Acorn Ideas

Issue No. 50, October 2017

Regional Environmental, Social and Governance (ESG) Trends Affecting Frontier Market Investments

Investors have traditionally looked for distinctive growth opportunities in markets where they can confidently understand and manage risks. Not surprisingly, this has kept investors’ focus on the world’s largest economies – the OECD and BRIC (Brasil, Russia, India, China) countries, which represent 84% of the world’s economy. Recent attention to the “Next Eleven” recognizes the potential of some of the largest economies in developing regions. But what about the smaller yet emerging (“frontier”) markets of the world? Consideration of the potentially extraordinary investment opportunities that lie beneath the Next Eleven could reveal exceptional gains... with manageable risks.

While concerns over cultural conflicts, environmental liabilities, corruption, and weak governance dissuade many investors, recent economic and demographic trends in some frontier markets are providing unmatched and often untapped opportunities for growth – both presently and for the foreseeable future. Learning how to better understand and manage the environmental, social and governance (ESG) risks of working in these countries may create important new pathways for finding and capitalizing on previously unappreciated, higher yield investments.

Consider Sub-Saharan Africa – a region that has traditionally received little attention from private investors and asset managers, South Africa excepted. The countries of Sub-Saharan Africa are known for crushing poverty, armed conflicts creating security and human rights concerns, cultural norms that support corruption and thwart transparency, existing production practices that cause environmental damages, create unsafe worker conditions and allow human rights abuses in the labor and supply pools. These challenges, combined with weak inconsistent and unpredictable governance from closely held national power bases, understandably create barriers for foreign investment.

With Africa accounting for half of world’s projected growth through 2030, an exceptionally young population and above-average economic growth, the emerging economies of the continent are becoming more difficult to ignore for investors looking for new opportunities and high multiples.

Four Rising Stars
According to the International Monetary Fund (IMF), Sub-Saharan Africa is home to six of the world’s ten fastest growing economies over the past decade. Growth has been particularly robust in a number of the region’s countries that are least dependent on extractive resources.

Cote d’Ivoire (CIV), Kenya (KEN) and Ethiopia (ETH) have seen their economies grow at 5% or more annually since 2010, and, together with Senegal (SEN), each is projected to grow at 6-8% in the coming years compared with an average global growth rate of just under 3% in 2017. And Cote d’Ivoire and Senegal have among the lowest inflation rates in the world – below the rate in the US.

Region-wide, foreign direct investment is increasing, yet private investment in these fast-growing, non-resource-intensive countries remains a small percentage of their economies. Why?

ESG Risks Deterring Investors
Financial journalist Antonio Oprita explains that “Frontier markets are a big gamble, as they often are plagued by political and social crisis and their markets are not as liquid as those of more established emerging markets.” Investors are also clearly wary of the corruption in these countries, which not only stifles sustainable economic growth but can implicate even well-intentioned ventures in reputation-breaking interactions and lawsuits for years.

To help expose and reduce corruption, Transparency International maintains a country-by-country rating of a Corruption Perception Index (CP Index). The CP Index reveals a particularly interesting pattern for the fast-growing non-resource-intensive countries of Sub-Saharan Africa – each of the four rising stars, with the exception of Kenya, has seen an improvement in its CP Index ranking relative to the other 172 countries ranked while also delivering better than average GDP growth. Cote d’Ivoire and Senegal have seen a very substantial improvement in the perceived level of corruption in the past five years.

Note: Corruption rank refers to Transparency International’s Corruption Perception Index. A rank of 1 is the least corrupt country.

It’s difficult to demonstrate a causal relationship between enhanced transparency and economic growth1, but the complementary pattern sends a signal to investors who are looking for breakthrough opportunities – frontier markets can yield exceptional opportunities where ESG risks can be managed.

Those investors who have ventured into frontier markets often focus on political risk indexes as an indicator of the soft but critical factors impacting investment success in this region, but societal and governance risks are hard to predict. And automated tools for assessing ESG risk are simply too limited in their ability to calibrate for the ecological, cultural, human rights and related nuances that are becoming so critical to selecting good investments and capturing sustainable growth. The good news is that increasing experience and emerging methods (see examples below) are enabling more reliable understanding of ESG risks in frontier markets, as well as how to manage those risks over time to promote safe, sustainable performance of exceptional investment opportunities.

Higher Returns through Superior Understanding of ESG Risks
ESG risk assessment methods and practices that can yield credible risk profiles to support sustainable investment decisions are beginning to take root and be successfully tested in frontier markets worldwide. Despite this, some investors still rely heavily on automated, data-driven models that provide quick profiles for evaluating ESG risks. Why aren’t these enough? Here are three important reasons:

  • Missing the Hidden Gems - Oversimplifying and ESG risks will limit investors’ ability to find and maintain the truly safest of those outlier opportunities that may generate exceptional growth. Investing in remote areas of the Democratic Republic of Congo would score low on most existing ESG screening methods given the reputation for violence, human rights abuses, and corruption. But a qualified, on-the-ground approach to managing these risks in DRC could open tremendous opportunities for investment in mobile telecom 2 and off-grid energy production in this country of 75 million. Trained anthropologists, sociologists and environmental scientists working in integrated teams with in-country observers are using established, rapid assessment techniques to develop a complete and reliable profile of ESG risks that serve as a clear basis for investment decision-making. These include, for example, social or human rights due diligence assessment, stakeholder mapping and community perception surveys.
  • Flying Blind - Relying on automated models to characterize ESG risk leaves investors with far too much uncertainty for understanding how these factors may influence the success or failure of an investment. The ability to access networks of trained, on-the-ground teams to provide understanding of the local context is critical. The failure of international brands entering emerging markets is routine, largely for cultural reasons, from Nestle in Africa to Coca Cola in Asia. Even MPESA, a highly successful mobile banking company from East Africa, failed when entering new markets Africa – a reminder that each country has unique social and cultural characteristics.
  • Holding on Too Long - Treating these risks as static determinants of an investment decision can lead investors to hold onto assets that are quickly becoming liabilities. BHP Billiton was slow to provide adequate attention and response to the scale of community opposition that would lead to its eviction just 10 years after it bought the Tintaya Mine asset in Peru in 1996. Extractive industries are engaging experts to help them design and apply participatory monitoring programs and impact benefit agreements 3 with host communities that not only maintain clear and honest lenses on evolving social tensions, but help to build trust and on-going social license to operate in even the most difficult cultural environments.

