The discussion around 'ESG standards and regulations' has become pivotal in the realm of finance, steering a significant shift in how investments are approached Investors have been increasingly pouring money into ESG funds, and asset managers have taken notice and responded to this trend by embracing ESG factors within their strategies to attract more inflows, balancing ESG requirements with traditional risk and reward considerations. Despite a lack of legal requirements from policy makers, stakeholders, both individual and institutional, have been seeking greater clarity regarding the impact of their contributions. They are keen to understand not only “if” asset managers are committing to ESG, but proactively asking questions about managers’ stewardship approach. What is ESG Standards? [caption id="attachment_5144" align="aligncenter" width="687"] Asset management firms manage funds for individuals and institutions by making investment decisions on their behalf while considering their unique circumstances, risk appetite and preferences[/caption] ESG stands for Environmental Social and Governance and refers to the three key factors when measuring the sustainability and ethical impact of an investment. Environmental factors include climate change, greenhouse gas emission, waste, pollution etc. Social include human rights, labor practices, talent management, product safety and data security. Governance refers to a set of rules or principles defining rights, responsibilities, and expectations between different stakeholders in the governance of corporations like board diversity, executive pay, and business ethics. ESG Fund Flows The year 2019 has been a memorable one for ESG investments as it saw a significant jump in sustainable fund flows. In the US, for instance, investors poured a record $21 billion into socially responsible investment funds, almost quadrupling the rate of inflows in 2018. In Europe, sustainable fund flows reached €120 billion in 2019, nearly triple the previous year’s amount which stood at €44.8 billion. [caption id="attachment_5156" align="aligncenter" width="626"] European sustainable fund inflows (€ billion)[/caption] To illustrate ESG’s rising popularity among investors, Legal & General Investment Management “LGIM”, the UK’s largest asset manager with £ 1.2 trillion under management*, has more than doubled its business in 2019 due to its excellent ESG track record. The company’s assets under managements were boosted by a £37 billion mandate from the Government Pension Investment Fund of Japan, the world’s largest retirement scheme (more than $1.5 trillion in assets*) and a vocal advocate of responsible investing. LGIM’s CEO Nigel Wilson stated: “ESG is really contributing to our success... the brand is travelling very well.” Industry Response While the degree to which asset managers have embraced this responsibility varies widely, we see growing evidence that some are taking this role seriously and using their influence to encourage greater sustainability. For instance, in 2019, BlackRock, the biggest money management firm in the world with more than $7 trillion under management*, announced its intention to start divesting from companies that get more than 25% of their revenue from coal production by mid-2020. (* figures are as at 31st December 2020) [caption id="attachment_5158" align="aligncenter" width="628"] A growing number of asset managers have voluntarily signed and embraced the United Nation’s Principles for Responsible Investment “UN PRI”[/caption] Regulatory Challenges: On much of this, the investment industry has been running ahead of the regulator, meeting market demands for a greater focus on ESG. However, the market has not been able to agree on common definitions, resulting in fragmentation. Ultimately, regulators will need to intervene. Investor Sentiments Investors are sending strong signals that they are unsatisfied with asset managers ESG criteria and disclosures. For instance, big names such as Morgan Stanley and Vanguard have been denounced for their “sin” stocks. Morgan Stanley Global Brands Fund had 6.83% in Philip Morris, its third largest holding, compared to 0.29% in the benchmark. The allocation comes despite the fact that the investment policy explicitly states the fund incorporates ESG considerations into its approach. The Vanguard SRI European Stock Fund did not have any tobacco exposure but was also criticized for its 5.7% allocated to alcohol, gaming and defense stocks. When questioned about their ESG criteria, some asset manager respond that they want to maintain a “seat at the table” with companies that do not score well on ESG metrics, that ESG does not equal ethical investment, or that their specific methodology does not reject a given product. Some investors might question such approaches, but from managers’ point of view, they carry potential for gains, both environmentally and financially. A Vanguard spokesperson said: “There are different flavors to socially responsible investing. Investors should look closely at a fund’s methodology and exclusion policy to ensure it matches their beliefs.” ESG Policies In their current form, ESG policies seem to be lacking two core elements: first, a universal consensus on what constitutes an ESG investment and a way for asset managers to assess ESG compliance in their portfolio; and second, reporting on ESG is still non-coercive and even if it were, without a proper framework, these policies remain inefficient. European Regulatory Landscape To demonstrate the ineffectiveness of current regulations, we turn to the EU, leaders in ESG regulations, to get an idea of current world standing in ESG policies. [caption id="attachment_5161" align="aligncenter" width="700"] Europe has been leading the race in sustainable finance regulation. The progress on the matter started immediately after COP 21.