PROMOTING ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) PRINCIPLES IN AFRICA’S ENERGY SECTOR
INTRODUCTION
The Namibian government has partnered with Hyphen Hydrogen Energy, a leading green energy company, to launch a ground-breaking $10 billion green hydrogen initiative. As part of this initiative, a comprehensive socio-economic development plan has been introduced to the public for consultation. The plan aims to foster the growth of the local community and economy by creating new employment opportunities, developing critical infrastructure, and enhancing the skills of the workforce.[i] Over the next three months, stakeholders will have the opportunity to review and provide feedback on the framework, ensuring that it reflects the needs and aspirations of the Namibian people. This initiative represents a significant step in the global transition to a more sustainable, low-carbon future.
Toni Beukes, who is the Head of Environment, Social, and Governance (ESG) at Hyphen, has stated that the framework will facilitate collaboration between the company and central, regional, and local governments to create solutions that ensure Namibia's renewable prospects are utilised fairly and sustainably for the benefit of the local community.[ii]
ESG AND THE AFRICAN ENERGY SECTOR
For the past three decades, Africa has maintained a consistent energy mix mainly consisting of fossil fuels. Although there have been some successful renewable energy projects, the scale of renewables in Africa is still relatively small. Hydropower is currently the only renewable energy source that makes a meaningful contribution to Africa's energy generation mix.[iii] At the heart of this generation is investor funding and company operations. However, as the clamour for climate change continues to rise considering the negative impacts of the continued use of fossil fuels, there is now a substantial shift towards decarbonizing the energy system to allow for the widespread integration of renewables into the energy mix and the phasing out of fossil fuels.
For African countries whose energy systems continue to run on fossil fuels for energy generation and whose economies are also sustained by the associated exports of these fossil fuels, this presents a problem.[iv] The problem is particularly understood in light of the investment trends moving towards clean energy development, which means less funding and investments in fossil fuels. As a member of the global community, African governments are now pressed with the parallel responsibility of revamping their energy systems by maximising their vast natural renewable energy resources and meeting other developmental goals.[v]
As earlier noted, investor funding and the operations of companies have significantly driven the energy sector. However, with investor funding moving towards sustainability, companies seeking to attract such funding must align their operations accordingly. This alignment simply entails incorporating environmental, social and governance (ESG) principles in their operations. ESG is an acronym for Environmental, Social, and Governance, which are three crucial factors considered when evaluating a company's operational strategy. It goes beyond the traditional focus on profitability and emphasizes the importance of sustainability, social responsibility, and ethical governance. By assessing a company's performance through the lens of ESG, investors and stakeholders can have a more comprehensive understanding of its long-term value and impact on society and the environment.
In addition, to ensure that firms provide value for their investors and other stakeholders (such as the environment, employees, host communities, customers, suppliers, labour unions, and host governments), ESG compliance integrates ethical principles into business operations.[vi]
WHY IS ESG SO IMPORTANT?
In Africa, ESG investing has not been a top priority for corporations and investors, but this is changing. The investment landscape is being impacted by these issues, and companies of all sizes will face greater demands and expectations for sustainable business practices.[vii] Therefore, the importance of ESG lies in its potential to greatly affect the energy industry. A company with poor environmental practices could experience a decline in its stock value, as investors become more aware of the risks associated with its operations.[viii] Conversely, a company that implements good ESG practices may experience a rise in its stock value, as investors perceive it as a more sustainable investment.[ix] Additionally, a company's ability to secure financing may also be influenced by its ESG practices. Banks and other lenders are increasingly considering ESG when making lending decisions as they view companies with good ESG practices as less risky and more likely to repay their loans.[x] Therefore, ESG is becoming increasingly vital in the energy sector, and companies that neglect to consider it may find themselves at a disadvantage in the future.
CONSIDERATIONS FOR PROMOTING ESG IN THE AFRICAN ENERGY SECTOR
The following considerations are necessary to ensure the smooth incorporation of ESG principles into the African energy sector.
Environmental aspects of ESG in Africa’s Energy Sector: Notwithstanding the fossil fuel dominance in Africa’s energy sector, Africa is poised to take the lead in driving the global transition towards a net zero future in terms of energy systems.[xi] This is due to the vast potential presented by the continent's diverse geography, which offers significant opportunities for harnessing solar and wind power.[xii] Additionally, the soils of Africa contain rich deposits of minerals and rare earths essential for developing and implementing clean energy technologies.[xiii] By leveraging these abundant natural resources, Africa has the potential to become a key player in the worldwide effort to combat climate change and transition toward a sustainable future.
