African SMEs often lack the funding to put formal CSR policies in place, but doing so could help them to achieve greater economic success and boost their impact on development. As well as providing funding, the role of an impact investor such as I&P is to support these businesses in improving their environmental, social and governance practices.
There is a widespread view, both in mature markets and in Africa, that entrepreneurs heading up small and medium-sized enterprises (SMEs) are not interested in social responsibility and that this remains the preserve of big companies. African SMEs indeed rarely have formal corporate social responsibility (CSR) policies and the financial and human resources required to implement them. As a result, their ESG practices can be sometimes lax.¹ Yet the African entrepreneurs with whom we work are often as committed to their country’s development as they are to running a successful business. This dual motivation tends to produce entrepreneurs who are admirably courageous and tenacious, since setting up a business in the countries in which we operate is both risky and challenging. The commitment of these entrepreneurs is reflected in initiatives – especially social – such as better living conditions for employees and projects benefiting local communities.
SMEs can be economically successful and have significant local impact. In Africa, there are many promising opportunities for creating combined social and economic value. Paradoxically, some of these opportunities are linked to the constraints under which SMEs operate in Africa. CSR initiatives represent innovative solutions to overcoming such obstacles. One very good example of this is the Cameroonian company ITG (box 1), which specialises in new technologies. The company has set up a training centre in partnership with the Polytechnic University of Douala to address the problem of hiring qualified IT staff. A well-designed CSR strategy in tune with a company’s size and the issues it faces can be a highly effective performance driver.
Investisseurs & Partenaires (I&P) is one of the leading private equity investors in African SMEs. As an impact investor, its goal is to maximise the economic, environmental, social and corporate governance impact of its investments while maintaining a financially sound business model.
Promoting ESG initiatives
I&P’s core remit is to promote a new génération of responsible entrepreneurs who will have the greatest impact on their local stakeholders. To this end, I&P seeks to promote ESG strategies that can be fully integrated into a company’s operations and will generate economic value. Managing key risks, such as workplace injuries, comes down to the need for good management. And seizing positive-impact opportunities, such as employee training, will improve a company’s performance, especially in the medium and long term.
In practical terms, reviewing an investment project means spending a substantial amount of time with the company concerned in order to gain in-depth knowledge of its operations and the entrepreneur. We draw up a report of the company’s ESG practices that includes, for example, an assessment of remuneration and employment contract practices, working and safety conditions at the company and, where pplicable, at its suppliers, and its systems for processing effluent and waste.² Then, based on this report, we rate the ESG risks and their management. The aim is not to penalise SME’s practices but rather to work with the entrepreneur to identify areas for improvement, especially with the help of existing projects. We establish priority action points for the main challenges and everything is formalised in an ESG action plan. Our partner companies legally undertake to implement and monitor this plan, and a contact person is appointed to oversee the process. While this legal obligation is well accepted, it is not the most effective way to improve business’s efforts in this area. The choice of committed entrepreneurs and I&P support has a far greater impact on the success of this approach.
ESG priority areas for I&P
As part of our ESG report, we make sûre that the SMEs guarantee their employees decent work as defined by the International Labor Organization (ILO). This is a key area of analysis which covers in particular job creation, salary levels, social security, working conditions, labour rights and social dialogue. Worker safety, which can sometimes be neglected in SMEs, is prioritised in annual ESG action plans (for example, compliance of equipment with safety regulations and safety awareness workshops).
In addition to a company-by-company approach, I&P has implemented a strategy at the portfolio level. Our current network comprises some fifty entrepreneurs in Africa and so we are trying to pool initiatives across all disciplines to produce ‘turnkey’ solutions.
In terms of health insurance, state systems in countries in which I&P is involved offer very low coverage levels with just half of our partner companies providing employees with complementary health insurance systems. We are currently studying the possibility of creating a group health insurance solution for our partner SMEs.³ The goal is to make it easier for SMEs to implement such initiatives by having collective access to more favourable conditions. Ultimately we want this incentive system to lead to universal coverage for all employees of our partner SMEs. As regards the environment, we produce an annual assessment of the carbon footprint of all companies in our latest portfolio. This analysis identifies the main sources of CO2 emissions at both the company and portfolio level and encourages companies to think more about vehicle management, supply practices, processes’ energy efficiency and the use of renewable energies. Energy savings are of great interest to entrepreneurs in countries where electricity is extremely expensive. For projects that are major power consumers, an analysis of energy challenges – produced with the support of a specialist firm – identifies opportunities for improvement. For manufacturing projects, energy-saving equipment can be incorporated into the investment plan. On a modest scale, the goal is to ensure that SMEs can step up their operations without increasing their carbon emissions.