[/caption] In terms of ESG compliance, the EU has been working on creating ESG and climate change standards by deploying a Technical Expert Group on sustainable finance (TEG). However, most guidelines are still voluntary, non-legislative and unbinding for now. The current proposals include: - An EU green bond standard: The TEG proposed that the Commission creates a voluntary, non-legislative EU Green Bond Standard to enhance the effectiveness, transparency, comparability and credibility of the green bond market and to encourage the market participants to issue and invest in EU green bonds. In 2019, the TEG published a report on EU Green Bond Standard. - EU taxonomy: On June 2019, the TEG published a report on EU Taxonomy that sets out the basis for a future EU taxonomy in legislation. However, this report only tackles the climate change area of ESG. - Benchmark: The TEG has been working on recommending minimum technical requirements for the methodologies of the “EU Climate Transition” and “EU Paris-aligned” benchmarks, with the objective to address the risk of greenwashing (greenwashing refers to marketing that portrays an organization’s financial products, activities or policies as producing positive environmental outcomes when it is not the case). As part of its mandate, the TEG also worked on recommending the alignment with the Paris agreement and ESG disclosure requirements, including a standard format to be used to report such elements. Nonregulatory bodies have also been looking for solutions to help companies audit green conformity and provide companies with step by step instructions , such as the UN PRI. Signatories of the UN PRI recognize the potential impact of ESG issues on the performance of investment portfolios, they acknowledge that in order to be effective fiduciaries, they must integrate these factors into their investment analysis, seek appropriate disclosures, and incorporate ESG issues into their ownership and voting practices. As per ESG reporting, it is also still voluntary in most EU countries except for France which has made it mandatory for asset managers and institutional investors to report on how ESG are incorporated in their investment and risk-management processes with specific mention on climate change considerations (Article 173 of French Law on energy transition for green growth), and the Netherlands, where pension plans are required to disclose in their annual report if ESG criteria are incorporated. Reporting guidelines were only published recently in 2019 by the TEG and they provide non-binding advice to help disclose climate change mitigation investments and activities. In order to express their frustration, 631 institutional investors with more than $ 37 trillion in assets organized the largest ever joint call for climate change to governments during the 2019 COP 25 in Madrid. These investors wrote and signed a petition reiterating their full support for the Paris agreement and urging all governments to implement the actions that are needed to achieve the goals of the Agreement, with the utmost urgency. Conclusion It has become clear that regulations that govern ESG are still insufficient. The introduction of such regulations will be beneficial threefold: First for investors as they deserve more transparency, second for asset managers to simplify the current disclosure standards that are both confusing and expensive for them and to renew their trust with their clients, and third and most importantly for the greater good of society and the planet. Sources: A sea of voices, Evolving asset management regulation report, KPMG, June 2019, https://assets.kpmg/content/dam/kpmg/xx/pdf/2019/06/a-sea-of-voices-eamr2019.pdf Action Plan on Sustainable Growth”, European Commission, August 3rd, 2018 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018DC0097&from=EN Climate action in Financial institutions, https://www.mainstreamingclimate.org/initiative/ Climate change and Green finance: summary of responses and next steps, FCA , October 2019, https://www.fca.org.uk/publication/feedback/fs19-6.pdf ESG Investing 2.0: Moving Toward Common Disclosure standards, State Street, February 2020, https://www.statestreet.com/content/dam/statestreet/documents/Articles/1369%20ESG%20Metric%20and%20Reporting%20Standards.pdf ESG: Understanding the issues, the perspectives and the path forward, PWC, February 2019, https://www.pwc.com/us/en/services/assets/pwc-esg-divide-investors-corporates.pdf EU technical exert group on Sustainable finance, report on climate related disclosures, January 2019, https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/190110-sustainable-finance-teg-report-climate-related-disclosures_en.pdf EU technical exert group on Sustainable finance, Report on EU green bond standard, June 2019, https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/190618-sustainable-finance-teg-report-green-bond-standard_en.pdf EU technical exert group on Sustainable finance, Report on EU green bond standard – summary , June 2019, https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/190618-sustainable-finance-teg-report-overview-green-bond-standard_en.pdf EU technical exert group on Sustainable finance, Taxonomy