Meet ... Mike Davies, Director, Kigoda Consulting

We provide succinct insight on industry news and regulatory developments

Meet … Mike Davies, Director, Kigoda Consulting

11 March 2014

SRI-CONNECT is a global marketplace for sustainable investment research & a professional network facilitating communication between companies and SRI investors. Each week, SRI-CONNECT interview a member of the global SRI community about their role in SRI and their thoughts on the industry’s direction.

SRI-CONNECT recently interviewed Kigoda Consulting’s Director Mike Davies. Some extracts are included below but you can find the full interview here.

What factors do international investors have to consider when applying SRI in an African context?

Thematically, the factors that international investors have to consider across Africa are much the same as for any other region. They cover the full spectrum including climate change and pollution, water use management, human rights, labour standards and corruption.

However, the effect that these factors have and the degree of materiality differ from sector to sector, from country to country and even regionally. Africa, for example, is widely believed to be highly vulnerable to climate change. Depending on location, the effects could range from water stress to coastal flooding. In some areas, shifts in rainfall and higher temperatures could improve agricultural yield, but more arid areas are expected to suffer food shortages.

Given the socioeconomic environment of many African countries, some issues are more acute:

Inequality is increasingly highlighted as a barrier to sustainable development. Healthcare issues vary from country to country, but in many African countries HIV/AIDs programmes are particularly relevant.
In addition to the sustainability factors, corporate governance issues can represent a greater risk to investors as corporate governance frameworks outside of South Africa fall well short of best practice.

What would you most like to see ‘fixed’ or ‘developed’ in African SRI in 2014?

Firstly, studies demonstrating that SRI can yield risk-adjusted returns in South Africa and Africa’s frontier economies would be a great step forward. This would go some way to addressing the considerable scepticism that continues to exist over SRI and the potential costs to investors in the local market.

Another issue is so-called “greenwashing”. South Africa is a leader, particularly in emerging markets, in advancing the cause of sustainable and responsible investment. It was the first emerging market country to have an SRI Index. Regulatory changes and initiatives such as the Code for Responsible Investing in South Africa have encouraged the disclosure of relevant ESG information and the integration of sustainability factors into investment decisions.

But, while various asset managers have signed up to these initiatives, implementation remains variable, and in some cases, weak. We need to move beyond the culture of lip service towards SRI and see results from real implementation of the commitments. This will require more transparency on the part of asset managers both in terms of how they are integrating ESG and also in terms of engagement and voting.

Finally, more disclosure by Africa’s listed companies is essential. Outside of South Africa, where Integrated Reporting is the norm, disclosure of material sustainability issues in Africa is weak. In 2012, a review of Africa’s top 100 listed companies outside of South Africa found that less than a third reported on ESG factors regularly. Given the growing international interest in these companies, an increase in the number of companies disclosing ESG information will be an important indication that investors are starting to ask the right questions.

How can investors encourage mining companies to communicate sustainability & corporate governance issues more directly to them?

There’s been a lot of progress by mining companies in the communication of sustainability and corporate governance issues to investors. I think a key issue here is not how sustainability and corporate governance issues are communicated, but rather what issues are communicated.

While there is considerable PR spin in some sustainability reports, the focus on metrics has provided analysts with valuable information on factors such as carbon emissions, resource efficiency and health and safety violations.

But there is still a lack of transparency in other areas, which is detrimental to the sustainability of the sector. The finding in the Africa Progress Panel’s 2013 report that trade mispricing in Africa’s extractive sector could exceed the amount of development aid is an important illustration of this.

Another issue is that while the communication between mining companies and investors is improving, the communication between mining companies and other stakeholders, such as mining-affected communities and employees, is not. This limits effective stakeholder engagement and can ultimately undermine the “social licence to operate”. There are many instances in South Africa where mining companies refuse to provide surrounding communities with the Social and Labour Plan that companies must develop as part of their mining right application.