African exchanges have experienced muted activity when it comes to listings and capital raisings in the past decade. Will sustainability-themed market activity be the shot in the arm these exchanges need to find their relevance for African economies?
The limited liability company, as powered by financial markets, may be the greatest invention of all time. They have unleashed human ingenuity and productivity, making more of us more prosperous than could be imagined without them. But they can always be better, smarter and more efficient.
Markets need both issuers and investors to flourish, and no active primary market means investment opportunities are scarce. These exchanges should interrogate their relevance in their current form and ask whether issuers and investors are not looking for something different.
To answer this, it is worth considering data from the World Federation of Exchanges, the global industry body for exchanges and clearing houses. Statistics illustrate telling trends in global equity markets showing that over the decade to 2023, the Asian region alone significantly increased its number of listed companies. Calculations include new listings and delistings of companies.
This region saw the number of listed companies increase 24% from 25,881 to 32,166. Notwithstanding the love affair with the so-called Magnificent Seven, exchanges in the Americas were relatively flat during this spell, growing listings by 10% from 10,570 companies to 11,594 companies.
Growing and declining listings by region
Dramatically, Europe, Middle East and Africa exchanges experienced a 35% decline, from 18,802 companies to 12,201 companies. In sympathy with the Europe, Middle East and Africa trend, Africa performed poorly, due to a dearth of new listings and an increase in delistings.
The number of new listings on African exchanges has declined steadily since 2014, from a high of 62 new listings in 2014 to just 13 in 2023. Despite two new equity markets opening during the period, listed companies decreased slightly from 1,289 in December 2014 to 1,264 in December 2023. Capital raised by new listings also has fallen dramatically from more than $2bn in 2014 to just $174m in 2023.
The decline is particularly evident on the Johannesburg Stock Exchange (JSE), the biggest African exchange by market capitalisation and number of listed companies. Since January 2014 the JSE’s equity market listings have dropped from 380 companies to just 284 companies – shedding nearly a quarter of listings. A decade before that, the JSE boasted 434 listings, suggesting a systemic decline rather than a cyclical interruption.
JSE market cap over time
This has been exacerbated by documented endemic corruption in the public and private sectors. All three global ratings agencies have downgraded South Africa to junk status, and South African government bonds have been removed from Financial Times Stock Exchange’s World Government Bond Index, leading to an outflow of passive funds.
Corruption also led to South Africa’s grey listing by the Financial Action Task Force in 2023 for, among other things, “failure to show serious commitment to prosecuting individuals linked to state capture”. Investors both domestic and foreign have moved capital offshore, meaning there is less institutional capital available for companies wanting to expand.
In contrast, there has been an established upward trend in equity market capitalisation globally in the time under review. Global market capitalisation increased from $77-trillion to $112-trillion (although this has not been a steady rise), reaching a high of $121-trillion in 2021.
Despite the World Federation of Exchanges admitting new African members and the launch of new stock exchanges, market capitalisation of African exchanges has not followed the global trend, increasing marginally from $1.18-trillion to $1.38-trillion, with a high of $1.46-trillion in 2022. The depreciation of various currencies against the USD has had a part to play in this decline – but not enough to explain the result.
The steady decline in activity on African equity markets flies in the face of spectacular opportunities in those markets, underpinned by the looming theme of sustainability.
The sustainability solution
The United Nations Sustainable Development Goals (SDGs), introduced in 2015, state that “the SDGs address the global challenges we face, including those related to poverty, inequality, climate change, environmental degradation, peace and justice… it is important that we achieve them all by 2030.” Covid-19 meant that much of the progress made towards the 17 Sustainable Development Goals was reversed in short order, as countries focused on immediate challenges.
The near-magical aggregating power of capital markets hold the key to a great deal of progress towards the Sustainable Development Goals.
Sustainability is as much a challenge as it is an opportunity for exchanges on a continent that is home to glaring inequalities and gaping infrastructure deficits.
African Economic Outlook 2023 confirms that public finances are constrained, and estimates that approximately $1.3-trillion is needed annually to finance Africa’s Sustainable Development Goals by 2030, meaning that “bolstering resource mobilisation from the private sector becomes imperative”.
Capital markets are the ideal means for mobilising private capital, but markets need to offer what issuers and investors want. Increasingly, these are sustainability offerings.