technical report, June 2019, https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/190618-sustainable-finance-teg-report-taxonomy_en.pdf European Commission, Technical expert group on sustainable finance (TEG), https://ec.europa.eu/info/publications/sustainable-finance-technical-expert-group_en Europeans make record investments in sustainable funds, Chris Flood, Financial Times, January 2020, https://www.ft.com/content/c2952357-c28b-4662-a393-c6586640404f FCA urged to take action as investment industry shamed for greenwashing, Portfolio Adviser, November 4th 2019, https://portfolio-adviser.com/fca-urged-to-take-action-as-investment-industry-shamed-for-greenwashing/ Guidelines on certain aspects of the MiFID II suitability requirements, European Securities and Markets Authority (ESMA), May 2019, https://www.esma.europa.eu/system/files_force/library/esma35-43-869 _fr_on_guidelines_on_suitability.pdf?download=1 Investment Stewardship and the asset manager of the future, Legal & General Investment Management America, March 2020, https://www.lgima.com/landg-assets/lgima/insights/esg/esg-stewardship-and-the-asset-managers-of-the-future.pdf Monstrous run for responsible stocks stokes fears of a bubble, Financial Times, Temple-West, P., February 20, 2020. New business surges at Legal & General Investment Management, Financial Times, March 4th 2020 Regulating the growth of ESG Investing, A look at the landscape of ESG regulation around the world, across three main areas, Morningstar, June 3rd, 2019 https://www.morningstar.com/blog/2019/06/03/esg-regulation.html The Evolving Approaches to Regulating ESG Investing, Morningstar, June 3rd 2019 The Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018, October 1st 2019, http://www.legislation.gov.uk/uksi/2018/988/regulation/4/made The Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018 full PDF, made 10th September 2018 http://www.legislation.gov.uk/uksi/2018/988/made/data.pdf US Forum for sustainable and Responsible Investments, https://www.ussif.org/index.asp
Home to more than 700 million low-income citizens, Africa is considered a major market for micro-financial offerings, including microinsurance. According to the 2018 Landscape of Microinsurance in Africa study conducted by the Micro Insurance Network, only 2% of Africa’s low-income population is currently served by microinsurers. Microinsurance at its core is a type of insurance offering designed for affordability and inclusivity. This means that microinsurance only targets low-income clients, who cannot access mainstream insurance services or equivalent government programs. Despite operating with the same revenue and business model as traditional insurance providers, microinsurance companies serve these marginalized populations by offering suitable coverages for specific types of risks in exchange for low premiums. To better understand the microinsurance dynamics and progress in Africa, there needs to be a focus on two key elements. The first is the emergence of microinsurance and the type of products marketed in Africa, which will help categorize and explain the recent sector growth in the continent. The second point is the innovation in distribution channels, which highlights the type of efforts and initiatives made by microinsurance stakeholders to increase their profitability. Microinsurance in Africa: Context of emergence As a division of microfinance, microinsurance began to appear in the African market as a form of charity which was part of global financial aid programs introduced by international organizations. Other market players also started to offer cheap insurance policies to a specific type of clientele. These players include private insurers, mutual insurance companies and funds, microfinance institutions, NGOs, governments or semi-public bodies, etc. Two key main factors drew some of these players to the microinsurance market in Africa. First, the great success that microfinance practices had in Africa, in addition to a relatively low competition level compared to the traditional insurance market. Second, there was a significant insurance gap that needed tailored products to answer certain types of risks that were not covered by traditional insurance offerings. This led microinsurance programs to focus on the following types of products: -Credit life and life insurance, which respectively represent 26.2% and 15.1% of the total premium collected in 2017, are considered as the original microinsurance products developed in Africa. The domination of life and credit life insurance is due to the profitability that the products offer to the stakeholders as well as the flexibility of distribution of these products, that are often bundled with health and accident insurance policies. -Funeral insurance products, account for 17.4% of the total premium collected in 2017 in Africa, and are particularly successful in Southern African countries, including Zambia, Namibia, South Africa, Malawi, and Zimbabwe. These policies can also be offered as part of a life insurance policy. -Health insurance is another forefront microinsurance product which represents 25.5% of the total premiums collected. The product has been positively expanding in the African market over the past few years, and is provided through two main branches, either by supporting public coverage schemes or by directly offering complementary health products, such as hospital cash and health value-added coverages. -Crop and livestock insurance’s percentage of total premiums collected in 2017 stood at 4.9%. The product maintains its steady growth as one of the major microinsurance products, often supported by government schemes. These schemes not only support the vulnerable population that needs micro agriculture insurance, but also help the private insurers face the higher claims ratios and costs structures caused by the distribution difficulties and climate challenges. Innovative distribution channels for a more profitable microinsurance market Microinsurance distribution channels in Africa are highly reliant on partnership models. 