyone starts seeing that this is where the money is
going they start taking all those issues seriously,” said Mr Mavingire.

Economist and academic at Kulm Research Dr Alfred Mthimkhulu indicated that there
were high chances to involve the local capital markets in the initiative given that local
securities have been lately chaining out a string of products.

“It is an exciting time for our local capital markets especially given the ESG conversation
going on , we should be reasonably confident of products that will come on stream to
harness capital so that we can steer this conversation and scale whatever is happening on
the ground,” said Dr Mthimkhulu.

There lately have been growing initiatives designed to monitor value chain processes to
curb malprsactices like modern-day slavery, the latest key concept on the social side of
ESG, where individuals who work barefooted, getting slave wages and other similar
malpractices have all been classified as “modern slavery”.

Numerous institutions, such as the Sustainability Accounting Standards Board (SASB),
the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial
Disclosures (TCFD) are working to form standards and define materiality to facilitate
incorporation of these factors into the investment process.-The Herald