#9 Summer 2017

Can Africa unlock the potential of investing for impact?

Bertha Centre research shows that investments seeking to combine financial returns with positive social, environmental and/or governance outcomes are flourishing on the African continent – but professional investors still have a long way to go in terms of practice and disclosure.

Investing for impact (IFI) has become a key focus for many fund managers in Africa. According to the 2016 African Investing for Impact Barometer released in June 2017, just under half of funds surveyed in southern, West and East Africa are now using their assets not only to generate good returns for their clients, but also to achieve outcomes that are good for society at large.

Of 1 924 investment funds surveyed in the study across nine key African countries, 45% have been identified as implementing one or more IFI strategies, which amounts to $353.9bn.

This is good news for Africa, a continent that needs billions annually to deliver on the United Nations’ sustainable development goals (SDGs) and the African Union’s Agenda 2063, but with limited domestic resources to meet these huge investment needs.

It also demonstrates the robustness and vitality of African markets. According to recent research reported in the Stanford Social Innovation Review, Africa has been a top geographic focus for impact investment for the past few years and if anything, demand for investments outstrips supply of investible enterprises – so there is immense room for growth in this sector.

Now in its fourth year, the African Investing for Impact Barometer seeks to provide a snapshot of the growing IFI market on the continent. It is produced by the Bertha Centre for Social Innovation and Entrepreneurship at the UCT Graduate School of Business and the research team uses publicly available information sourced from fund manager disclosures on their websites, reports and fund-fact sheets to assess the size and the trends within the African Investing for Impact market.

Expanded study allows for regional comparisons

For the 2016 barometer, six additional countries – Tanzania, Uganda, Rwanda, Namibia, Zimbabwe and Ghana – were added to the three surveyed in previous years (Nigeria, Kenya and South Africa). This allowed for a deeper and wider perspective of professional fund managers’ practices across the East, West and southern African regions.

The study showed that southern Africa is home to the majority of IFI investments, with $325.9bn of assets using at least one impact strategy in 2016. Fund managers in East Africa reported $15.4bn of overall assets, and in West Africa another $12.6bn of assets were deploying at least one IFI strategy.

At a country level, South Africa remains the country in southern Africa with the largest amount of funds and assets dedicated to IFI with Namibia and Zimbabwe following well behind.
In East Africa, Kenya dominates Tanzania, Uganda and Rwanda, which have less established financial markets, and in West Africa Nigeria represents the largest IFI assets, well ahead of Ghana. Ghana displays a flourishing fund management industry but it is currently less geared towards IFI than its neighbour.

Five types of investment strategy

The barometer analysed two distinct categories of professional fund managers: asset managers, and private equity and venture capital firms. It scored their investments according to five internationally-recognised investment strategies: ESG (environmental, social and governance) integration; investor engagement; screening (positive and negative); sustainability; and impact investing.

ESG integration into investment decisions remains the leading IFI strategy employed across all countries. Investor engagement, where an investor uses their shareholder or bondholder status to promote positive change in a company’s behaviour, is the next most implemented strategy, while screening, which includes religious and ethical investment practices such as Islamic Finance, remains third.

Environmental and social issues still a challenge

Asset managers, based predominantly in South Africa, are leading the ESG effort. However, they still focus primarily on integrating corporate governance when implementing ESG integration. The systematic integration of environmental and social issues remains a challenge.

Impact investing and sustainability themed investment, which involve investing directly in companies promoting sustainability, remain the two least used IFI strategies in Africa. Fortunately however, they are showing growth in the proportion of IFI assets as the study increases its scope of markets surveyed.

They represent $44bn amounting to 6% and 8% respectively of the total 2016 IFI assets surveyed, up from 2% and 4% respectively in the 2015 survey. The most popular themes for investments in these categories are agriculture, infrastructure, energy, healthcare, financial services, and investment in SMEs.

In southern Africa, socio-economic transformation ranks second of the top five themes showing that there is investor commitment to this issue. However education, water and sanitation, which are considered key to achieving the SDGs, do not feature in the top five in any of the three regions.

The UNDP has identified the development of a strong impact investing sector as an important step in achieving Africa’s development objectives. But while the African investing for impact industry is consolidating, its actual impact on key sectors and ultimately on African citizens who are in the greatest need of developmental and impact capital, remains unclear.
More needs to be done therefore to qualify how IFI changes lives and why this matters. Transparency and disclosure are key here; and while the Bertha Centre research shows that the investment industry is doing better in communicating how they invest for impact, a lot of work still needs to be done to record the tangible impact of these investments in practice.

The importance of reporting

It is critical that this is reported in a transparent way that will convince an external audience of their value and therefore unlock future investment.

A handful of large fund managers with a Pan-African footprint are showing improvement in this regard, implementing and reporting on their investor engagement strategies, although with varying degrees of consistency.

Large asset managers such as Old Mutual, Stanlib and Allan Gray have extensive operational footprints across the three regions. Old Mutual is however the only one that discloses IFI strategies at a country-by-country level.

More of the large players must do the same and lead by example in encouraging a culture of transparency in the industry if we are to be able to fully tap into this powerful force to fund much-needed development on the continent. If we don’t, we run the risk of IFI becoming just another buzzword investors pay lip service to but without actually becoming direct drivers of sustainable developmental change.

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