68% of microinsurance companies in Africa distribute their products using brokerage and agency channels. And 22% of companies partner with microfinance institutions to either directly sell the individual microinsurance policies or bundle them with other micro-financial products. Proportion of microinsurance providers making use of each distribution channel type in 2017 [caption id="attachment_5115" align="aligncenter" width="678"] Source: Recreated using data from the Landscape of Microinsurance in Africa 2018 report published by the Microinsurance Network in 2019 [/caption] In recent years, microinsurance has become an attractive segment for multiple insurance providers due to the high demand and overall potential profitability of the products. Consequently, this rush towards the market has led more stakeholders to launch new microinsurance products. In addition to the rise in competition, micro insurers face another type of challenge related to policy costs. As previously defined, the microinsurance business model is based on low-premium policies. This pricing constraint has an impact on the policy costs that are not proportional to the policy value or type. In order words, micro insurers have to offer low-premium policies while taking into consideration the high costs of the underwriting and distribution processes. To deal with this issue, microinsurance providers are gradually increasing the use of digital technologies and platforms in their processes. Moreover, microinsurers are also finding great value in Mobile Network Operator (MNO) partnerships that allow them to facilitate the distribution of the products while reaching new clients based in rural areas. For instance in Ghana, Tigo began offering a life insurance product that is bundled with the customers’ monthly cell phone subscriptions. The offering was developed in partnership with Bima, a Swedish company specializing in mobile insurance, Vanguard Life Assurance, a local insurer, and MicroEnsure, a specialist insurance provider. The basic insurance scheme allows customers to access free of charge life insurance for themselves and one family member. The insurance coverage also depends on how much airtime customers use in a month. In case customers want to upgrade their coverage, they can pay an extra monthly premium, which gives them additional life coverage for them and their families. Partnerships with mobile money operators have also emerged as a new way for microinsurance companies to digitalize steps in the insurance value chain which include premium collection and claims payments. A major example of this is the microinsurance offering provided by telecommunications provider Safaricom and their leading mobile money solution M-Pesa. Safaricom established partnerships with several micro-insurers such as UAP Insurance, Britak, MicroEnsure, and GA Insurance. The microinsurance products offered include weather index insurance designed to insure and disbursement maize and wheat farmers, personal accident, life, disability, and health insurance products. Through these partnerships, microinsurance carriers can directly receive premium payments from the policyholders using M-PESA’s mobile money transfer service. In addition, policies management, monitoring, and adjustment processes are completed through FrontlineSMS and PaymentView, which are the integrated open-source software programs. Technology-based integrations in the microinsurance experience seem to be a real opportunity for microinsurance providers to grow their business and reach more customers. According to a study from Cenfri, 277 unique digital platforms are operating in Ghana, Kenya, Nigeria, Rwanda, South Africa, Tanzania, and Uganda. And 20 of these platforms already integrate insurance products in their offerings. Lastly, there is no doubt that microinsurance is a promising sector experiencing drastic growth across its operations as well as its innovation processes. And while costs constraints remain a major challenge for micro insurers, recent initiatives showcase the efforts undertaken by stakeholders to increase the reach and viability of micro-insurance as a standalone and profitable sub-sector. Intissar Mounaji - Senior Analyst at Infomineo Sources : https://microinsurancenetwork.org/sites/default/files/Landscape%20of%20Microinsurance%20in%20Africa%202018_LR.pdf https://assets.kpmg/content/dam/kpmg/za/pdf/2017/08/microinsurance-in-africa.pdf https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2012/07/MMU_m-insurance-Paper_Interactive-Final.pdf http://www.impactinsurance.org/sites/default/files/MP26%20v3.pdf
