Role of Finance & Investment on ESG

ESG stands for Environmental, Social, and Governance (ESG), referring to three central factors in measuring business sustainability and societal impact of an investment in a company or business. ESG are becoming key criteria in determining the future financial performance of companies (return and risk). Historically, decisions of where financial assets would be placed were based on financial returns, but in these past few decades this has changed significantly.
The current trend is that there has been a new form of pressure applied by environmental groups, social activists and those who promotes good corporate governance leveraging the power of their collectiveness to sensitize investors and financiers and encourage companies and capital markets to incorporate environmental, social and governance challenges into their day-to-day decision-making.
It is from such kind of initiatives that the United Nations Sustainable Stock Exchanges (UN-SSE) came about, which is a peer-to-peer learning platform for exploring how exchanges, regulators and companies can enhance corporate transparency on performance on ESG issues while also encouraging sustainable investments. The UN-SSE, to which the Dar es Salaam Stock Exchange (DSE) is a partner exchange, is overseen by UNCTAD, UN-Global Compact, the United Nations Environment Programme Finance Initiative (UNEP FI) and the Principles for Responsible Investment (PRI).
In a bigger context, these sensitivities inform us that unless concrete actions and measures are taken, we may be headed to the wrong end – as a humanity. From the environmental perspective – threat of climate change and depletion of resources has grown; many investors are now making clear decisions as to which factors of sustainability issues should go into their investment choices. The issues often represent externalities, such as influences on the functioning and revenues of the company that are not exclusively affected by market mechanisms. As with all areas of ESG, the breadth of possible concerns is vast (e.g. Green House Gases emissions, biodiversity, waste management, water management, etc). In these past few months, we have observed on what has happened with the fires in Amazon, California, Australia and then of course the melting glaciers in Pakistan – not a good sign at all.
On the social aspect, investors and financiers’ concerns are on the level of diversity as well as inclusion in companies’ recruitment and management policies. There is a growing perception that the broader the pool of talent open to an employer the greater the chance of finding the optimum person for the job. Innovation and agility are also seen as the great benefits of diversity. And, of course there also issues of human rights and consumer protection. Investors are becoming even more keen on these issues prior to making their investment and financing choices.
On corporate governance, concerns are on the rights and responsibilities of the governance and management of a company—its shareholders, its board of directors and the various stakeholders in that company. There are also matters of management structures, executive and employees’ compensations as well as employees’ relationships.
As matters stands, the three domains of social, environmental and corporate governance are intimately linked to the concept of responsible investment (RI). RI began as a niche within the investment area, serving the needs of those who wished to invest but wanted to do so within ethically defined parameters. But, in recent years it has become a much larger proportion of the investment market and decisions. Such that, we are now experiencing situations where global investors in DSE demand that listed companies produces ESG Reporting (in addition to financial reports), which forms a core part of their investment decision process. In this aspect, we, as exchanges are expected to play a major role in supporting enhanced disclosures on ESG practices by listed companies.
Now, this conversation doesn’t end on how exchanges facilitates capital raising from “responsible investors” – it also involves financiers such as banks and financial institutions and how they relate to who they finance. As it were, the financial system includes commercial banks, insurance, capital markets, Saccos, sector regulators, etc. These market players and regulators plays a pivotal role in capital allocation, managing risks and mobilizing savings and investments. However, the financial system is dependent on other sectors of the economy. For instance, the bulk of companies listed on the DSE consist of commercial banks which majorly lend to agriculture, real estates, manufacturing, tourism, mining, and transportation sector. The inter-dependence of financial system on these sectors puts the stability of the entire financial system at risk due to credit risk exposure and systemic risk arising out of the effect of climate change, social irresponsibility or poor corporate governance behaviors. The shift of mindset, raising awareness and being conscious on ESG issues and how they impact investment and finance is a matter of necessity.