To maximise this potential, oil companies in Africa incorporate ESG principles into their business models and operations by investing in renewable energy projects and clean technologies. Additionally, these companies can employ technologies such as carbon capture in their operations. For instance, Chevron has taken a notable step towards promoting clean energy, by constructing Australia's Gorgon carbon capture and storage project. This initiative aims to limit Chevron's emissions by capturing up to four million tonnes of carbon dioxide annually.[xiv]
Social Considerations in Incorporating ESG: Investments into renewable energy and clean technologies take on a social dimension when tailored to ensure sustainable energy access for all. This can be achieved by investing in rural electrification projects and off-grid solutions which have further far-reaching impacts in terms of job creation in the local communities. For instance, the partnership between the Namibian government and Hyphen Hydrogen energy, is one that prospectively proposes to foster the growth of the local community and economy by creating new employment opportunities, developing critical infrastructure, and enhancing the skills of the workforce.
Furthermore, within the company’s internal operations, they must ensure that health and safety concerns are adequately addressed; in addition to other factors such as fair compensation, respect of human rights, and chances to enhance professional skills.[xv]
Governance aspects of ESG: Companies should consider the following crucial ESG factors when it comes to governance: The composition of the Board, shareholder rights, corporate performance metrics, management structure, company policies and values, health and safety, information disclosure, auditing and corporate compliance, data security, and cyber risks, etc.[xvi]
Regulatory Frameworks and Policy Support: Addressing sustainability can be daunting, and there are countless ways to tackle climate action in business. Without guidance, attempting to create a comprehensive strategy can result in significant resource waste[xvii]. To that effect, African governments must engage with the relevant stakeholders and partners and collaborate with local communities and Non-Governmental Organisations to work towards establishing clear guidelines for ESG compliance.
CONCLUSION
The incorporation of ESG principles in Africa’s energy sector is central to building a sustainable and resilient future for Africa. By prioritizing Environmental, Social, and Governance considerations, Africa can address its energy challenges and promote economic growth, social equity, and environmental preservation.
[i] Nicholas Nhede, ‘Hyphen Unveils ESG Framework for Namibia Green Hydrogen Project’ <https://energycapitalpower.com/hyphen-esg-framework-namibia-green-hydrogen/ >
[ii] Ibid.
[iii] PwC, ‘Africa Energy Review 2021’ < https://www.pwc.com/ng/en/assets/pdf/africa-energy-review-2021.pdf >
[iv] Ibid.
[v] Ibid.
[vi] VAULTINUM ‘Checklist for a successful ESG audit’ < https://vaultinum.com/blog/checklist-for-a-successful-esg-audit >
[vii] ‘ESG and Renewable Energy in Africa’ < https://www.investafrica.com/invest-africa-events/esg-energy-dlapiper >
[viii] Vitality, ‘What Is ESG in Energy and Why Does It Matter?’ < https://vitality.io/what-is-esg-in-energy-and-why-does-it-matter/#:~:text=ESG%20in%20energy%20refers%20to,to%20its%20treatment%20of%20workers. >
[ix] Ibid.
[x] Ibid.
[xi] World Bank, ‘Breaking Down Barriers to Clean Energy Transition’ <https://www.worldbank.org/en/news/feature/2023/05/16/breaking-down-barriers-to-clean-energy-transition >
[xii] Ibid.
[xiii] Ibid.
[xiv] Yoana Cholteeva, ‘Five ways the oil and gas industry can mitigate climate catastrophe’ < https://www.offshore-technology.com/features/five-ways-the-oil-and-gas-industry-can-mitigate-climate-catastrophe/ >
[xv] ‘ESG Governance Factors - Meaning, Examples & Improvement’ <https://www.ansarada.com/esg/governance#:~:text=The%20'G'%20in%20ESG%20stands,in%20ESG%20to%20be%20overlooked. >
[xvi] Ibid.
[xvii] Will Basil-Jones, ‘The importance of ESG regulations in facilitating business climate action’ <https://plana.earth/academy/role-of-esg-in-facilitating-climate-action >