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Sustainable and Responsible Banking in Africa

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Sustainable and Responsible Banking in Africa INTRODUCTION Africa is now the world’s fastest-growing continent1. On a regional level, economic growth in Africa has raised its GDP to a level similar to that of to Brazil or Russia. The World Bank estimates that by 2025, most African countries will have reached ‘middle income’ status2. While there are differences within and amongst countries on the continent, generally, social development indicators have improved, poverty has reduced, governance has improved and generally there is more stability. The importance of efficient and well-regulated financial markets that mobilise capital, channel resources into productive investments, manage and diversify risks, mobilise savings and monitor the corporate sector, are all well documented3. Sustainable financial markets enable businesses to grow and are essential for nations’ macro-economic stability. Over the past decade, Africa’s financial markets have been experiencing enormous growth as a result of the efforts made by governments, the private sector and multilateral and bilateral donors. Despite the progress however, much remains to be achieved. The financial systems of most Sub-Saharan African markets are largely dominated by banks where credit is limited, assets are highly concentrated in a few banks and the overall volume of assets is low. Legal and regulatory structures, poorly defined property rights, weak contract enforcement and insufficient creditor protection have also been defined as some of the pertinent problems in the region4. At the same time, more and more questions have been raised in relation to the ways in which banks contribute to society and banks are now faced with challenges in restoring trust. Environmental, Social and Governance (ESG) related issues are posing risks to companies in Africa and this in turn brings risks for their lenders. Poor governance, immature legal systems, social inequality, vulnerable ecosystems and political and social conflict all can pose serious problems to the continent’s businesses, and threaten their investors with material losses. Stakeholder expectations on the roles of financial institutions to manage sustainability issues are increasing. Banks around the world have had to deal with issues surrounding their reputations and rebuild public trust in banks as responsible corporate citizens. The financial crises of a few years ago elevated the importance of good corporate governance with clear connections between well governed companies and better performance and it is widely recognised that social and environmental responsibility can add value to businesses in emerging markets5. However, limited ESG disclosure by companies in the region also poses a challenge to effectively integrating sustainability issues into financing. It is widely recognised that Small and Medium Enterprises (SMEs) are the engine of growth across countries. However, most banks have often remained wary of lending to SMEs. According to the OECD ‘a lack of innovative financial instruments geared towards SMEs’ is one of the main obstacles to more efficient and effective financial markets in the region6. Sound, inclusive and sustainable financial markets are essential to building shared prosperity and ending poverty. With investments into Africa expected to significantly increase in the near future, encouraging sustainability will have multiplier effects for later investment. Financial institutions that take an integrated approach to lending and incorporate governance, environmental and social standards, as well as embed resource efficiency and inclusive lending will be more robust and competitive. Banks are recognising that to build trust they need to be seen to be a more responsible citizen within the communities in which they operate and can also make pro-active social investments aligned with their business objectives. Leading banks in Africa recognise that they must contribute to improving the business climate in the region and integrating and addressing corporate responsibility and sustainable business practices and develop inclusive banking approaches. IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector in developing countries. The Sustainable Business Advisory (SBA) unit of the IFC works with companies to adopt environmental, social, and governance practices and technologies that create a competitive edge, which can help to transform markets and enhance benefits to communities. The SBA team in Africa is working with businesses and their stakeholders to create long term value for companies, communities and the environment. It is engaging with companies across industry sectors and helping to share and disseminate good practices for more sustainable business. The SBA Financial Markets Business line, working together with other departments of IFC aims to address this problem focusing on: standards; resource efficiency; programmes in support of SMEs as well as community investment strategies for financial institutions. Through its Advisory Services, IFC has scaled up the sustainable provision of financial services in developing countries by addressing systemic issues such as corporate governance and the introduction of environmental and social standards. 4 Sustainable and Responsible Mining in Africa | A Getting Started Guide Sustainable and Responsible Mining in Africa | A Getting Started Guide 5 WHY THIS GUIDE? This guide has been prepared to assist financial institutions in Sub-Saharan Africa (SSA)i in understanding sustainability issues and to share examples of good practice. This guide has been prepared based on a review of literature and a scan of practices in countries which were prioritised by IFC for the research and supplemented by a scan of disclosure of 15 banks, some interviews with companies, IFC and World Bank staff, and consultants in the industry. A focus group discussion took place in February 2013 which helped to shape and inform this report. The banking sector is diverse and includes commercial and wholesale banking (provision of consumer banking, leasing, consumer banking products, venture capital for small and medium enterprises), investment banking (raising capital in capital markets and advising on mergers and acquisitions as well as private equity and project finance) and asset management (custody of assets for clients). The focus of this guide is geared towards commercial and wholesale banking but also touches on issues related to project finance and private equity. It should be noted that any viewpoints expressed in the text are those of the consultant tasked with preparing this and may not necessarily reflect those of the IFC. This guide is not exhaustive but is intended to be introductory and will be more relevant to managers or companies who are new to working in sustainability and need a basic understanding of the issues in a Sub-Saharan African context. It includes SBA’s framework for working with companies and examples of practices which address sustainability through standards, resource efficiency, supply chains and community engagement. i While ‘Africa’ is sometimes used in this report the focus is on Sub-Saharan Africa 6 Sustainable and Responsible Mining in Africa | A Getting Started Guide Sustainable and Responsible Mining in Africa | A Getting Started Guide 7 SUSTAINABLE AND RESPONSIBLE BANKING – WHAT ARE WE TALKING ABOUT? Sustainable development is about ‘meeting the needs of current generations without compromising the needs of future generations to meet those needs’7. The financial sector plays a different role to other industry sectors in relation to sustainable development. First and foremost is a concern from stakeholders in relation to how financial institutions manage social and environmental risks and protect social and environmental capital in their own lending and, in addition, how they adapt products and services to those in need of banking and finally what additional actions can be taken to contribute positively to the communities in which they operate. Sustainable and responsible banking is about balancing financial, social and environmental issues, to ensure the Box 1: Standard Bank’s Sustainability Report states: success of the company as well as the sustainable livelihoods of the communities. It involves integrating social and “We must contribute to improving the business climate in environmental criteria into lending decisions, ensuring good this region and increase our relevance in the communities we governance, building more inclusive lending which supports operate in. Increased trade and investment is an important small and medium enterprises (SMEs) and those at the base driver of economic growth and job creation on the continent, of the economic pyramidii, protecting the environment, being with Standard Bank being well positioned to take advantage transparent, and acting with integrity. Companies that are of the financing opportunities that stem from these trade better positioned to manage the social and environmental and investment flows. We also play a positive role through risks and challenges in business will be better able to deliver facilitating relationships between the public and private sectors sustainable growth and returns. Box 1 provides an excerpt and in providing services, capital and advice to governments. We from Standard Bank’s website on their contribution to socio- contribute to infrastructure development, capacity building and economic development in Africa8. the operation of government through sharing
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