ESG: Non-financial disclosures must be embraced by African banks, here’s why

Jul 3, 2024 8:14:44 PM

"Today’s investors are increasingly seeking commitments to non-financial disclosures and sustainable reporting from banks, as well as greater accountability and transparency when it comes to the disclosure of the social and development impacts of the projects that are financed by the banks they choose to work with," writes Sandra Villars

ESG: Non-financial disclosures must be embraced by African banks, here’s why

By Sandra Villars, Partner at Oliver Wyman

To achieve its Sustainable Development Goals by 2030 and unlock the potential of its youthful population, Africa needs $7-trillion, with $6-trillion of this dependent on private sector investment, including banks and financial institutions.

Remember, sub-Saharan Africa is currently home to more than 1 billion people and it’s estimated that by 2050, half of the continent’s ever growing population will be under the age of 25. For those young people to become an active part of the economy and to share in global prosperity, Africa needs to unlock capital on a large scale.

Today’s investors are increasingly seeking commitments to non-financial disclosures and sustainable reporting from banks, as well as greater accountability and transparency when it comes to the disclosure of the social and development impacts of the projects that are financed by the banks they choose to work with.

While advocacy groups have developed disclosure guidelines, they are mostly voluntary. However, companies that do not comply with these reporting protocols and standards may face challenges in loan and investment approval processes, including from funding sources such as pension funds and development finance institutions.

Although African banks understand the importance of improving their reporting and social, environmental, and governance track records, many are not taking the necessary measures to address this need. A recent poll by Oliver Wyman of board members, banking executives, financial services investors, and heads of sustainability found that 70% believe that the quality of a company's non-financial disclosure reflects management's commitment to ESG issues, while two-thirds agree that the reputational benefits of voluntary reporting generally outweigh any reputational risks.

Despite these statistics, half of the respondents in the poll cited a lack of prioritisation at the leadership and executive levels as the main obstacle to implementing a comprehensive non-financial disclosure framework. Additionally, 77% of the respondents were unable to provide concrete examples of non-financial reporting best practices within the African banking landscape.

Bloomberg Intelligence reports that ESG-focused funds hold $41-trillion in managed investments, but African banking institutions will be unable to access any of this without a shift in mindset. Banks should view reporting a company's social and environmental assets and liabilities not as a burden, but as an opportunity to control their own narrative and as a way to access significant investment.

Steps that banks can take to start the process of improved reporting include:

Banks should create a customised ESG strategy with targets and metrics that align with each organisation's vision and mission in order to improve reporting. There is no one-size-fits-all approach for African institutions, and frameworks such as the Global Reporting Initiative and Task Force on Climate-Related Financial Disclosures can serve as useful roadmaps. Banks must also be flexible and adaptable to a rapidly evolving reporting environment
To clarify roles and responsibilities, banks must have a comprehensive governance and operating structure that addresses challenging "who does what" questions, even when resources are limited. It is crucial to form a diverse and cross-functional team with C-suite backing
This team should consist of members with expertise in ESG issues who are empowered to make decisions. If the bank lacks internal specialised resources, it can engage qualified third parties. Additionally, many African banks must acknowledge that their sustainability functions and reporting areas require additional resources, such as recruitment, training, and IT investment
To ensure accountability for achieving ESG goals, banks should establish ongoing, coordinated governance through senior committees. Banks should also consider aligning the achievement of critical ESG targets with existing incentives, such as by modifying metrics in performance review frameworks
To develop an appropriate strategy, banks should take inventory, track, and benchmark their ESG efforts against peers, which can be challenging but highly insightful. Banks should also consider seeking independent reviews and ratings voluntarily. Additionally, banks should make an inventory of the steps they are already taking across the business, including community initiatives, green products, fair-lending practices, consumer protection, and anti-money laundering compliance programmes
It’s also important to make connections and build networks. Although financial non-disclosure can be intimidating, there are resources available to provide support, ranging from voluntary programmes to worldwide initiatives such as the Glasgow Financial Alliance for Net Zero (GFANZ), a group of prominent financial institutions dedicated to expediting the decarbonisation of the economy

Embracing novel processes and methodologies poses a significant challenge for institutions, necessitating an initial transformation in mindset. In the context of non-financial reporting, the repercussions of African banks failing to adhere to these standards would be nothing short of a costly catastrophe that would not only jeopardise their own financial stability but also threaten to impede the broader progress of the continent.

Therefore, it becomes crucial to recognise that the overall value of a company should extend beyond mere financial considerations, catering to the interests of not just funders and investors, but also society and the planet.

Find out how you can get involved in the next edition of ESG: The Future of Sustainability