In Uganda, its typical for most people to struggle with where and how to invest their savings, no matter how small or large the sum maybe. This is partly because few businesses take the time to develop structures that will guarantee long term success.
Think of all the great companies and brands that have come and gone. Firms such as the Co-operative Bank, The Greenland Bank, The Trans-Africa Bank and The Trust Bank have all come and gone with the unforgiving tides of the rough seas of business.
This trend is not limited to Uganda alone. Business failure is not a novel concept as it is hard to precisely predict the future. However, there is a new way to view the prospects of a business by considering how it performs on three aspects: Environmental, Social and Governance (ESG) factors.
ESG analysis has become an increasingly important part of the investment process. ESG issues are often inter-linked and it is difficult to classify an ESG issue as only an environmental, social, or governance issue.
Environmental considerations look at how the company deals with waste management, energy efficiency, deforestation and issues to do with air and water pollution. It is important not only for the prospects of the company itself, but for its customers, suppliers and shareholders that it doesn’t harm the environment where it operates.
Social considerations look at how the company treats people. A company with good customer satisfaction, protection of customer data, gender and diversity, positive employee engagement, excellent community relations, high labor safety and compensation standards and respect for human rights is generally on the right path.
Lastly, but by no means least is observance of governance standards for running a company. It is vital that a company has a full and high value board composition, an audit committee structure, a competitive wage structure and whistleblower protections.
Usually, investors will just look at the profit/economic value of a business. However, experience has shown that this is insufficient. There is need to balance economic value with moral values. A profitable company that doesn’t treat people well and doesn’t consider the environment is often not a good bet for sustained future progress.
There must be a balance between economic and moral value for a company to last for the long term.
During the CMA – Uganda, World Investor Week (WIW) webinars, CFA Alan Lwetabe, the manager deposits at the Deposit Protection Fund (DPF) pointed out that there is marked increase in the number of investors looking at the ESG components of companies before extending their money to any company.
“Expectations are much higher than just two years ago. Previously, governance issues were mainly for value-motivated investors and environmental and social issues were for values-motivated investors.”
“There is growing realization that ESG issues are relevant for all long-term investors – regardless of whether investors are motivated by economic value or moral values,” he explained.
Research by Morningstar on the impact of the market downturn in the first quarter of 2020 due to the COVID-19 pandemic and subsequent lock-down and found that businesses with 51 out of 57 ESG sustainability indices outperformed their counterparts without those indices.
They observed that there has been a “flight to quality” accelerated by the pandemic. This move has benefited ESG complaint firms. “Firms that focus on these standards tend to be more robust, with strong governance, strong balance sheets and sustainable cash flows,” the report said.
If you intend to start a business, if you own a start-up and especially, if you are on a company board or if you are an investor; ensure that the business looks at economic issues and balances them by looking at moral issues that pertain to the environment, society and governance structures.