The US-China Trade War has seen two of the world’s largest economies battle each other through increased tariffs, political speeches and propaganda. While the presence of both countries in international cooperation forums, such as the G-20 summit should imply that there is hope for a quick “cease fire”, the current scenario points at a long, and more importantly, costly war. Economists estimate that the expansion of tariffs in US-China trade, and a consecutive fall in financial markets, could represent a decline of the world’s GDP by 0.6% ($600 billion) in 2021. Even though Africa is not a direct target in the US-China Trade War, the continent is already being affected by its impacts. U.S. tariffs have contributed to drops in commodity prices, local currencies, and major stock exchanges across Africa, shaking investor confidence in the continent. Moreover, the expected slowdown in the Chinese economy will also hinder the exports and government revenues of many economies across the African continent. However, in this scenario where the world’s largest economies are colliding, there are still opportunities for Africa to reap some benefits. More importantly, despite recent initiatives such as the Continental Free Trade Area (CFTA), the impacts of the trade war have exposed many pending tasks for Africa in terms of economic development. These pending tasks are not only preventing the economies of the continent from reaping further benefits from the Trade War, but also hindering their long-term prospects for economic growth and development. The Threat of the Trade War The African Development Bank estimates that the trade tensions could cause a 2.5% reduction in GDP in resource-intensive African countries and a 1.9% reduction for oil exporters by 2021. In some African economies, the fall of commodity prices has affected export values and revenue generation for some governments. This is especially important for countries and governments that rely on the exports of a small set of commodities with non-African partners, including China. Moreover, weak manufacturing sectors, infrastructure gaps, domestic instability and unsustainable economic policies have hindered the economic diversification of many countries in Africa, making them extremely vulnerable to falls of commodity export volumes and prices. Source: CSIS with data from IMF and the African Development Bank.[/caption] The International Monetary Fund (IMF) lowered African growth projections from 3.3% to 3.1% for 2019 due to rising trade tensions, Brexit and slow growth in China, and warned that the trade war could cause a 1.5% drop in Africa’s GDP growth by 2021. A decrease in demand from China could also reduce annual imports from Africa by $75.26. China is Africa’s top trading partner and represented 12% of total African exports during the past 5 years, with raw material representing most of the total exports from Africa to China during the period. While the reliance on China does not seem very large at continental level, some African countries are heavily dependent on China for their exports. Source: Own elaboration with data from ITC Trademap.[/caption] Some of the most developed economies in the continent, such as Nigeria and Morocco have a relatively diversified trade balance in terms of partners, and China does not weight heavily on their export activity. However, countries such as Sierra Leone, Congo and Angola depend on China for half of their exports, with South Sudan being a more extreme case relying on China for almost 100% of its exports. Source: Own elaboration with data from ITC Trademap.[/caption] While some sources point that the trade war might bring new commercial opportunities for many countries, African economies and businesses are not well positioned to obtain great benefits in this scenario. Even though manufacturing companies are relocating their operations outside of China to avoid US tariffs, other regions with more developed manufacturing sectors and more integrated supply chains, such as Latin America and Asia, are better positioned to reap the benefits and attract these investments. South Africa is probably the only economy in the continent with the capacity to obtain some benefits out of the trade war in this scenario, despite reports of Chinese entities approaching other countries such as Nigeria and Ethiopia. Opportunities Despite the daring scenario for many African economies, there are still opportunities to gain some benefits out of the dispute between the US and China. During late 2018, China started to seek further trade integration with Africa. At the Forum on China-Africa Cooperation, both parties adopted a joint statement and a three-year action plan, looking forward to deepening cooperation in various fields, including boosting trade, nurturing the African industry and reinforcing security. China increased its imports of crude oil from Angola and other countries in order to compensate for the decline in import of natural gas from the US. During 2017, ~40% of China’s crude oil imports came from the Middle East and ~20% from Africa. As China seeks to reduce its reliance on the Middle East and the US, China’s proportion of crude oil imports from Africa could increase up to 30%. Additionally, in order to secure deals on crude oil in Africa, China will continue to invest in the continent through FDI, which cumulatively surpasses $40 billion, and increased offerings of loans and grants, such as the $60 billion financing offered during September 2018. This is in line with recent trends in infrastructure funding in the continent, with China representing 16% of the total infrastructure funding commitments to Africa during 2013-2017. Source: Own elaboration with data from the Infrastructure Consortium for Africa (ICA)[/caption] Meanwhile, the continent-as-a-whole is already taking significant steps towards self-reliance and economic diversification. The entry in force of