AfCFTA: ESG at the heart of success

• Environmental, social and governance (ESG) impact lies at the heart of the African Continental Free Trade Agreement's (AfCTFA) design, aiming to lift 30 million Africans out of extreme poverty.
• The AfCFTA represents more than a direct financial opportunity for local and multinational organisations through trade. It also represents an opportunity to formalise and improve ESG reporting on the continent.
• Accurate data about workforce diversity measures are key and many African countries have local ownership and empowerment requirements that meet international DE&I reporting requirements.
• While some countries are known for having progressive environmental and conservation policies, these don’t always translate to world-leading environmental performance.
• Companies must be prepared to make an investment in development of the local community and be patient for that investment to pay dividends.

Implementation of the African Continental Free Trade Agreement (AfCFTA) continues to gain traction. New announcements about progress are released almost weekly. The Economic Commission for Africa (ECA) announced on 4 March 2024 that protocols have been concluded on the investment policy, intellectual and property rights and competition policy. The South African government hosted a workshop for special economic zones operators and businesses to empower their participation under the AfCFTA. Nigeria has committed to begin formal exports of locally produced commodities to South Africa, Rwanda, Cameroon and Kenya in April 2024, and Eswatini has announced that it will join the second phase of countries trading under the AfCFTA’s Guided Trade Initiative (GTI). For companies that are considering expansion on the continent, this unprecedented drive for economic growth represents a real opportunity.

Jeanelle Connolly, GBSC Transaction and Accounting Services, SoluGrowth, South Africa.

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Environmental, social and governance (ESG) impact lies at the heart of the AfCFTA’s design, aiming to lift 30 million Africans out of extreme poverty and boost the incomes of nearly 68 million others who live on less than USD5.50 a day. “The AfCFTA must actively guard against the risks of labour exploitation and elite capture,” writes Dr Maxime Houinato, Regional Director for East and Southern Africa, UN Women as the Protocol on Women and Youth in Trade comes under the spotlight next.

According to Deloitte, 92% of S&P companies were reporting ESG metrics by the end of 2020 – just one indicator that ESG reporting is becoming ubiquitous, driven by international legislation across developed nations. Yet this traction is not yet translating to businesses operating in Africa, and according to KPMG’s 2022 Survey of Sustainability Reporting in Nigeria, the Middle East and Africa have an average sustainability reporting rate of only 56% among the N100 companies within their jurisdiction.

So, the AfCFTA represents more than a direct financial opportunity for local and multinational organisations through trade. It also represents an opportunity to formalise and improve ESG reporting on the continent and, in so doing, improve the company’s ability to attract investors, impress shareholders and retain employees.

Because ESG is in a constant state of evolution, there is no single international standard for ESG reporting. From the year 2000’s Carbon Disclosure Project system and the United Nations Global Compact, to the more recent IFRS Sustainability Disclosure Standards from 2021 and the currently leading Global Reporting Initiative (GRI) Standards, companies can choose from a variety of reporting standards to suit their business requirements.

At SoluGrowth, we have noticed keen interest from our multinational clients in Diversity, Equity & Inclusion (DE&I) metrics. Accurate data about workforce diversity measures such as ethnicity and gender – and at which levels they are represented in the business – as well as policies regarding employment equity, training and development, recruitment practices and so on, are critical to these organisations. Fortunately, many African countries have local ownership and empowerment requirements, and these in-country requirements often meet international DE&I reporting requirements as well. Planning for, and executing, skills transfer between skilled international resources and local talent is one of the best ways to ensure business continuity and contribute to DE&I reporting targets.

It gets a little trickier for environmental reporting. While countries such as South Africa and Kenya are known for having progressive environmental and conservation policies, these don’t always translate to world-leading environmental performance. Infrastructure challenges, for example – particularly in energy, transport and connectivity – make it difficult to contain greenhouse gas emissions, much less meet reduction requirements. Yet this, too, represents an opportunity for business operations that hold sustainability dear.

For example, implementing work-from-anywhere workplace management policies can minimise business travel emissions. Investing in renewable energy solutions for the business can support energy efficiency scores and help to keep operations running smoothly where public electricity supplies are unreliable. Investing in LEED certified office space – or a local equivalent like Green Star South Africa – can enable reporting on measures such as water usage or even carbon off-sets.

In developed countries, ESG influences employees' choice of employer and investor decision-making. Measuring and reporting on African operations can support employee value propositions and investor confidence in your home country. Key to this is choosing an internationally recognised reporting framework that aligns to your ESG goals and aligning African operations to these criteria.

One thing is certain – a “get-rich-quick” mindset will not make for successful business in Africa. Businesses that want to leverage the AfCFTA for growth must contribute to the economy and improve local communities in a sustainable way. The questions must be: What does the organisation leave behind? And what does sustainable community upliftment look like for your industry? You must be prepared to make an investment in development of the local community and be patient for that investment to pay dividends.