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Norton Rose Fulbright LLP

01/24/2023 | News release | Distributed by Public on 01/24/2023 04:02

ESG in the context of the African and Middle Eastern telecommunications and digital infrastructure sectors

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Introduction

In April 2021, a survey of 34 limited partnerships by the African Private Equity and Venture Capital Association showed that 97% considered it important to take ESG factors into account when making investment decisions.1 Such a focus on ESG is partly driven by investors, suppliers, customers and local stakeholders requiring ESG to be a principal factor in the terms of any investment or contractual relationship.

Telecommunications and digital infrastructure industries have attracted significant attention for their role in advancing ESG, particularly over the COVID-19 pandemic where the importance of internet connectivity as a social contribution was underscored. The industries include companies providing fixed and wireless telecommunications services (such as mobile network operators, virtual mobile network operators and internet service providers), as well as those companies that build out the infrastructure on which telecommunication and internet networks rely (particularly mobile telecommunication towers, fibre and cable networks, data centres and marine cables).

A strong telecommunications and digital infrastructure sector can help towards digital inclusion and the achievement of many of the UN Sustainable Development Goals. Reliable internet connectivity and communication channels facilitate access to education and employment, and can reduce income inequalities. Internet of Things (IoT) technologies which rely on a robust infrastructure can help towards agricultural growth and food security, and studies have found links between telecommunications infrastructure investment and gender equality. Digital infrastructure provides an opportunity for countries to accelerate development by underpinning technologies such as mobile money payments, blockchain applications and telehealthcare. According to the World Bank, a 10% increase in mobile broadband penetration in Africa would result in an increase of 2.5% of GDP per capita.2

For many investors, such benefits are key in driving their investments into digital infrastructure and telecommunications. This is helped by burgeoning ESG frameworks and regulations, such as the EU's Taxonomy Regulation, which makes data processing, hosting and related activities eligible for the climate mitigation and climate adaptation objectives.

Despite being a net ESG contributor, the telecommunications and digital infrastructure sector is not perfect. The power consumption of digital infrastructure assets such as data centers, mobile communications towers and fibre networks is clearly significant and can have adverse environmental impacts without sources of renewable energy and sustainable cooling. This is particularly true in geographies that lack reliable power connection and where inefficient diesel or battery powered solutions are relied on to satisfy stringent uptime requirements. With an estimated 1% of global electricity being used towards data centres and transmission networks, investors are looking into sustainability factors when investing into such companies. Furthermore, for operations in Africa and the Middle East where ESG frameworks and uptake have come to the fore later than in other parts of Europe, for example, the breadth of ESG requirements for companies to come up to speed with at pace, is significant.

So how do investors navigate the ESG implications of investing in what is a necessary asset class for the development of emerging markets in Africa and the Middle East? And can companies hoping to raise capital use their ESG credentials to facilitate this?