ESG risks can be messy and fraught with uncertainty – enough so that they can easily deter investors from exceptional growth opportunities in frontier markets of Sub-Saharan Africa. While countries like Senegal, Cote d’Ivoire, Kenya and Ethiopia provide outstanding growth opportunities for investors, the ESG risks in these and other frontier markets are more material than in developed economies. But investors that are better prepared to assess and manage ESG risks, understand the local context, and leverage local teams will be better poised to earn exceptional returns, both through risk minimization and identification of value creation opportunities in frontier markets.


Acorn International, LLC is a boutique ESG risk consultancy that helps investors and industries assess and manage host country risks. It does so by forming, building the capacity of and directing partnerships with in-country experts in >70 frontier market countries worldwide. The consultancy maintains a staff of senior social and environmental experts, and has master service contracts in place with seven of the world’s largest energy companies.

1 See an argument by the World Economic Forum for how corruption hinders economic growth at

2 A 2013 article estmated that only 25% of the DRC population own cell phones.

3 Ironically, BHP instituted an impact benefit agreement with representatives of local communities near Tintaya – it was just too little, too late.


Acorn International Notes

Acorn Notes is a series of periodic papers to share ideas regarding EHSS and sustainability management for international industry.

Issue 49 -Dr. Chris Anderson on the Extractives Sector
Issue 48 -Regional Non-Technical Risk Trends Affecting Oil and Gas / Energy Investments
Issue 47 -Social Risk Trends in Mexico's Energy Industry
Issue 46 -Hi-Tech for Non-tech
Issue 45 -Culture – Understanding its Impact on Business and Community EngagementNot Too Technical
Issue 44 -Not Too Technical
Issue 43 -Myanmar – Another step in the transition
Issue 42 -Meeting expectations in human rights reporting - a delicate balance
Issue 41 -FPIC Is Here To Stay
Issue 40 -A Multi-Stakeholder Partnership in Ghana: Marine and Fisheries Management
Issue 39 -The Colombian Social Responsibility Framework: An Evolving Model
Issue 38 -Social Network
Issue 37 -A Community Look-back on Ebola
Issue 36 -Ghana and the Voluntary Principles: Implementing the Human Rights Protection Framework
Issue 35 -Inundation
Issue 34 -Colombia: Local Hiring Requirement for O&G Industry
Issue 33 -Mature and Frontier Mining Geographies: Where does Greater Risk (and Reward) Reside?
Issue 32 -Local Content in Mining: Increasing Expectations and Potential Solutions
Issue 31 -Fast Money Beware: Non-Technical Risk Due Diligence
Issue 30 -Social and Environmental Performance - Considerations for Difficult Commodity Price Environments
Issue 29 -A Window into the Opposing View - Stakeholder Concerns about Oil and Gas in Mexico
Issue 28 -Why Non-Technical Risks Matter to the Mexican Apertura
Issue 27 -Equator Principles:Drivers of Sustainability in the Oil and Gas Industry?
Issue 26 -The Transparency Tightrope: Examining UNEP’s New Access to Information Policy
Issue 25 -July 2014: Bouston
Issue 24 - July 2014: Land Tenure and Property Rights - Where Legal Compliance May Not Be Enough
Issue 23 - May 2014: 3 Things I Learned in Mexico - Non-technical Risks in the Oil Industry
Issue 22 - April 2014: Capacity Building on Stakeholder Engagement
Issue 21 - March 2014: Above-ground Facilities and Stakeholder Engagement: Deploying the 'CAC'
Issue 20 - March 2014: A Starting Point for Shared Equity
Issue 19 - March 2014: What It Takes to Run a Great Consulting Firm
Issue 18 - February 2014: Considering Human Rights - Trends and Lessons in Oil and Gas Impact Assessments
Issue 17 - June 2013: Managing Environmental Health in International Development Projects
Issue 16 - January 2013: Integrating Environmental and Social Performance throughout the Project Lifecycle
Issue 15 - January 2013: The State of Shale Play in 2013
Issue 14 - August 2012: Building Environmental and Social Governance in Host Countries
Issue 13 - May 2012: Human Rights and Business: A New Era
Issue 12 - February 2012: Extractive Industries Confront Pressure for Greater Transparency
Issue 11 - January 2012: Key Updates to the IFC Sustainability Policy and Performance Standards
Issue 10 - June 2011: Oil & Gas and NGOs: New Rules of Engagement?
Issue 9 - February 2010: Annual Study of Sustainable Development Priorities
Issue 8 - January 2009: Annual Study of Sustainable Development Priorities
Issue 7 - May 2008: Top Ten Lessons Learned About Health Impact Assessment
Issue 6 - January 2008: Annual Study of Sustainable Development Priorities
Issue 5 - September 2007: Results of web forum with our International Partners
Issue 4 - January 2007: Annual Study of Sustainable Development Priorities
Issue 3 - May 2006: Suggestions and tips for safe international travel
Issue 2 - January 2006: Annual Study of Sustainable Development Priorities
Issue 1 - November 2005: The Top 10 “unspoken" criteria for determining the success of EIAs


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