If
you’re reading this, there’s a very good chance you’re already familiar with
the acronym ESG. Standing for “environmental”, “social”, and “governance”, it’s
a constantly evolving standard that emphasises the importance of doing business
in a way that positively impacts the environment, society and stakeholders.

In
essence, it’s the idea that companies can grow and profit while doing good and
it encourages businesses to be more transparent about how they add to or create
value for their society, community and/or stakeholders.

While
ESG has its critics (on both sides of the aisle), it’s philosophy has gained
near-universal acceptance in investor circles. In fact, a 2022 study by asset
management firm Capital Group found that 89% of investors consider ESG issues
in their investment approaches.

Additionally,
there are around US$2.5 trillion in ESG assets under fund management. And with
rising interest rates putting a dampener on investment (including in Africa),
scoring well on those metrics may become more important than ever.

But
for African fintechs the case for ESG goes beyond becoming investable.
Implemented properly, the principles behind ESG make a great deal of business
sense.

As
an illustration of how much of a boost it can be to a business, a study by
accounting firm Moore Global found that companies with strong ESG principles
saw their profits grow 9.1% in the three years between 2019 and 2022.

In
other words, the fintechs that get ESG right won’t just have an easier time
attracting investment, they’ll also be better poised for growth, sustainability
and profitability.

Why
ESG works

Before
looking into how African fintechs can put together the kind of ESG frameworks
that encourage growth and investment, it’s worth taking a deeper look at why it
makes good business sense (outside of the already strong investment case) to
invest in ESG.

One
of the most powerful is the African environmental context. According to the
Africa Development Bank, for example, Africa is the continent most vulnerable
to climate change.

Any
fintech that understands this and works to ensure that its operations are
sustainable isn’t just helping mitigate the effects of climate change on the
planet, it’s also helping ensure a future environment in which it’s more likely
to survive and thrive.

Of
course, ESG isn’t just about the environment. Its second social pillar has an
equally important role to play. For fintechs this can look like ensuring that
they hire diversely, support MSMEs, and contribute positively to employment in
areas where it’s needed most.

But
perhaps even more importantly, it also includes financial inclusion. Choosing
to hire diversely has obvious societal benefits: for example, it means that
previously marginalised groups are able to participate in the economy at much
higher levels. But it also comes with significant business benefits. And the
higher up the organisation those hires climb, the greater the accrued benefits
are.

According
to the Boston Consulting Group, companies with above-average diversity in their
management team report 19% higher innovation revenues than those with lower
diversity.

Supporting
micro, small, and medium-sized businesses also benefits fintechs. For starters,
they make up a large customer base (particularly for B2B-focused fintechs) on
the continent. In sub-Saharan Africa, there are approximately 44 million SMEs.

These
enterprises not only serve as the engine of many economies across the African
continent, but they also represent a segment historically ignored and
under-served by the more traditional financial services players.

By
providing products and services which speak directly to the pain points of
micro and small enterprises, fintechs can not only tap into a fast-growing and
profitable segment but can have a positive impact on the overall economic
development and prosperity in the country in which they operate.

Growing
financial inclusion in the region, meanwhile, is absolutely critical. At
present, just 43% of people in sub-Saharan Africa have a formal bank account.
That makes it difficult to access things like vehicle, home, and business loans
that can be used to grow income.

It
also means that any savings the unbanked have can’t be used for wealth-generating
investments. Across the region, fintechs are helping people overcome those
barriers by expanding financial services such as digital banking,
microfinancing, and digital payments to people who wouldn’t previously have
access to them.

The
final pillar within the ESG framework focuses on governance and this is often
an overlooked and misunderstood pillar. I am an avid advocate and loud champion
of strong corporate governance workings, but I am often asked how strong
governance arrangements actually help an organisation thrive and grow.

Many
people equate good governance with rigid structures and bureaucratic processes,
but I respectfully disagree with these assertions. The truth is that a solid
corporate governance foundation, coupled with the right corporate culture, has
exactly the opposite effect.

It
frees an organisation from confusion and unnecessary work. It allows for
decisions to be made more freely by people who have been empowered to take
decisions. It ensures that key decisions are placed with and taken by the most
appropriate individuals within an organisation.

And
it allows for a dynamic, organised, and agile organisation.

Examples
of good governance practices every fintech should have in place include
transparent decision-making processes, ethical behaviour, and accountability to
stakeholders. This, in turn, helps build trust with customers, investors, and
(increasingly stringent) regulators; fostering long-term sustainability and
growth.

Building
the right frameworks

Of
course, claiming to be ESG compliant and having an effective ESG framework are
two different things. While there are a variety of approaches that can be taken
in doing so, at MFS Africa we take a three-pillared approach that focuses on
“setting”, “measuring”, and “reporting” the impact we have in local communities
and across the Africa continent.

During
the “setting” phase, we outline the parameters which will guide the
organisation in its ambition to build a strong impact-driven organisation with
a clear ESG approach. Having done that, we measure against those parameters and
then report transparently on those measurements.

While
each organisation should tailor its ESG framework according to its individual
needs and context, we’ve found this model to be the one best suited to us. It’s
helped us grow to be the kind of organisation that can connect more than 500
million mobile money wallets across 40 African countries, supporting over
300,000 agents and providing access to financial services for millions of
Africans.

A
policy worth getting right

Ultimately,
despite dire predictions from the extremes of the political landscape, it’s
unlikely that ESG will go away soon. Even if the label disappears, it’s now so
entrenched in the way that investors do business, that it’ll remain an
important consideration.

And
that’s because the companies that do ESG well share many of the hallmarks of
good, investable companies. As the African fintech sector continues to grow,
its participants should ensure they’re taking a proactive and positive approach
to ESG.

This
will transform the sector beyond, “doing” good to “being” good – good for the
economy, good for society and good for stakeholders.

(Dele-Giwa is the General Counsel & Head, GRC at
MFS Africa.)