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April 01, 2004
Into Africa: The Paradox of Socially Responsible Investing in the Developing Continent
    by Willliam Baue

To support sustainability in Africa, social investors can invest directly outside the SRI community, or else they can pursue community investment and shareowner action.


As a continent of predominantly developing nations with emerging economies, Africa presents a paradox when it comes to socially responsible investing (SRI).

On the one hand, South Africa's Johannesburg Securities Exchange (JSE) requires listed companies to comply with the second King Report on Corporate Governance (or King II), which necessitates adherence to Global Reporting Initiative (GRI) guidelines for reporting. In a sense, JSE's King II mandate stipulates that all companies exceed a minimum bar of SRI standards. Furthermore, JSE recently launched an SRI index.

"The most significant event providing a platform for SRI to take off in Africa is the launch of the Johannesburg Securities Exchange SRI Index," said Paul Kapelus, director of the African Institute for Corporate Citizenship (AICC), a South Africa-based nonprofit nongovernmental organization (NGO) promoting corporate social responsibility (CSR). In 2001, AICC's Centre for Sustainability Investing published a report entitled Socially Responsible Investing in South Africa, perhaps the most comprehensive statement on SRI in Africa.

On the other hand, South Africa is a complete anomaly.

"Unfortunately, there's very little SRI happening outside of South Africa," Mr. Kapelus told SocialFunds.com.

This is reflected in SRI international fund holdings in Africa-based companies. The Calvert World Values International Fund (ticker: CWGVX) invests 1.03 percent of its portfolio in South Africa, as of January 31, 2004. The MMA Praxis International Fund (MPIAX) holds only one African company, New Clicks Holdings (NWCZF.PK) in South Africa. Essentially, African markets are not developed enough to support investment from U.S. SRI funds.

So, investors may have to look outside the SRI community to invest directly in Africa-based companies. However, it is still possible to focus on issues of concern to social investors, such as corporate governance and environmental stewardship.

"The private sector in Africa realizes that the conditions have to be right for investors to come in," said Reed Kramer, CEO of AllAfrica Global Media, which hosts the AllAfrica.com website, a comprehensive information source on Africa. "There are several preconditions to attracting investments, among those are certainly transparency, anti-corruption measures, and good corporate governance, which all go together."

"The issue of corporate governance is being discussed all over Africa, not just South Africa," Mr. Kramer told SocialFunds.com.

Mr. Kapelus of AICC provides an example.

"The Kenyan Capital Markets Authority [CMA] has recently issued corporate governance guidelines and criteria for investing on Kenya's Nairobi Stock Exchange [NSE, ]," said Mr. Kapelus.

Outside investors concur.

"We consider corporate governance as very crucial" when assessing African companies for investment "because corporate governance affects growth," according to Jacob Ajayi, president and CEO of Dallas-based Africa Mutual Fund Corporation (AFMC).

AFMC has investments with a total market value of almost $7.5 million, with 80 percent in equities and 20 percent in bonds. AFMC invests in nine African stock exchanges, including Kenya's NSE, which was up 112 percent in 2003, Egypt's Cairo and Alexandria Stock Exchange (CASE--up 60 percent), and Nigeria's Lagos Stock Exchange (LSE--up 59 percent).

"Corporate governance has always been very solid in companies traded on African stock markets," Mr. Ajayi told SocialFunds.com. "Most big African companies were at one time or another associate with big corporations outside of Africa."

"Because of this outside oversight, the boards of directors in Africa are held to a higher corporate governance standard than the parent companies hold themselves," he explains. "The king can do whatever he wants, but the subjects can't--they must always be on their toes."

While AFMC does not claim to practice SRI, Mr. Ajayi points out that providing equity capital to emerging markets, which often rely on high-interest loans that preclude the consideration of social and environmental issues, may represent a necessary precursor to SRI.

"When companies owe a lot of money, they are running with their eyes closed just to make the debt obligation, so environmental and social considerations will be the last things they think about, but when we provide equity funding, they are able to pay more attention to environmental and social issues," said Mr. Ajayi.

Social investors can also support sustainability in Africa through two other tenets of SRI, shareowner action and community investment. For example, shareowner resolutions addressing the HIV/AIDS pandemic in Africa have been filed at four major pharmaceutical companies: Abbott Laboratories (ABT), Merck (MRK), Bristol-Myers Squibb (BMY) and Pfizer (PFE). PepsiCo (PEP), which tried to block the resolution last year in vain, faces it again this year, while the Coca-Cola (KO) board of directors is taking the opposite tack by recommending shareowners support the resolution with a "yes" vote.

Community investment is another way the SRI community supports social and environmental sustainability in Africa. For example, the Calvert Social Investment Foundation, a nonprofit community investment vehicle affiliated with the Calvert Group, provides approximately $2.5 million in financing to 10 community development organizations at work in Africa. Among the 10 groups supported by the Calvert Foundation are Boston-based ACCION International, the Toronto-based Africap Fund, and Washington, DC-based Oikocredit, or the Ecumenical Development Cooperative Society.

 

 
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