African markets must improve ESG integration

AFMI 2021 report reveals opportunities for sustainable development

The Absa Africa Financial Markets Index evaluates financial market development in 23 countries, and highlights economies with the most supportive environment for effective markets. The aim is to show present positions of the countries, as well as how economies can improve market frameworks to bolster investor access and sustainable growth.

The index assesses countries according to six pillars: market depth; access to foreign exchange; market transparency, tax and regulatory environment; capacity of local investors; macroeconomic opportunity; and enforceability of financial contracts.

This is an extract from Pillar 3: Market transparency, tax and regulatory environment.

Pillar 3 scores countries on the conduciveness of the regulatory environment for local and foreign investment, gauged through tax incentives, reporting standards and market transparency. On average, scores fell by 8.2 points.

Part of the score deterioration is due to lower marks in capital market development, which gives points based on survey respondents’ assessment of relevant initiatives being undertaken in their jurisdiction. Nigeria moves up one place to the top of the pillar, narrowly overtaking South Africa. Nigeria’s Securities and Exchange Commission is in the process of updating its 10-year capital market master plan, which spans from 2015-25, to reflect changes in market and economic conditions.

Another reason for the overall decline in scores is the introduction of new indicators on environmental, social and governance factors, scoring countries based on policies that support the development of sustainable markets. The index also incorporates climate stress testing as one of the financial stability indicators, an indicator where only South Africa earned points. Ten countries earned minimal points on all three new indicators, suggesting that, despite the prominence of sustainability in financial sector discourse, more needs to be done to integrate ESG into financial policies across the region.

Figure 1. Scores drop due to lower marks on market development and introduction of ESG metrics

Kenya improves the most, moving up five places after scoring better on financial information availability and market development, as well as being one of only six countries that earned full marks on sustainable markets. A survey respondent highlighted the introduction of a securities lending and borrowing framework to boost liquidity in the Nairobi Securities Exchange. The Capital Markets Authority works closely with other stakeholders on different market enhancements, including establishing electronic over-the-counter secondary market trading platforms and developing Kenya’s green bond programme.

Incentivising investment

Mauritius and Morocco tie with top marks for their tax regimes once again. Both countries have a high number of double taxation treaties, and Mauritius has tax exemptions for dividends. The number of tax agreements in 14 countries increased, signalling that countries are recognising the importance of incentivising foreign investment through tax concessions. Zambia entered into 10 additional tax treaties, the biggest increase in the index, helping it move up one place.

Transparency and the availability of financial information help investors gain confidence in markets they plan to enter. Nearly all countries score full marks on the timeliness of financial market reporting, except for Namibia where there are no scheduled reporting requirements. Despite this, respondents in several countries expressed concern about the quality of financial reporting. One respondent in Nigeria noted that, ‘The quality of financial reporting is still low and the poor oversight by regulators has done little to improve this.’ Another respondent from Uganda stated that there is ‘poor enforcement of financial reporting standards for companies as prescribed in the Companies Act.’

Sovereign and corporate credit ratings help investors gauge market environments. The pandemic prompted a wave of negative credit rating actions since its onset, but the index scores countries on whether or not they have a non-default sovereign rating. Angola, Ethiopia, Mozambique and Zambia lose points for not having ratings from all three of the international ratings agencies.

The number of corporate ratings in index countries went down to 179 from 205. The biggest decrease was in South Africa, where 27 corporates lost their ratings, although it still has the highest number with 66. Egypt and Morocco each had four additional corporates rated. Tanzania had two, while Botswana, Ghana and Kenya had one each. The total number of ratings given by regional ratings agency GCR went down to 458 from 523. The number of ratings for Nigeria went up by 15, while Namibia’s increased by three.

Figure 2. Over half of index countries score on ESG indicators

Encouraging sustainable markets

Greening capital markets could be key to attracting investors looking for alternative asset classes, while enabling countries to finance sustainable projects. Some countries have introduced incentives and regulatory guidelines to support the development of sustainable finance products. In certain jurisdictions, listed companies are encouraged to integrate information on ESG factors in their reporting.

Zambia reduced the registration fees for green instruments by 50% and published guidance for the issuance of green bonds. Nigeria issued similar guidance in 2018, prompting the issuance of corporate and sovereign green bonds.

More recently in June, the Bank of Mauritius released guidelines for the issuance of sustainable bonds. One respondent said that ‘The guide on sustainable bonds provides an overview of the requirements and process for the issuance of sustainable bonds and the listing of these bonds on the Stock Exchange of Mauritius… It not only seeks to ensure the integrity of the sustainable financing ecosystem in Mauritius but also to prevent greenwashing.’ The SEM also has a sustainability index that tracks the performance of listed companies based on ESG metrics.

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