the Africa Continental Free Trade Area (CFTA) earlier this year is a great initiative to boost intra-African trade, economic diversification within the region, and put African countries in a better position to attract investments. The CFTA will provide a framework that will allow investors to enter a market of 1.3 billion people and a combined GDP of $2.2 trillion. The CFTA transition phase alone has the potential to generate welfare gains of $16.1 billion and increase intra-African trade by 33%. Earlier during August 2019, the Southern African Development Community (SADC) signed a protocol on industry aimed at promoting harmonized industrial development policies and strategies in the region and move economies further away from exports of raw materials. Pending tasks: infrastructure gaps and the need for better regulation The trade war has exhibited not only Africa’s level of dependency on China, but more importantly, the many internal weaknesses in the African economy in general. Continental trade agreements and industrial development policies are beneficial, but only to the extent to which African economies can materialize and spread their benefits. Although the African continent shows recent signs of progress towards economic development, diversification and integration, this needs to be supported by addressing the continent’s infrastructure gap and improvement of the business environment to facilitate the entrance into the formal economy in order to ensure that the benefits of economic growth are materialized and spread, and further contribute to the economic transformation of the continent. Despite the reported increase in funding, the continent still has an infrastructure gap of $130-170 billion per year, and an annual financing gap of $68-108 billion. This gap includes continent-wide needs such electrification, access to water and sanitation, information and communication technology coverage, as well as transport infrastructure. The current quality and high costs of infrastructure services in the continent constrains productivity by up to 40% each year and reduces Africa’s annual GDP by 2%. In terms of quality of the business and investment climate, a key factor to assess the ease of entering the formal economy, Africa stands below the world average, as shown by the regulatory performance of North and Sub-Saharan Africa during the past 4 years. Moreover, there are huge disparities among African countries in terms of their regulatory performance; some of the continent’s top performers are well above the world and regional average, while others are still below these thresholds. [caption id="attachment_4952" align="alignnone" width="1162"] Source: Own elaboration with data from World Bank Doing Business database.[/caption] [caption id="attachment_4951" align="alignnone" width="1121"] Source: Own elaboration with data from the World Bank-Doing Business database.[/caption] While external events have an important impact on Africa’s development, the continent is still being hindered by internal struggles. Even in a scenario without a trade war, there would still be plenty to talk about regarding Africa’s development challenges, opportunities, and the substantial progress observed across the continent in recent years. One thing is certain: recent events such as the Trade War and the Brexit indicate that it is no longer “business as usual” for Africa and the developing world as “our country first” policies in developed countries are now changing the status quo of the world economy. Jesus Cazares - Senior Research Associate at Infomineo Sources: Center for Strategic & International Studies – CSIS: https://www.csis.org/analysis/innocent-bystanders-why-us-china-trade-war-hurts-african-economies Bloomberg: https://www.bloomberg.com/graphics/2019-us-china-trade-war-economic-fallout/ Nikkei Asian Review: https://asia.nikkei.com/Economy/Trade-war/China-turns-to-Africa-to-mitigate-impact-of-US-trade-war World Bank – Doing Business: https://www.doingbusiness.org/ African Union: https://au.int/en/pressreleases/20190531/afcfta-one-year-later-road-travelled-and-road-towards-launch-operational ORD – Observer Research Foundation: https://www.orfonline.org/expert-speak/42580-what-does-global-trade-war-mean-africa/ DW: https://www.dw.com/en/can-africa-benefit-from-us-china-trade-spat/a-49389296 UNCTAD: https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2463 The Citizen: https://www.thecitizen.co.tz/news/1840340-5240736-9alqgg/index.html TRALAC – Trade Law Center: https://www.tralac.org/news/article/12934-regional-industry-protocol-on-the-cards-for-sadc.html Thomson Reuters: https://www.reuters.com/article/us-china-africa/chinas-xi-offers-another-60-billion-to-africa-but-says-no-to-vanity-projects-idUSKCN1LJ0C4 African Development Bank: https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/2018AEO/African_Economic_Outlook_2018_-_EN_Chapter3.pdf Brink News: https://www.brinknews.com/africa-has-a-100-billion-infrastructure-problem-whats-missing/ Morocco World News: https://www.moroccoworldnews.com/2019/08/280034/nigeria-morocco-gas-pipeline-ecowas/ ICA – The Infrastructure Consortium for Africa https://www.icafrica.org/fileadmin/documents/Annual_Reports/IFT2017.pdf Qatar Ministry of Transport and Communications: http://www.motc.gov.qa/en/news-events/news/mwani-qatar-investing-somalia%E2%80%99s-hobyo-port The Africa Report: https://www.theafricareport.com/15263/us-china-trade-war-opens-a-market-for-african-rare-earth-suppliers/
