If you’re reading this, there’s a very good chance you’re already familiar with the acronym ESG.
Standing for “environmental”, “social”, and “governance”, it’s a constantly evolving standard that emphasizes the importance of doing business in a way that positively impacts the environment, society, and stakeholders.
In essence, it’s 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.
While ESG has its critics (on both sides of the aisle), it’s philosophy has gained near-universal acceptance in investor circles.
In fact, a 2022 study by asset management firm Capital Group found that 89% of investors consider ESG issues in their investment approaches. Additionally, there are around US$2.5 trillion in ESG assets under 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.
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 study by accounting firm Moore Global found 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’t just have an easier time attracting investment, they’ll also be better poised for growth, sustainability, and profitability.
Why ESG works
Before looking into how African fintechs can put together the kind of ESG frameworks that encourage growth and investment, it’s worth taking a deeper look at why it makes good business sense (outside of the already strong investment case) to invest in ESG.
One of the most powerful is the African environmental context. According to the Africa Development Bank, 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’t just helping mitigate the effects of climate change on the planet, it’s also helping ensure a future environment in which it’s more likely to survive and thrive.
Of course, ESG isn’t 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.
Choosing to hire diversely has obvious societal benefits: for example, it means that previously marginalized 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 organization those hires climb, the greater the accrued benefits are.
According to the Boston Consulting Group, companies with above-average diversity in their management team report 19% higher innovation revenues than those with lower diversity.
Supporting micro, small, and medium-sized businesses also benefits fintech. For starters, they make up a large customer base (particularly for B2B-focused fintechs) on the continent. In sub-Saharan Africa, there are approximately 44 million SMEs.
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.
Growing financial inclusion in the region, meanwhile, is absolutely critical. At present, just 43% of people in sub-Saharan Africa have a formal bank account. That makes it difficult to access things like vehicle, home, and business loans that can be used to grow income.
It also means that any savings the unbanked have can’t be used for wealth-generating investments. Across the region, fintechs are helping people overcome those barriers by expanding financial services such as digital banking, microfinancing, and digital payments to people who wouldn’t previously have access to them.
The final pillar within the ESG framework focuses on governance and this is often an overlooked and misunderstood pillar. I am an avid advocate and loud champion of strong corporate governance workings, but I am often asked how strong governance arrangements actually help an organization thrive and grow.
Many people equate good governance with rigid structures and bureaucratic processes, but I respectfully disagree with these assertions.
The truth is that a solid corporate governance foundation, coupled with the right corporate culture, has exactly the opposite effect. It frees an organization from confusion and unnecessary work. It allows for decisions to be made more freely by people who have been empowered to take decisions.
It ensures that key decisions are placed with and taken by the most appropriate individuals within an organization. And it allows for a dynamic, organized, and agile organization.
Examples of good governance practices every fintech should have in place include transparent decision-making processes, ethical behavior, and accountability to stakeholders. This, in turn, helps build trust with customers, investors, and (increasingly stringent) regulators; fostering long-term sustainability and growth.
Building the right frameworks
Of course, claiming to be ESG compliant and having an effective ESG framework are two different things. While there are a variety of approaches that can be taken in doing so, at MFS Africa we take a three-pillared approach that focuses on “setting”, “measuring”, and “reporting” the impact we have in local communities and across the African continent.
During the “setting” phase, we outline the parameters which will guide the organization in its ambition to build a strong impact-driven organization with a clear ESG approach. Having done that, we measure against those parameters and then report transparently on those measurements.
While each organization should tailor its ESG framework according to its individual needs and context, we’ve found this model to be the one best suited to us. It’s helped us grow to be the kind of organization that can connect more than 500 million mobile money wallets across 40 African countries, supporting over 300,000 agents and providing access to financial services for millions of Africans.
A policy worth getting right
Ultimately, despite dire predictions from the extremes of the political landscape, it’s unlikely that ESG will go away soon. Even if the label disappears, it’s now so entrenched in the way that investors do business, that it’ll remain an important consideration.
And that’s because the companies that do ESG well share many of the hallmarks of good, investable companies. As the African fintech sector continues to grow, its participants should ensure they’re taking a proactive and positive approach to ESG.
This will transform the sector beyond, “doing” good to “being” good – good for the economy, good for society, and good for stakeholders.