Changing the sustainability story
To date, sustainability has been a debt story, with little emphasis on equities. The past decade has seen a huge increase in the issuance value of sustainability instruments, from $159-billion in 2014 to just over $1-trillion in 2023, partly due to increasing demand from impact investors who want to generate positive measurable social and environmental impact alongside an achievable market-related financial return. Global Impact Investing Network research shows this will continue to grow at a double-digit rate until 2030.
However, stock exchanges are best at leveraging the power of shared ownership. Barriers to sustainability being enticing as an equity asset are real, but surmountable.
The biggest hurdle to cross-border or cross-regional issuance and investment is the lack of a common sustainability taxonomy. Countries and regions have been working to resolve this, as standardisation will achieve for sustainability what International Finance Reporting Standards did for multi-jurisdictional company reporting. In short, we need a sustainability language that we all understand.
There is progress. Africa’s first framework, comparable to the June 2020 European Union Taxonomy Regulation, was published by South Africa in April 2022. In November 2021, the Association of Southeast Asian Nations published its Taxonomy for Sustainable Finance, and the European Union and China completed the initial phase of a project to create a common taxonomy for sustainable finance. The People’s Bank of China stated this “will help promote China-EU green investment and financing cooperation and cross-border activities, while also cutting the cost of green certification for cross-border transactions”.
The Green Economy Mark, launched by the London Stock Exchange, is a comprehensive taxonomy that can be employed by their equity issuers (listed or listing), and provides investors access to sustainability investment opportunities, beyond debt. London Stock Exchange statistics for 2023 show that since 2020, market capitalisation of Green Economy Mark companies and funds grew 26%, reaching GBP172-billion.
Environmental, social and governance investing has experienced pushback as a sustainability framework. Criticism centres on inconsistent metrics, increased work and the associated costs of environmental, social and governance reporting. There is merit in this, and the work being done on taxonomies and frameworks harmonisation speaks to this. Corporate and government issuers have also missed or adjusted committed environmental, social and governance targets, meaning reputational damage.
Environmental, social and governance equity investing requires understanding by issuers of the risks and (just as importantly) benefits that they face. Research shows that companies that improve environmental, social and governance scores benefit from higher valuation multiples and lower costs of capital. Bloomberg reported that in 2023, their Global Aggregate, Green, Social and Sustainability bond indices outperformed their Global Aggregate Index by 423 basis points, delivering a return of 9.93% for 2023.
Where to next?
There is plenty of innovation in the debt space. Initially, sustainability financing as a debt class was green bonds, targeting positive environmental and climate change. The array of instruments now covers various Sustainable Development Goals, including blue bonds for marine and ocean-based projects. The world’s first blue bond was issued by the Republic of the Seychelles in 2018.
The JSE has five social bond issuers, with funds raised for projects with positive social outcomes. Africa’s first gender bond (a subset of social bonds) listed on the Dar es Salaam stock exchange in March 2022. Sustainability-linked bonds are forward looking, performance-based debt instruments issued with linkages to specific Key Performance Indicators and sustainability performance targets, and the cost of borrowing is linked to the borrower’s performance against these targets.
Transition bonds allow borrowers in traditionally high emissions industries to finance their operational and strategic shifts to net zero.
Finally, we have debt for nature or debt for climate swaps, appropriate for countries with fragile ecosystems, which are often highly indebted. Lenders fear that money that should be spent on nature conservation or the effects of climate change will be spent on debt servicing, so a portion of debt is forgiven in exchange for spending on nature or climate action. These aren’t yet listed, although this is just a matter of time.
The preponderance of debt instruments for sustainability has been due to the globally recognised debt frameworks that exist, but this must change to include equities. Although no equity frameworks exist, exchanges that offer equity options gain a competitive advantage.
African exchanges have launched sustainability segments, but only debt. The JSE’s Sustainability Segment, FMDQ Nigeria’s Green Exchange and the Sustainable Bonds segment on the Botswana Stock Exchange are admirable, but not enough.
The confluence of sustainability and equity markets represents one of the keys to unleashing a prosperous future for Africa.
The enterprising spirit is there, as demonstrated by firsts like the Seychelles blue bond. Barriers like taxonomies are being overcome. And our bourses have been in long-term decline. The time is now to regain relevance and unlock potential with sustainable equity solutions on African exchanges. DM