Why It might be time to buy stocks, and how (II)

This is further to the article I wrote two weeks ago. Based on that article many are still questioning; what good is a bargain if the market, as it were, has not recognized its value thus far? What if prices will never come back to their pick days? Why is it that it seems like everyone is fleeing the market? Well, much as I hate looking simplistic, but, these are normal mood swings. This is how markets behaves, there are always ups and downs – depends on the circumstances that causes such swings. By the way, this is not the case for our market only – it is for many developing markets over these past few years – just look across. And so, if you look at the East Africa region for example, the oldest, largest, liquid and sophisticated market is currently year-on-year down by Kshs. 272 billion (equivalent to TZS. 5,500 billion) – that is, it has recorded a drop-in market capitalization and so investors have lost about Tanzania equivalent TZS 5.5 trillion in paper wealth in these past 12-months. And if you decide to look on the trend during these past six-years, their market has tanked over half of its value since year 2013. Now, let us take a look on the DSE market performance, in the form of graphs, during the same period:

Even though investors have lost TZS 2,381 billion of paper wealth in terms of total market capitalization at the DSE in these past six-years, but in terms of domestic market capitalization the market has gained TZS 3,086 billion during this period. Well, so what? Total market capitalization is the total valuation of the market being a factor of number of listed securities and prices performance for these securities. For example, the DSE total market capitalization is a combination of volumes and prices of all 28 equity listed securities (including 7 cross-listings), while Domestic market capitalization is a basket of 21 domestic listed securities’ volume and prices. Hence, the decline in total market capitalization could be argued to have emanated from the decline in prices of cross-listed companies whose primary listing markets are Nairobi Securities Exchange and London Stock Exchange, as well as decline in prices for the domestic listed securities.
At the same time the increase in domestic market capitalization is mainly a result of the increase in the number of listed securities (there has been 10 new listed securities during this 6-year period) and whose impact has outweighed the decline in securities prices, as can be seen in the table below:

So, why should you invest? Reasons are many, but let us look on a few – GDP growth is expected to continue above 7 percent annually, interest and exchange rates are expected to decline, or at least stay the same and the political environment is envisaged to remain calm. Furthermore, bargains seem plenty – dividends yields are trailing at an average of 5 percent, etc.
As I indicated in the previous piece, if you consider yourself a “value-investor”, not a mere speculator, then just don’t be swayed by every opinion you hear and every suggestion you read. History records that whenever there are political, economic or social transformations — businesses and investments suffer hiccups, as they always have, but then comes long term prosperity for those who stay put. And so, by staying invested during this period – or by investing more – value investors can keep their portfolios on track in pursuit of their long-term goals. Sooner, or later the market will mirror the macro-economic strengths, bounces back and benefitting those stayed invested.
A final word: invest and stay invested in shares of a company not because you want their share prices to go up, but because of your motive to own that business. Value-investors have been successful not because they intended to be good in stock trading and speculating on stocks movements, but because they stuck with successful businesses.

Why It might be time to buy stocks, and how (II)

This is further to the article I wrote two weeks ago. Based on that article many are still questioning; what good is a bargain if the market, as it were, has not recognized its value thus far? What if prices will never come back to their pick days? Why is it that it seems like everyone is fleeing the market? Well, much as I hate looking simplistic, but, these are normal mood swings. This is how markets behaves, there are always ups and downs – depends on the circumstances that causes such swings. By the way, this is not the case for our market only – it is for many developing markets over these past few years – just look across. And so, if you look at the East Africa region for example, the oldest, largest, liquid and sophisticated market is currently year-on-year down by Kshs. 272 billion (equivalent to TZS. 5,500 billion) – that is, it has recorded a drop-in market capitalization and so investors have lost about Tanzania equivalent TZS 5.5 trillion in paper wealth in these past 12-months. And if you decide to look on the trend during these past six-years, their market has tanked over half of its value since year 2013. Now, let us take a look on the DSE market performance, in the form of graphs, during the same period:

Even though investors have lost TZS 2,381 billion of paper wealth in terms of total market capitalization at the DSE in these past six-years, but in terms of domestic market capitalization the market has gained TZS 3,086 billion during this period. Well, so what? Total market capitalization is the total valuation of the market being a factor of number of listed securities and prices performance for these securities. For example, the DSE total market capitalization is a combination of volumes and prices of all 28 equity listed securities (including 7 cross-listings), while Domestic market capitalization is a basket of 21 domestic listed securities’ volume and prices. Hence, the decline in total market capitalization could be argued to have emanated from the decline in prices of cross-listed companies whose primary listing markets are Nairobi Securities Exchange and London Stock Exchange, as well as decline in prices for the domestic listed securities.
At the same time the increase in domestic market capitalization is mainly a result of the increase in the number of listed securities (there has been 10 new listed securities during this 6-year period) and whose impact has outweighed the decline in securities prices, as can be seen in the table below:
NAME Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Today
TOL 310 550 760 800 780 660 660
TBL 8,100 14,090 14,800 12,000 14,000 12,900 11,400
TATEPA 650 650 650 650 600 120 120
TCC 8,600 16,740 15,950 11,500 16,800 17,000 17,000
SIMBA 2,020 4,500 2,670 1,600 1,200 640 600
SWISSPORT 2,680 5,010 7,350 5,450 3,500 2,660 1,600
TWIGA 2,660 4,000 3,000 2,290 1,460 2,060 2,000
DCB 490 720 570 400 380 340 340
NMB 2,620 3,400 2,500 2,750 2,750 2,340 2,340
CRDB 280 430 405 250 160 150 100
PAL 475 470 470 470 470 400 400
MAENDELEO 600 600 600 600 600 500 490
SWALA – 700 500 500 500 490 490
MKOMBOZI – 1,500 1,000 1,000 890 800 780
MWALIMU – – 665 520 500 500 500
MUCOBA – – – 400 400 400 400
YETU – – – 600 600 600 550
DSE – – – 1,000 1,120 1,400 1,080
VODA – – – – 850 800 800
TICL – – – – – 385 385
NICOL – – – – – 270 175
So, why should you invest? Reasons are many, but let us look on a few – GDP growth is expected to continue above 7 percent annually, interest and exchange rates are expected to decline, or at least stay the same and the political environment is envisaged to remain calm. Furthermore, bargains seem plenty – dividends yields are trailing at an average of 5 percent, etc.
As I indicated in the previous piece, if you consider yourself a “value-investor”, not a mere speculator, then just don’t be swayed by every opinion you hear and every suggestion you read. History records that whenever there are political, economic or social transformations — businesses and investments suffer hiccups, as they always have, but then comes long term prosperity for those who stay put. And so, by staying invested during this period – or by investing more – value investors can keep their portfolios on track in pursuit of their long-term goals. Sooner, or later the market will mirror the macro-economic strengths, bounces back and benefitting those stayed invested.
A final word: invest and stay invested in shares of a company not because you want their share prices to go up, but because of your motive to own that business. Value-investors have been successful not because they intended to be good in stock trading and speculating on stocks movements, but because they stuck with successful businesses.

