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The global dialogue surrounding Environmental, Social, and Governance (ESG) criteria is accelerating at pace. Across all industries, leaders are trying to integrate ESG principles into their operations to mitigate risks, foster sustainability, and meet their stakeholders’ expectations.
In some regions, the conversation is relatively straightforward. But in the case of Africa, the challenge of integrating ESG principles is not a simple one.
Africa stands at an exciting crossroads. On the one hand, the continent has been experiencing burgeoning economic growth, demographic shifts, and attracting increasingly diversified investments.
On the other hand, issues such as poverty, inequality, inadequate infrastructure, and political instability stand firmly in its way.
How can credit insurers integrate ESG in Africa?
Integrating ESG into credit insurance practices requires a holistic approach. Insurers need to evaluate the environmental footprint of the projects they insure, assess the social impacts on local communities, and strengthen their governance mechanisms to ensure they can comply with regulatory requirements and international standards.
A crucial step for this is fostering close engagement with stakeholders throughout the entire lifecycle of a project, from underwriting through to claim management, ensuring ESG principles are integrated at every point.
Regarding credit insurance in Africa, the sector faces inherent challenges related to infrastructure, governance, and resource constraints. However, these challenges sit alongside immense opportunities for innovation, collaboration, and inclusive growth.
To progress toward ESG integration, policymakers, regulators, and industry stakeholders across Africa need to create an enabling environment that promotes sustainable finance, encourages responsible investment, and incentivises performance.
This will require strong regulatory frameworks, transparency and disclosure, risk management capacity, and stakeholder partnerships that focus on best practices.
ESG at the forefront: Key themes from ExCred Africa
In November 2023, senior leaders of major banks, corporates, multilateral development banks, development finance institutions, export credit agencies, and insurers from throughout Africa came together in Johannesburg for the annual ExCred Africa conference.
Among the many conversations at the conference, a common thread was the emergence of ESG as a key influence on trade finance decisions in the continent.
ESG implications were extensively deliberated. While the need to explore fresh opportunities for African climate finance was widely agreed upon, it was matched by important discussions around the challenges that the ESG criteria pose, particularly in the context of oil and gas exploration and production across the continent.
Oil-rich nations such as Mozambique, Tanzania, Uganda, and Côte d’Ivoire all face hurdles in securing financing for refineries and infrastructure due to the environmental impact associated with oil exploitation.
For these countries, the ESG standards may be perceived as unfair obstacles to economic growth, due in part to the historical disparity in industrialisation between African nations and their Western counterparts.
Conversely, countries like Mauritania and Senegal, blessed with significant offshore gas reserves, find themselves in a more favourable position within ESG frameworks. The prospect of renewable energy projects further enhances their appeal to Western financiers, as is evidenced by a recent €300 million project supported by the Italian ECA, SACE.
ExCred delegates also raised concerns about the accessibility of trade finance, particularly for Africa’s small and medium-sized enterprises (SMEs).
Despite the pressing need to address the trade finance gap, some delegates expressed apprehension that ESG standards could perpetuate financial exclusion by further hindering SMEs’ access to credit – exacerbating the challenges they are already facing.
Also discussed was the urgency of addressing fundamental issues such as electricity access, sustainable cooking practices, and the imposition of additional compliance burdens that could deepen the trade finance gap.
Sparking the ESG debate: The East African Crude Oil Pipeline
A current example of the interconnectedness of ESG factors in shaping sustainable development outcomes is the East African Crude Oil Pipeline (EACOP).
Designed to transport crude oil from landlocked Uganda to the Tanzanian port of Tanga, EACOP has sparked debate, with concerns about its ESG implications. This is a particularly contentious issue, as there are implications not only at a project level, but for Africa and the future of ESG more broadly.
With the proposed crude oil pipeline set to traverse sensitive ecosystems such as protected areas and water sources, concerns have been raised over its negative environmental impacts including degradation, deforestation, and biodiversity threats. The EACOP project also crosses paths with marginalised communities who may be at risk of land dispossession, displacement, and socio-economic disruptions.
StopEACOP a vocal environmental advocacy movement – has emerged in opposition to this project.
StopEACOP has demanded greater transparency, consultation, and accountability from the project by mobilising local communities, civil society organisations, and international stakeholders.
In January 2024, StopEACOP announced that a coalition of 28 insurers and reinsurers unanimously agreed not to offer insurance for the project, due to the environmental and human rights risks.
However, with Uganda and Tanzania forecasting significant uplift in local employment, economic, and direct foreign investment opportunities, there are fears StopEACOP’s activism will push the project to insurers with little regard for ESG.
EACOP reminds us how important it is for credit insurers operating in Africa to adopt a proactive approach to integrating ESG principles.
With a critical role to play in facilitating trade and investment by mitigating risks associated with non-payment, political instability, and economic uncertainty, credit insurers must now lean in and respond to the expectations of stakeholders, including investors, regulators, and broader society, to align their practices with ESG principles.
Taking a nuanced approach to ESG in Africa
The ESG principles present Africa with a unique opportunity to advance sustainability, resilience, and social impact. However, while the ESG principles have the potential to drive responsible investment and sustainable development, their implementation must consider the unique socio-economic challenges that African countries face.
In essence, integrating ESG principles in Africa must balance these ideals with the economic reality.
For Africa to successfully navigate the many unique complexities of integrating ESG, all stakeholders must collaborate to ensure critical financing mechanisms remain accessible, equitable, and supportive of the region’s broader development objectives.
By safeguarding against emerging risks and integrating ESG principles into their practices, credit insurers can play an outsized role in Africa’s future prosperity. Critical to this is their ability to embrace the much-needed innovation and collaboration that will ultimately unlock Africa’s full potential.