Huruda D’Castro Malungane is a finance professional whose main goal is to shape the future of finance in Mozambique as the Director of Finance, Risk, and Compliance. As the founder of the country’s first CFO community and passionate about sustainability, she seeks to lead the integration of ESG principles into financial practices.
Profile Mozambique: What are the main challenges companies in Mozambique face in implementing ESG practices?
Huruda D’Castro: The introduction of ESG practices in Mozambique is still in an evolutionary process, as is the case in much of the world, especially in developing countries. However, Mozambique faces specific challenges due to the relevance of these practices in a country rich in natural resources with a high potential for attracting investments, particularly in the mining, energy, and agriculture sectors. One of the main obstacles is the weak consideration of sustainable practices by internal investors, which limits the impact and adoption of these initiatives.
The challenges can be divided into two main areas. The first refers to awareness and capacity building. Many organizations in Mozambique interpret ESG solely as corporate social responsibility (CSR), which is a limited view, as CSR is just a part of ESG. Moreover, few companies recognize ESG as a strategic opportunity that, when well implemented, can give them a competitive advantage over their competitors. There is also a significant gap in the capacity building of local agents, which hinders the effective adoption of these practices.
The second challenge relates to the lack of clear regulation and specific incentives. Despite the existence of policies such as the National Development Strategy and the National Environmental Policy, these provide general guidelines and lack robust mechanisms for monitoring and evaluation. The lack of integrated coordination among regulatory bodies exacerbates the situation, resulting in a disjointed and ineffective operation.
Additionally, the absence of concrete incentives, such as tax or customs benefits, discourages companies from investing in sustainable practices. Without guarantees of tangible returns on the investment required to implement these practices, many companies do not see them as advantageous or strategic.
PM: How does the lack of regulation and government incentives impact the adoption of ESG by local companies?
HDC: Government incentives aim fundamentally to lead companies to adopt certain practices. It is known that a large part of business costs is often taxable, and a reduction in these costs translates directly into greater profits.
In Mozambique, specifically in this context, there is a platform called the Investment Incentive System, created to support and attract investments. This system encompasses four main components: tax incentives, customs incentives, measures related to the repatriation of locally invested capital and profits, and finally, a guarantee of security and protection from the Mozambican state for those investments.
By incorporating ESG criteria into this system, all companies that adopt these practices can benefit, particularly from tax advantages included in this platform, as well as customs incentives. For example, a company operating in the agricultural sector may benefit from a substantial reduction in the corporate income tax rate. Instead of paying the usual rate of 32%, it could pay a significantly lower percentage.
This system creates conditions that encourage companies to adopt ESG practices, making them more inclined to do so, whether due to tax benefits, investment incentives, or facilities in the repatriation of profits, a particularly relevant aspect for companies investing in Mozambique.
Role of CFOs in ESG implementation
PM: What is the role of CFOs in integrating ESG practices into corporate strategies?
HDC: The CFO plays a crucial role in integrating ESG practices into corporate strategies. It is their responsibility to ensure that these practices are incorporated into the company’s long-term strategy, whether it be 3, 5, 10, or 20 years. This integration means that business decisions, whether financial or not, must consider not only the financial return but also the environmental and social impact. For example, when evaluating new investments, the CFO should identify and communicate the risks and opportunities associated with ESG practices.
A notable example is the case of PepsiCo, one of the pioneers in ESG initiatives. The company stopped producing harmful items, employing doctors in its factories to ensure that all products are safe for consumers and the environment. This example demonstrates the importance of aligning corporate practices with ESG principles.
Another relevant role of the CFO in this area is to ensure transparency in operations and corporate reporting. The CFO is primarily responsible for presenting the company’s financial and non-financial reports, and it is increasingly essential that these include detailed information about ESG-related activities. For example, in South Africa, the “Just-In-Time Transition” initiative assesses the environmental impact of coal companies by measuring carbon dioxide emissions and effects on local community health. This type of monitoring allows for holding companies accountable for possible damages, such as those caused by harmful emissions.
Additionally, the CFO plays a fundamental role in risk management and mitigation, whether these risks are financial or not. Regulatory risks associated with non-compliance with environmental standards can have significant qualitative and quantitative consequences. Companies that do not follow ESG practices may receive negative risk ratings, making it difficult to access investments or financing. The presence of a CFO committed to integrating ESG practices ensures that risk analyses are conducted and that the company is prepared to face these challenges.
Finally, the CFO must ensure the allocation of financial resources to implement ESG practices. Although some companies may not immediately recognize the value of such an investment, the CFO can demonstrate how this strategic allocation protects the company and increases its competitiveness in the market.
In general, the CFO is a fundamental agent for incorporating ESG practices into corporate strategies, promoting transparency, risk mitigation, and financial sustainability.
Benefits and challenges of ESG implementation
PM: What are the tangible and intangible benefits for companies that adopt ESG practices in Mozambique?
HDC: In our context, the first benefit of ESG practices is the attraction of investments. Currently, investors and customers are increasingly concerned with allocating their capital to companies that promote sustainable practices. A company that generates good revenue but causes significant harm to the local population or neighboring communities is unlikely to attract investors. If there is no control over the production’s impact, it is improbable that the business will attract capital. On the other hand, the implementation of ESG practices can open doors to new capital flows and investments, strengthening the company’s position.
In Mozambique, most companies that substantially contribute to the economic development of the country are multinationals. Working with these organizations requires suppliers to adopt practices aligned with their standards and values. Companies like ENI, MOZAL, SASOL, and Rovuma Basin require their partners to present a level of organizational culture that reflects a commitment to sustainability. By adopting ESG practices, local companies demonstrate a level of reputation and brand valuation that grants them greater credibility. This creates a stronger connection with investors and consumers, who are attracted to the concern for sustainability.
Moreover, implementing sustainable practices can help companies reduce operational costs. Although sustainability may not be the initial focus, adopting these practices tends to optimize the organization’s cost structure, making it more efficient in the long run.
