How aligned are Ghana's capital markets with ESG principles?

The importance of combatting climate change has become increasingly clear in recent years, and sectors across the economy have worked to diversify their offerings to deal with these challenges. For capital markets, sustainable financing has been key. In November 2019 the Bank of Ghana and the Ghana Association of Bankers launched the country’s Sustainable Banking Principles and Sector Guidance Notes, a first step towards developing the segment. More recently, in May 2021 the Securities and Exchange Commission signed an agreement with the International Finance Corporation to help develop green bonds in Ghana.

Sustainable financing requires enterprises to modify their traditional business models and activities to incorporate ESG criteria. While in the past investors have largely focused on returns and the security of investments, many are now considering how the investment or investee company’s business dealings will impact society and the environment.

ESG Considerations

Environmental considerations focus on the implications of climate change and how to preserve the environment. For example, while the returns may be high for an investment in a small-scale mining business that has sites close to bodies of water, the impact that the operations will have on its surrounding community would negate the benefits. In responsible investing such businesses will not receive funding, or before funding is granted, the company will have to review its business model and adopt practices that are not harmful to the environment. Other considerations that investors may consider are the use of fossil fuels and emissions; water consumption, conservation and recycling; air pollution; and waste management.

Social impact focuses on business relationships and how a business relates to its employees and the wider community, including suppliers. A socially responsible business takes good care of its employees and are sensitive to issues of gender, equality and diversity. The business relationship with its surrounding community is also taken into consideration. Businesses that make the effort to improve the lives of people in their communities through foundations, projects and other community engagement activities are highly attractive to socially responsible investors.

Governance, meanwhile, covers the practices and policies of the business in terms of ethics, transparency and accountability. Responsible investors pay attention to the business’ accounting policies; ensure that top-level decision-making avoids conflict of interests; and verify that all stakeholders are transparent and accountable.

Responsible Approach

Socially responsible investing (SRI) and impact investing are subsets of the responsible investing approach. SRI focuses on social values as a key consideration when making investment decisions. SRI investors avoid investing in businesses whose products, services or operations are perceived to harm society, such as gambling or weapons. Impact investors, for their part, seek to generate measurable social impact with their investments. They leverage their funds to directly address pressing social and environmental issues, and traditionally focus on opportunities in health care, education, agriculture and renewable energy.

Investors may not immediately see relatively higher returns as responsible issuers or businesses adopt ESG criteria. However, in the medium to long term these investments will provide sustainable returns and benefits that go beyond the investor, to the wider community. As more investors consider whether a business has implemented ESG before providing financing, issuers and institutions that raise capital will prioritise ESG. This will, in turn, further develop the segment, helping socially responsible investments both deepen and broaden in scope.