Pre-IPO Financing for a Sustainable growth of Capital Markets

In our quest to develop, we use various financing tools to finance our economic agents, businesses and enterprises. As we know it, our business enterprises are financed via personal sources, and largely by borrowing from financial institutions – while all aspects of equity financing beyond family/friends for business enterprises is less considered. Rightly so, because of limited in awareness, but also given business growth cycle and maturity of businesses with the economy. And, because of this agents like the DSE has introduced capital raising platforms to enable Start-ups and SMEs to access public funding via issuance of financial instruments (such as shares and bonds) to accelerate their business expansion and hence creations of jobs and enhanced tax revenue to the Government, among other benefits – but with minimal success.
Whatever reasons for not growing the equity side of financing that we front – the fact is that for us to actively finance our growth and development, as long as development and financing goes hand in hand, we need a full range of capital raising options in our finance sector ecosystem. For instance, consider this sustainable and graduating form of financing SMEs: it should start with own sources, then banks and microfinance institutions, before seeking Government grants (if any—especially if in area of R&D), then pursue financing from venture capital and private equity funds before lastly engage the entire public via IPOs and listing to the stock exchange. This is how it is supposed to be.
Where are we in this, our start-ups and SMEs finance are over 90 percent by friends/family and debt finance from banks. There is less than 10 percent risk-based equity finance. This a key gap in our financing, and of course there are other gaps in Tanzania compared to many other markets. In the UK, between 30 and 50 percent of all IPOs emanates from venture capital funds and private equity exits, as it is in Korea, Singapore, etc. Based on the above, one will clearly see the structural gaps in the finance for Start-ups and SMEs to be are as follows:
• no local venture capital or other forms of private or public equity;
• almost no bank equity investment by Tanzanian banks, meaning there is no process for banks to grow companies via equity financing and achieve an exit multiplier as they are almost 100% focus on debt rather than equity;
• no crowd funding and there is minimal debt or grant funding direct to SMEs from Government or Donors.
These gaps mean there is no feeder to the DSE. Unless, all stakeholders work to fix these structural gaps, the capital markets will always face growth and sustainability challenges.
My colleagues and I were recently in Korea, to learn from their experience, as preliminaries towards establishing the Enterprise Acceleration Program at the DSE. We learnt that previous Korean had problem like ours, where it took at least 12 years before a company is potentially ready for listing in the Korean Exchange. This was until the Government pro-actively started working with the private sector to initiate Acceleration Programs (currently there are more than 200 Programs) that includes pre-IPO/listing financing by Venture Capital Funds (partly owned by the Government), Government owned Industrial and Development equity financing divisions as well as investment banks’ specific programs to finance acceleration of Start-ups and SMEs prior to their IPOs and listing in the Exchange.
As a result, the period from Start-up to IPO in Korea has been shortened to 6/7 years from the previous 12 years. Since then, there has been a significant increase in IPOs and companies that have listed in the Starts-up Market segment, the SMEs and technology market segment as well as in their Main Investment Market segment of the Korean Exchange. In a way, this approach by the Government to be hands-on in ensuring there is complete ecosystem in the financial sector and its supporting institutions is a sustainable way towards inclusive and sustainable financing of the economy.
Under normal circumstances, the business of ensuring there are structures and supporting institutions for the financial sector ecosystem could be fronted by both the private sector and government. But then, if one consider and compares cases like that of Korea – a country that moved from the GDP per capital of less than US$ 100 during their independence in 1958 to more than US$ 30,000 now; and Tanzania, which like Korea was with a GDP per capital of about US$ 100 GDP in 1960s, still at around US$ 1,180 – somehow it tells that the examples of countries such as Korea and their approaches where the Government pro-actively engage in not only developing policies and legislative actions but also compliment/supplement these by establishing the necessary supporting institutions and financing them is the right approach to pursue. In the context of our local capital markets growth and development – institutions like venture capital funds, public equity funds, development and industrial banks as well as investment banks for market making and liquidity creation are necessary for a vibrant capital market. These will feed into the current existing structures and institutions, like the DSE for the sustainability of financing our projects and enterprises, while minimizing risk to the less sophisticated well-meaning citizens

