PRESCIENT ESG SCORECARD

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Many of these metrics are binary, as in, we view having a policy in place addressing equal opportunities, for example, as positive. Conversely, having no policy addressing these issues would negatively affect the company ’ s social score

We also track nonbinary metrics over time, such as the percentage of women in the workforce or percentage of minorities in management The data for the underlying metrics is cleaned and pre-processed accordingly and feeds through into the scorecard where the social factor score is calculated

The social and environmental and governance risks picked up in our scoring tool are then integrated into our investment process through our credit process Our credit scoring models determine the overall probability of default of the company, and we then make use of an ESG notching process Using the scores from our ESG scorecard, credit ratings are downgraded, left unchanged or uplifted

If the company has a poor ESG score, this then translates into a higher probability of default, which ultimately means higher risk We may still invest in a company that has a relatively poor score, but to do so we would require a higher return to compensate us for that embedded ESG risk we ’ ve identified

We make use of various pricing curves, which helps us determine the minimum required rate of return for any given investment opportunity If the company is sufficiently addressing social issues, they should score highly on their “S” factor, which, depending on their environmental and governance scores, means we would be more willing to invest in that counterparty

We believe ESG factors provide insight into the probability distribution of company returns value-creating ESGrelated practices contribute to company outperformance For instance, a wellmanaged company that adheres to social regulations is less likely to face costs associated with litigation and labour unrest, which may directly affect its short- or long-term performance ESG factors display strong explanatory power over a wide range of securities, offer a positive payoff over reasonably long horizons, have a significantly low correlation with other factors and, above all, make intuitive and economic sense x

Esg In Africa

The investment in, and development of, human capital increases the productive capacities of all the other factors that contribute to a country’ s sustainability This is according to the UN Conference on Trade & Development productive capacities index (PCI)

Simply put, social success is at the centre of a nation’ s overall success and sustainability

In Africa, several countries have seen the benefits of taking a “people first” policy approach, most notably Rwanda, Mauritius and Botswana

The PCI measures a country’ s ability to produce and export a diversified range of goods and services that can sustainably increase its economic growth and development It reflects the effort invested by countries to improve their ability to derive value from their economic structures, human capital and natural capital.

Once the components of the PCI are modelled against the real GDP per capita of each country, over 95% of each country’ s GDP movement can be explained by the changes in the PCI’ s components According to the World Bank, the world’ s 20-year cumulative annual growth rate (CAGR) stands at 1 2% Rwanda, Mauritius and Botswana have delivered comparable CAGRs of 4 1%, 2 5%, and 1 2%, respectively, while South Africa’ s CAGR has been 0 9%

In analysing the decisions made by each of these countries after 2000, it is evident that the investment in human capital is what has allowed Rwanda, Mauritius and Botswana to achieve above-average GDP per capita growth rates This means that the strong relationship between human capital and the above factors is the key to a country’ s ability to achieve a strong productive trajectory The correlation of other sectors such as transport and natural capital (resources such as mining) all have a weaker relationship compared with human capital

Rwanda

Rwanda has a similar history to South Africa Both countries experienced discriminatory policies and laws that caused deep social and economic inequalities, re- quiring significant political and social transitions to correct historical injustices

A significant investment in Rwanda was made to increase the quality of its health care, education and basic public services

According to the World Bank, in 2000, Rwanda’ s combined spending on health care and education was 4 3% of GDP and by 2018 this rose to 7 4% What is notable about the structure of the spending is the focus on its quality Rwanda introduced a competence-based curriculum and teacher training, and prioritised early childhood education This was in recognition that early quality interventions in education improve outcomes. Rwanda’ s PCI increase reflects the knock-on effect of social intervention

Mauritius

Mauritius is the highest-ranked African country in the PCI, at 48th out of 195 countries As a small island country, Mauritius has limited natural resources, in contrast to South Africa’ s resource richness After independence, Mauritius realised that its comparative advantage would lie in creating a diversified skills-based economy. According to the latest national accounts, 69% of Mauritius’ s gross value add comes from the services sector and only 4 3% from agricultural and mining activities The country’ s strong focus on services is underpinned by a skilled workforce

The ability to achieve a high PCI rating with a skills-based economy is unsurprising given the nation’ s historical investment in socially focused infrastructure Mauritius made primary education free and compulsory in 1976 and made significant investments in educational infrastructure and the recruitment of teachers. The strong foundational focus on the social capabilities of its workforce has earned Mauritius a Gini coefficient of 36 8, making the country attractive to the private sector

Botswana

Botswana and South Africa are similar in that they are both considered to be resource-based economies However, according to the PCI, Botswana has made a cumulative gain of 8% more on its human capital measure compared with South Africa Early in the 1970s Botswana invested in health care and education It implemented free and universal education, increasing its literacy rate from 44% to 87% Through its human resource development council and partnerships with internation-

Manka Sebastian

al organisations, the government provides full support to students who want to pursue skills that are imperative to the development of Botswana Its commitment to human capital efforts has allowed it to outpace South Africa marginally on factors such as ICT and an enabling private sector

South Africa

South Africa is ranked 74th in the PCI Its cumulative increase in human capital ranking has been 12% The consequence is that it ranks the lowest in every area, except ICT, when compared with Rwanda, Botswana and Mauritius This is concerning because South Africa’ s allocation to social services is R1.35-trillion according to the 2023 national budget

The difference seems to be in the quality of execution While having the highest literacy rate among the mentioned countries, it has the lowest primary school enrolment and the second-lowest level of completion, according to the World Bank The South African education system faces several challenges, including inadequate funding, teacher shortages, a lack of resources in schools and the challenge of having 11 languages spoken across the population Investing in education should include providing adequate funding for schools, training and retaining quality teachers, and ensuring that all children have access to quality education, regardless of their socioeconomic background

South Africa has the lowest life expectancy at birth among the four countries It is therefore important for South Africa to reduce the significant disparities in access to health care, particularly in rural areas

Investing in health care should include building and improving health-care facilities, ensuring that there are enough health-care professionals to meet the needs of the population, and implementing policies that ensure equitable access to health care for all

The examples of these countries provide a spectrum of lessons and a path for accelerated progress for South Africa through investment in the “S” in ESG South Africa is a hybrid of Rwanda and Botswana in that it is a country with a discriminatory past and a resource-based economy It is also the opposite of Mauritius, which is an island skills-based economy. The focus as illustrated goes beyond increasing access and spend it must be about quality x