Another key part of our analysis is the ripple effect of an SME’s operations on suppliers and distributors. SMEs obtain their supplies locally, far more so than multinationals, which have international networks. The contribution of an SME can go well beyond a simple ripple effect, especially in the agricultural sector. It can play a key role in creating and structuring a new local sector (Box 2).
In a context where supply reliability is not always guaranteed, organising and supporting local producers is critical to a company’s development. This support often exceeds the extent to which an SME can take action by itself, and in such cases partnerships with non-profit organisations can be the answer. I&P therefore plays a support role in setting up these partnerships and in seeking financing. Lastly, standards and certifications (Fairtrade, for example) demonstrate a company’s greater responsibility towards suppliers and boost access to international markets. I&P’s technical assistance budgets enable us to provide joint financing to help introduce certification, which is an added incentive for partner companies.
Key success factors
For investors, the rigorous choice of a committed entrepreneur and a socially relevant project is the number one factor for success. ESG initiatives must be part of a holistic strategy and be driven by the manager. This is therefore an issue that must be addressed as early in the project appraisal process as possible in order to formalise all options. In terms of financing, this means quantifying certain investments (such as the use of renewable energies) or certain costs (such as setting up health insurance). The planned ESG initiatives must be included in a ‘road map’ along with a timetable. This sets long-term goals and also defines short-term priorities. If investors serve on a company’s board of directors, they can check that governance bodies are paying regular attention to the CSR policy. To be sustained, ESG initiatives must have a positive impact not only on stakeholders but also on the company itself: the benefit of integrating ESG initiatives into a company’s opérations is often obvious but carries more weight when quantified. While some initiatives, such as energy savings, produce quick, direct and easily quantifiable benefits, other impacts are more difficult to measure. Establishing a system to monitor the rate of absenteeism and employée turnover, for example, can provide useful feedback about the success of social initiatives, albeit more indirectly. When it comes to manage certain risks, ‘not doing something’ can result in prohibitively costly consequences, such as tax reassessment penalties or the financial consequences of an accident in the event of non-compliance with safety rules.
Given the lack of human and financial resources, technical assistance mechanisms offered by some investors are particularly useful for implementing ESG initiatives in SMEs. Because I&P has access to grants from the European Investment Bank (EIB) and FISEA (an investment fund held by the AFD Group and managed by Proparco), it can cofinance a variety of support missions being carried out by independent specialists.
The success of the ESG strategy also requires good governance. When I&P takes a stake in a company, it immediately sets up a shareholder representative body to manage the company in a concerted manner. Such shared governance helps some entre preneurs feel less isolated: they remain in charge of day-to-day operations while I&P pursues a minority investment strategy. Good governance also involves impeccable integrity at all levels of the company. No matter how complex the situation, I&P will not tolerate corruption or bad practices, even if it means giving up an investment.
Establishing a formalised approach to ESG within I&P has proved highly beneficial. But this didn’t happen overnight: taking account of every aspect of ESG for each investment was a gradual process that requires the raise of staff members’ awareness and the progressive adoption of the methodology by the investment team. When it comes to selecting and monitoring investments, our policy regarding ESG and impact is now included in all procédures related to the various investment process stages. Specialist members help with the practical application of this approach, not only in memos sent to the various committees but also within the committees themselves. The team also receives regular training. In addition, it is useful for employees’ performance in this area to be part of their annual appraisals and potentially reflected in their salaries.
As a signatory to the Principles for Responsible Investment (PRIs), a United Nations initiative, I&P reports annually on its ESG measures. The first items assessed under these PRIs were very positive and confirm that our policies are in line with international best practice. But we are determined to go further: we are currently looking into ways to have an independent, broader assessment made of our ESG approach and impact.4 This assessment would be based on methodology as well as implementation.
¹ Reasons include for instance the lack of formal employment contracts,random compliance with environmental regulations, absence of formal governance bodies or lack of anti-corruption and anti-fraud policies.
² I&P has based its investment project analysis and monitoring guidelines on the methodological framework defined by the UK development finance institution CDC Group. For high-risk ESG sectors, I&P applies the standards and practices of the International Finance Corporation (IFC).
³ This feasibility study is funded by the technical assistance budget granted by FISEA for the IPAE fund.
References / ILO, 2013. The extension of social security and social responsibility of multinational enterprises: An exploratory study. ESS – Document No. 35. Available at http://www.ilo.org/wcmsp5/groups/public/—ed_emp/—emp_ent/—multi/documents/publication/wcms_213756.pdf