Why Persistence in Investing in the Stock Market Pays

Stockbrokers and dealers — collars unbuttoned, sleeves rolled up, yelling into several telephones at once, gesticulating as though their lives were on the line. The air crackles. Every now and again one of them slams a receiver down onto the table like he wants to break it. Then the traders start bawling at each other over their Bloomberg terminals, on which stock prices flash like carnival lights. You will be fair if you agreed with me — this is how the media depicts the world of finance, and the work of stock markets, relaying images from either the stock-market floor/gallery of a major stock markets, or the trading area of a major investment bank.
Let’s change the scene – here there is a dull office on the fourteenth floor of an unassuming high-rise in a sleepy Omaha, Nebraska, the most negligible state in the USA where there is no Bloomberg terminals, no computers, no emails, no nothing as impressive. Just an old-fashioned desk and a telephone, there he sits, day after day as he has done for nearly fifty years: Warren Buffett, the most successful investor of all time.
The contrast couldn’t be starker, on the one hand: hyperactive, sweat drenched, testosterone-laden stockbrokers, on the other a quiet silver haired Uncle Warren. Once you have grasped the difference between speculating and investing you will start seeing parallels everywhere and you will have a good mental tool to hand.
So, what exactly is the difference? the stockbrokers and dealers trying to make a profit through frenetically buying and selling shares and bonds. What’s behind the shares – it is neither the fundamental performances of a software firm based in California or somewhere in Seoul, nor is a copper mine located in Peru or Zambia – these are irrelevant in this case. What matters most to these stockbrokers and dealers is that the share or bonds prices move temporarily in the right direction.

Classic investors however buy shares in only a handful of companies, which they know as thoroughly as the backs of their hands. The opinion of the market reflected in the temporary ups and downs means nothing to them their commitment is long term. To avoid transactions costs they buy and sell as infrequently as possible. Warren Buffet and his long-term investment partner Charlie Munger don’t even seek out new investment opportunities to come to them. From the horse’s mouth: “Charlie and I just sit around and wait for the phone to ring.” So says Uncle Warren.
Who is more successful — speculators or investors”? I would be quick to admit that there are winners and losers on both sides, but the giants among the winners are to be found only on the side of the investors. Why is that? One major difference: investors take advantage of long timespans; stockbrokers don’t. Our brains love short-term, spasmodic developments. We react exaggeratedly to highs and lows, to rapid changes and jarring news — but continuous changes that we barely notice. As a result, we systematically overemphasize doing above not-doing, zeal above deliberation, and action above waiting.
Let’s consider these — what are the most purchased books of all time? not the ones on the current best seller lists or stacked highest on bookshop tables at the bookstores or airports, I mean the ones that have remained continuously in print for decades or even hundreds of years—the bible, Mao’s Little Red Kook, the Koran, the Communist Manifesto, the Lord of Rings, the Little Prince. These are known as “longsellers”, and no major publisher can live without them. The same goes for Broadway shows, tourists’ attractions, songs and many other products. And what is one of the most successful cars of all time? the Toyota Corolla, continuously available as new since 1966 now in its eleventh generation. It wasn’t the first years’ turnover that made the Corolla a superstar but the span of time over which it has been sold.
Such long-term successes often have inconspicuous ingredients that function like baking powder, producing incremental progress that builds up over a long period of time. Take the example of investment; if you invest Tsh.10 million at ten percent return, after a year you will be Tsh.1 million richer. Piece of cake, right. But if you keep reinvesting these modest profits, after twenty years you will have seen an impressive growth of more than Tsh. 40 million, that you could have imagined when you started with your humble Tsh. 10 million. Your capital will accrue not linearly but exponentially, because our brains have no instinct for duration, they also have no feel for exponential growth.
This, then my friends, is the secret of persistence; long term successes are like making cakes with baking powder — slow, boring, long winded processes, but which lead to the best results. The same goes for many aspects of our lives. Just reflect, make a careful observation around you, and you will see.
In our current environment we are meant to be convinced, forced to understand and embrace the idea that in modern times, disruptions, constantly changes of careers and companies, spouse, etc is the way to remain competitive and happy. This may be right and wrong, why? Because sometimes a peaceful and predictable life is what you need and is actually more productive –and what this says is that sometimes a less busy work, more endurance and perseverance, tenacity and long term thinking could be highly valuable, as Charlie Munger says: “only a little bit wiser than the other guy, on average, for a long, long time”. This how you become a value-based investor and not the one stressed with the temporal ups and downs of stocks. Afterall you are not a broker, a speculator or a gambler – you are an investor who looks into the future of yourself and your children, trying to lock into what is possible.