Wednesday, 30 November 2022

In Finance

Impact Investing is the Future of Investment in West Africa

If you missed the memo, Impact Investing is the future of investment in West Africa, and the continent as a whole. According to the IFC, Impact Investing is “Investments made into companies, organisations, vehicles, and funds with the intent to contribute to measurable positive social, economic, and environmental impact alongside financial returns".

Impact Investing is an area of investment, business, and leadership that African economies cannot ignore anymore. By making the choice to invest into companies, organisations, and funds that provide benefits to society in addition to financial return, investors are engaging in Impact Investing.

In the past decade Africa has made great strides in economic freedom and human rights. However, the continent still faces an array of challenges including poverty, lack of regulation, war and conflict, and corruption. Millions of Africans live without access to clean drinking water or electricity; education opportunities are limited; infrastructure is lacking or inadequate among other things. This is where Impact Investing can come into play. Investors can choose to invest into companies that have social business goals as a part of their corporate responsibility (CSR) plans.

The most common areas of interest in South Africa include Affordable housing, SMME Financing, Job Creation, Healthcare, Education, Sustainable Agriculture, Infrastructure and Development, Renewable Energy. South Africa has the largest economy in Africa. It is the most industrialized country on the continent, and its wealth of natural resources makes it a strong investment destination. With a population of more than 50 million people, South Africa is home to many micro, small and medium enterprises (MSMEs) that are in need of much help and support from investors across the world. South Africa offers many attractive investment opportunities for foreign investors interested in Impact Investing due to its relatively strong political stability, favourable business environment, well-developed capital market, large pool of skilled labour force and excellent infrastructure.

Since 2011 Mira Digital Film Academy has provided free training in Digital Filmmaking to over 60 000 students from disadvantaged communities around South Africa.

Capital is flowing into the African continent at a steady rate. Over the past decade, overall foreign direct investment (FDI) targeting the continent has steadily grown, partly driven by a continued interest in natural resources. Inflows into East Africa for instance, have generally increased due to recent discoveries of oil and gas in Kenya, Uganda and Tanzania36. Some flows into sub-Saharan Africa are now targeting consumers instead of extractive industries as well as countries unaccustomed to this capital – such as Ethiopia and Mozambique. 2014 also saw improved investor confidence in countries previously affected by the Arab Spring of 2011, and Egypt and Morocco saw growing levels of FDI inflows.

Africa has also seen a steady increase of domestic savings in recent years that can add to capital available for investment. Historically, African countries have relied on foreign sources of capital in the form of FDI, ODA, debt and remittances to complement and often compensate for domestic sources of investment. 

According to the Global Impact Investor Network's 2020 survey, 43 percent of impact investors have funds allocated to Africa – more than any other emerging market region. And 52 percent of investors surveyed plan to increase their Africa exposure in the next five years. The investment ecosystem in the Africa impact investing sector includes 5 main actors: early-stage impact funds, private equity funds, development finance institutions, foundations, and institutional investors. While private equity funds are the most active in the region, early-stage impact funds, development finance institutions, and foundations are also actively engaged in Africa.

The growing local market for impact investing has enabled a number of impact asset managers to enter the sector. The World Bank Group has started an investment arm that is dedicated to African development called Africa Stakeholder Forum (AFS), which offers advisory services to investors in Africa and invests on their behalf. Another is the "African Impact Fund", run by a group of African institutional investors (including Nigerian Fidelity Bank) with $3.1 million under management as of March 201640. 

Africa Impact Finance (AfriFin) is a pan-African network of impact investors committed to supporting advancing the impact economy on the continent. AfriFin's mission is to build a strong and sustainable asset base, bringing together private investors and financial institutions to increase their impact.

Africa Impact Fund (AIF), which was created in 2016 by African individual investors, private banks, sovereign wealth funds and hedge funds, with over $500 million under management as of March 201741. The AIF portfolio is made up of real estate investments in Europe funded with an African buyer base via real estate fund managers such as Oaktree Capital Management located in London.

It estimates that over 1,340 organizations currently manage USD 502 billion in impact investing assets worldwide. This research also underscores the diversity of the market, capturing data from many types of investors — from family offices to foundations to banks to pension funds — who are based in every region of the world and investing worldwide. Over 800 asset managers account for about 50% of industry assets under management, while 31 development finance institutions (DFIs) manage just over a quarter of total industry assets. Most impact investing organizations are relatively small, with about half managing less than USD 29 million each, yet there are also many large players managing over USD 1 billion each. In 2020, the market reached roughly $715 billion in assets under management, according to GIIN. The International Finance Corporation (IFC) put the estimate even higher: $2.1 trillion. With such remarkable growth over the last 10 years, we wondered how far impact investment might advance from 2020 to 2030.

Small businesses in African must start shaping their value chains around the Impact Investing business model, in order to tap into the available international funds (assets under management) in Impact Investing capital markets. This is especially important for small businesses in Africa, as the markets are not efficient yet. They are, however, making great efforts to optimize their value chain to align with the market expectations.

There are a number of different types of funding that Impact investors can use. For example, Impact investors can use grants and loans to provide capital to small businesses that would otherwise not have access to financing. This allows entrepreneurs and small businesses to grow by providing fresh capital and credit lines. 

In order to mobilize capital in the form of grants and loans, Impact investors need to attract a large pool of first-time grantors. One way to promote Impact investing in Africa is through the use of alternative investment funds (AIFs) that adopt the model and create a standardized framework for comparing different types of investments. AIFs are aimed at attracting new investors by offering standardized terms and conditions and by connecting them to an established network of pension funds or insurance companies. 

Insurance companies like SANLAM, have in recent years, invested in Impact Investing projects, that benefit families and communities in South Africa. Many companies operating in Africa are growing internationally at a rapid pace. However, besides the cost of living, the high labour costs sometimes make it difficult to compete with companies operating abroad. The upside is that many African-owned international firms have grown in size and influence in different parts of the world, creating job opportunities for local workers.

The Climate Bonds Initiative (CBI) was founded at Stanford University by Paul Polman in 2008 to bring together private investors who want to help address climate change and meet the funding gap for climate mitigation and adaptation projects. CBI has now raised over $7 billion worldwide from more than 3 million investors in its first 13 years, which means that there are many large Impact Investors on board. According to CBI, their investors are actively involved in all stages of the investment cycle, from finding projects to early private placement, and promote investments that have a positive social and environmental impact.

The second largest fund in the fund family is the World Resources Institute (WRI) The WRI fund offers a variety of funding for environmental impact investing. As of February 2016, the fund has had over 1.3 billion invested with an average compound annual return of 15 percent. The WRI has pioneered research and publications on both climate change and sustainable development and has been at the forefront of creating innovative financial vehicles for investments in these areas.

Sources: GIIN, Forbes, ECOWAS

Cabanga Media Group publishes of thoughtful economic and business commentary magazines and online media, in several African markets, that include South Africa, Botswana, East Africa Community, Ethiopia, Egypt, Nigeria, and Zambia.