This article will present the key findings of 2015 report about “Illicit financial integrity” prepared by Global Financial Integrity (GFI) -a non-profit, Washington, DC-based research and advisory organization, which produces high-caliber analyses of illicit financial flows, advises developing country governments on effective policy solutions, and promotes pragmatic transparency measures in the international financial system as a means to global development and security-. While discussing the development equation especially for the developing countries, we should take into consideration the massive outflows of money that are likely to adversely impact the domestic resources and illicit leakages of capital from the balance of payments and trade misinvoicing. Illicit financial flows can be defined as illegal movements of money from one country to another, the illegal attribution can be due to the illegal sources used to earn the money, transfer or utilize it. By their nature, illicit funds are difficult to estimate with precision taking into consideration the lack of economic data and methods that can help in framing and forming the scale of the problem. Among the top ten countries with the highest average illicit financial outflows, which stand for 62.3% of cumulative amount of illicit capital outflows from the entire developing world, the Asian presence is further emphasized as the top exporter of illicit capital with a representation of 5 countries out of the sample (10 countries) and a percentage of 38.8%. The Western Hemisphere represented by Mexico(3rd) and Brazil (6th) in the top ten countries accounted for 20% while Sub-Saharan Africa regions represented as well by two countries: South Africa(7th) and Nigeria (10th) accounted for 8.6%off cumulative illicit financial , Russia (2nd) alone appear in the global top ten representing Developing Europe with 25.5%. The main components of this illicit capital can be represented by trade misinvoicing which means export under invoicing (undervalues export sales) and import over-invoicing (raises import costs).According to statistics found on the “OECD, IMF, UNTCAD Statistics…and other databases” it has been proved that the amount of illicit financial outflows exceeded both official development assistance (ODA) and inward foreign direct investment (FDI) in all developing countries which shows the seriousness and gravity of the issue since the unrecorded illicit outflows are significantly much higher than the resources these countries might accumulate through ODA and FDI. US$1.1 trillion was recorded as the amount of illicit flows in 2013 from developing world, which represent 10 times the amount of official development aid received by these countries in the same year and the annual percentage of growth of these outflows is approximatively 6.5% Money laundering through trade transactions which can be done via various techniques including trade misinvoicing was defined by the financial action task force (FATF) as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.”. also an important link had been tied between illicit outflows and countries that are major drug producers and/or represent a transit point for drug trafficking since an appealing ratio of misinvoicing to total trade drug transiting countries and the other developing countries was identified (For 68% of the sample trade misivoicing outflows to total trade are significantly above the 6.7% which is the developing countries average. The opacity of global financial system that can be represented in the following issues-tax havens, secrecy jurisdictions, bribery and corruption- which make up the bulk of illicit financial flows from developing countries, even though there are some best practices that should be adopted and promoted at international and institutional level by all these countries such as: Anti-money laundering: by enforcing all anti-money laundering laws and regulations and penalizing employees of financial intuitions who are facilitating the money laundering operations. Beneficial Ownership: Government authorities should coordinate with banks in order to create public registries in order to maintain a database of the true owners of any account opened all over the financial institutions. Country-by-Country Reporting: Multinational companies should have the obligation to disclose their revenues, profits, losses, sales, taxes paid, subsidiaries, and staff levels on a country-by-country basis. Tax Information Exchange: Encouraging the participation of all countries to contribute in the worldwide exchange of tax information. Trade misinvoicing: Preparation of well trained and equipped officers to enhance the ability to detect intentional misinvoicing of trade transactions through the ability to access real-time world market pricing information. The issue of illict finiancial flows is at the forefront international forums and agendas, national and international mobilization is required to tackle the issue and take serious actions on the fight against the phenomenon Fatima-Zahra Boukhari, Analyst at Infomineo Know more about Fatima-Zahra // Know more about Infomineo Sources : • Financial Action Task Force, “Trade Based Money Laundering” (Paris, France: Financial Action Task Force (FATF), June 23, 2006), 3, http://www.fatf-gafi.org/media/fatf/documents/reports/Trade%20Based%20Money%20Laundering.pdf. • “Illicit Financial Flows from Developing Countries 2004-2013” report issued by Global Financial Integrity in December 2015 : http://www.gfintegrity.org/wp-content/uploads/2015/12/IFF-Update_2015-Final.pdf