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Analysis > Analysis and Strategy

Southern Africa PE shows ESG credentials

Africa Global Funds
April 29, 2015, midnight
732

Word count: 837

Private equity investors are taking into account environmental, social and governance (ESG) principles, helping to drive best practice, attendees heard at the launch of the first Southern African Venture Capital and Private Equity Association (SAVCA) Case Study Compendium in Sandton, South Africa last week.

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Private equity investors are taking into account environmental, social and governance (ESG) principles, helping to drive best practice, attendees heard at the launch of the first Southern African Venture Capital and Private Equity Association (SAVCA) Case Study Compendium in Sandton, South Africa last week.

The Compendium is a collection of sixteen case studies showcasing how private equity investment is resulting in more sustainable business practices and positive community outcomes.

The positive outcomes illustrated in the report range from job creation and skills development to reducing environmental impact, the introduction of more sustainable operations and, importantly, the positioning of private equity and venture capital owned companies as compelling investment opportunities.

During the panel discussion at the event, Stuart Bradley, SAVCA director and senior partner at Phatisa, said that, in Africa in particular, private equity is not about big money getting bigger – it is about contributing to real business growth and community development.

Fellow SAVCA director and managing director of Edge Growth, Daniel Hatfield, noted that the launch of the Compendium presented an opportunity to create a baseline for measuring the outcomes of ESG and impact investing – investments made into companies or funds with the intention of generating positive social and environmental impact alongside a financial return. “BEE may have catalysed moves toward impact investing in South Africa,” he said.

Now, impact investing is growing, with a focus on more than solid investment, but also on leaving a legacy - Daniel Hatfield “Now, impact investing is growing, with a focus on more than solid investment, but also on leaving a legacy. With this Compendium, we are developing the first formalised measure to assess the impact of responsible private equity investment.”

Keynote speaker, Professor Mervyn King, Chairman of the King Committee on Corporate Governance in South Africa and Chairman of the International Integrated Reporting Council (IIRC), said ESG reporting could no longer be done in a separate silo. Sustainability must be embedded into the long-term strategies of companies and their investors, he said, and ESG factors are crucial in determining a company’s future prospects.

“Since 2005, we have seen companies producing reports in two silos: financial reporting and sustainability reporting. But from the perspective of the allocation of capital, one needs all of this information in integrated reports to address critical questions about how the company will sustain value creation in the long term. Investors must look beyond the outputs of a company, to its outcomes, because how a company is impacting on society and the environment could have a dramatic effect on its bottom line.”

Professor King noted that there were numerous examples of high-profile companies destroying shareholder value owing to their negative impact on communities or on the environment. In a climate where stakeholder expectations have changed and where businesses need to deal with factors such as radical transparency through social media, greater awareness of the global environmental crisis, and needing to make more with less impact, it is no longer a matter of business as usual.

“None of us who are investing other people’s money can ignore these changes. The financial modelling may look good, but it’s also important to understand the drivers of change, what the character of a company is, and how the company enhances the positives and ameliorates the negatives for sustainable value creation.”

It’s not about a big-stick approach. It's about helping portfolio companies understand their impact in the community - Stuart Bradley In line with these changing attitudes in the global market, private equity investors are working to ensure that the companies in which they invest acknowledge the importance of ESG. Phatisa’s Bradley said: “It’s not about a big-stick approach. It is about helping portfolio companies understand their impact in the community, as well as the shifting perceptions of buyers.”

Christopher Clarke, partner at Inspired Evolution, highlighted his fund’s investment in Red Cap, which is developing a portfolio of large-scale wind energy projects across Southern Africa, as an example of one challenge surfacing in the private equity arena: the question of creating realistic expectations in communities where projects such as these are developed.

Mike Goldblatt, investment lead at Metier, added that in long-term projects such as renewable energy and affordable housing development, transparency was important from the outset in order to manage expectations.

Localised private equity investment is stepping up, both in South Africa and into the rest of Africa. This investment is having a transformational impact on micro, small and medium enterprises and the communities in which they operate. Not only is it creating much-needed jobs, but it is raising operational standards, improving corporate governance and efficiencies, and putting African businesses on a par with their global counterparts.

Siya Nhlumayo, partner at Medu Capital, affirmed that this asset class does promote sustainable business and noted the job-led growth achieved at Medipost Pharmacy which was profiled in the Compendium. Bradley agreed, concluding that things are different in Africa. “There is a sense of the legacy beyond profits. We understand that you have to build long-term sustainability into a business to ensure you create value that is recognised by the market.”

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