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Energy investment in fragile settings to address ESG standards

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The Africa Enterprise Challenge Fund (AECF) has been operating in fragile and post-conflict settings for the last 15 years and has developed an impactful approach to ESG standards which can inform how others operate and consider ESG in fragile settings.

Environmental, social, and governance (ESG) standards are at the forefront of risk management and responsible business operations. In fragile and post-conflict settings, ESG standards are often underdeveloped or non-existent. This does not remove the importance of ESG standards. Instead, it requires initiative from responsible stakeholders to uphold the ESG standards, even when the environment of operation does not enforce doing so.

The work of Africa Enterprise Challenge Fund

The Africa Enterprise Challenge Fund (AECF) is the world’s largest challenge fund, focused on creating impact through the provision of patient capital to small and growing businesses (SGBs) in sub-Saharan Africa (SSA) where markets are not covered by traditional lenders. They focus on the renewable energy and agriculture sectors as these are the sectors with greatest potential for transforming lives across Africa. They also prioritise fragile contexts where conflict, crisis, and trauma have been experienced by local communities, as well as complex operational environments or transitioning economies where hyperinflation, capital controls, and lack of infrastructure constrains development progress. To date, this has included settings such as Somaliland, Somalia, Zimbabwe, Ethiopia, and Mali.

Since launching in 2008, AECF has raised US$ 392 million of catalytic funding, which has served 375 enterprises across 26 countries in SSA, created 27,000 direct jobs, and impacted over 30 million lives in settings where most traditional financing institutions do not go.

Approaching ESG standards amidst fragilities

In many of the fragile and post-conflict settings where AECF operates, the reality and actualisation of ESG standards, including regulatory, enforcement and accountability systems, are often absent or at its infant stages, posing a risk that ESG standards are not always adequately set or adhered to. Yet, AECF considers ESG as the core to their risk management. AECF has aligned themselves with internationally accepted standards, anchored primarily by the World Bank Group’s Environmental and Social Framework and the International Finance Corporation’s Performance Standards on Environmental and Social Sustainability.

National laws and standards, when in place, tend to align with these internationally recognised standards, which minimises conflicting standards and facilitates easier operation at the local level. In fragile settings, however, procedures, policies, and systems are not always clear in relation to ESG and AECF has had to navigate these environments responsibly. AECF sees themselves as a funder that sets an example through their internal ESG standards that developers receiving AECF support have to meet. There are two keyways AECF approaches ESG in such settings:

1. Behavioural change

AECF approaches ESG from a behavioural change perspective. This is because ESG is a relatively new concept in many fragile settings and often requires support to people and institutions to change how they do things. This, naturally, has some level of resistance and takes time to take hold.

At a government level, AECF do not apply pressure to policymakers directly, especially when it may not be a priority for them given the frequent urgent challenges that policymakers in fragile settings are face. Instead, in many fragile settings, AECF builds a close working relationship with government, often closer than in non-fragile settings, which allows AECF to demonstrate the implementation of their internal ESG standards, including through the activities of their investees. This helps set a benchmark and encourages government to make enforcing ESG standards a priority.

In addition, their efforts support building an understanding of and appreciation for ESG standards and how they can be applied in the given context. The relationship they build with governance and the practical example they demonstrate of international ESG standards operating in practice, allows AECF an open door to policymakers when government considers adopting ESG standards.

2. Technical assistance

At a developer level, ESG is still considered as behavioural change, but is actioned through technical assistance. From AECF’s initial screening of applications, there is a self-assessment evaluation that investees are required to submit. This includes checking the project does not fall into any categories on the AECF ‘exclusion list’, which outlines projects that AECF cannot support due to their potential to violate ESG standards, including projects that support terrorist organisations, have humanitarian consequences, or significantly interfere with the quality of the natural environment.

After the self-evaluation, the project then goes through a project specific assessment against the ESG standards, which is done jointly with the investee to ensure mutual ownership of findings. If a risk is identified, the project is not rejected based on that risk, instead AECF’s encourages and works with investees to identify all risks and come up with mitigation measures. These risks and mitigation measures are captured in an environmental and social management plan. This is added as a contractual obligation that is monitored and linked to milestone payments to ensure compliance.

It is also important to note that benefits from complying with ESG standards can take some time to materialise, however, when developers realise these benefits, it can have multiplier effects in the sector through encouraging peers to adopt the same approach. Part of this engagement is to also ensure all AECF staff play a role in ESG enforcement. Therefore, when the investee engages with any of the AECF team members at different levels of project assessment and implementation, all team members of AECF are trained in practical application of ESG standards and play a role in providing technical assistance and ensuring compliance is enforced.

ESG standards are at early stages of development in many fragile settings. Nonetheless, as responsible investors, AECF and other funders have a responsibility to comply with these standards and, where possible, use their examples of doing so to inform the need for procedures, policies, and systems for ESG standards. AECF take an impactful approach in this process, which recognises the complexities of such settings and the need to work closely with policymakers and investees to allow for ESG standards to maximise benefits in their settings.