Shaping the African Impact Investing market: What are the market’s largest opportunities and challenges?

Essentially the supply of impact capital is expected to rise, as additional private sector, public sector and philanthropy actors begin to develop interest in impact investing, yet new opportunities are emerging. Firstly, the impact investing sector in Africa is growing, with the flow of new capital from investors outside Africa, local public institutions, and commercial investors. These increased sources of capital offer existing African impact investors access to new opportunities for partnership, coordination, networks, and scaling operations. Secondly, African financial services, infrastructure, and technology markets continue to grow and professionalize, thereby contributing significantly to reducing the risks and costs facing impact investors and increasing the chances to achieving sustainable, and profitable, impact.

Despite this, impact investing in Africa is far from reaching its potential in terms of volume of impact capital placed and replicable successful returns. This article reviews the growth of the impacting investing sector in Africa, the opportunities therein, and possibly suggest possible course of action to address the challenges existing within.

The Emergence of the Impact Investing Sector:

Presently, the impact investing landscape has grown into a worldwide movement with thousands of organisations and billions has been invested globally. Through increasing specialization and innovation many organisations have taken variety of roles, for instance impact investors will come in multiple role/s but in this case as asset owners, and under this cohort of investors will include high net worth individuals/families, corporations, institutional investors (e.g.: pension funds), government agencies and so on.

There are multiple drivers for entering the impact investing space, yet the dissatisfaction from the results of traditional practices of capital deployment, both via philanthropic giving and commercial investment, provide a strong motivation. These include:

(1) Donor Motivation for Catalysing Impact Investing – An important driver for the development of the impact investing methodology was donor disappointment with the sustainability and long-term impact of traditional philanthropic and public funding for global social and environmental challenges (i.e.: grant for non-profit organisations). The traditional donor model was not substantial enough for two main reasons:

• Firstly, donor money proves insufficient. Challenges such as climate change, extreme poverty, lack of health service amongst others, require huge amounts of capital to truly make an impact – much more than what is available through private philanthropy and or government spending.
• Secondly, it is acknowledged that the philanthropic model has certain limitations in its ability to create long-term impact. In certain cases donations cause unintentional negative consequences, including donor dependency, restrained public accountability, market distortion, and top-down initiatives which are unsuitable to local conditions and needs.

Consequentially, from the beginning of 1990s, international donors (including Rockefeller foundation and World Bank) got involved in the impact investing landscape via searching intensively for sustainable solutions to address the huge daunting global environmental and social challenges.

(2) Private Sector Motivation for Impact Investing

Major events in the financial services industry like the global financial crisis in 2008 has caused major change-led actions, which requires increased public and regulatory pressure on corporations and financial institutions. Especially, large investors, asset managers and corporations have been required to increase accountability on how their capital flows are managed. Several initiatives have called for responsible and accountable deployment of capital in ways which address environmental and social challenges (e.g. Islamic Finance which is an ethical finance model is now commonly used), to add, in many countries there are stricter regulatory controls encourage responsible practices within the financial services. These and other drivers have created an emerging shift in business values to include social and environmental objectives. Impact investing can be viewed as one indicator of the shifting approach of taking into account broader considerations beyond the financial bottom line into economic decisions – consumption and investment.

There are other major drivers contributing towards the impact investing space, it is within the author’s interest to limit the thoughts to the above discussed points for simplicity.

Despite the growth trends, for example (i) the increasing confidence by governments and philanthropists regarding cooperation with the private sector, after realising that capital deployed with positive intention is both effective and critical in scaling up solutions for social challenges including poverty and job creation. (ii) Early evidence of the effectiveness and profitability of impact investments, which increases the confidence of private sector actors to enter this sector in emerging markets. The impact investing sector still represents a tiny fraction (less than 1 percent) of the trillion dollars (USD) in global capital markets. To develop towards its fullest potential, the sector needs to mature from its early trial phase and new actors should find their way to participate in improving the reach of capital directed to impact investing.

Similar to several other emerging industries, the impact investing sector is quite fragmented and difficult to define, as such that each actor tends to associate a separate understanding and meaning of what social impact can be achieved through this type of investment, how it can be measured, what should be the financial return, and who should be receiving the capital.

Perhaps, it is easier to define impact investing as a spectrum that defines approaches to investment based on the level of impact and level if return targeted.

    In order to review the potential demand for impact investing in Africa, it will be useful to firstly review the key development challenges that can be partially addressed through market base mechanisms. In this article it is within the author’s interest to address these challenges to 4 main areas: (i) access to basic products and services (for instance access to financial, healthcare, and or educational services), (ii) infrastructure development (such as water, housing, transport or energy systems), (iii) social development (including job creation, enhancing security level, entrepreneurship, and or gender equality) and (iv) environmental challenges (including climate change adaptation and or environmental degradation).

(i) Demand for Basic Services: Economic growth has taken root across most of the African region. The continent’s exports has almost quadrupled since 2000 to well over 2 trillion (USD) in 2013, with predictions from IMF indicating that between 2011 and 2015, 7 out of the 10 fastest growing economies in the world, in relation to GDP, will be in Africa. According to certain analysis, the GDP growth for the African continent in whole was estimated to be around 5.4 percent in year 2013, making the continent one of the fastest-growing regions in the world.

Yet the process of reducing poverty, improving people’s lives and putting in place the foundations for more inclusive and sustainable growth still has a long way to go. Economic growth has not reduced across all populations equally and many immediate needs are still yet to be met, while income inequality grows. In many instances where research shows that several Africans fall into the segment earning less than 8 (USD) per day, an indicator shown and used by recognised institutions including International Finance Corporation (IFC) in providing clarity to the low-income market.

• Access to Healthcare Services: Sub-Saharan Africa accounts for around 11 percent of the world’s population, yet it carries 24 percent of the global disease burden and command as little less that 1 percent of global health expenditure. Therefore, in some analysis present some result whereby in a sample of 31 countries worldwide recording an under-five mortality rate of at least 100 deaths per 1,000 live births in 2009, 30 (practically all) were in sub-Saharan Africa.

To add, infectious diseases continue to plague lives of many low-income Africans. Yearly there is an estimated 900,000 fatalities from malaria, a chronic disease affecting African children accounting for more than 80 percent of malaria victims.

(This is simply one of the most basic examples under the demand for basic services which needs immediate solutions to propel Africa towards achieving sustainability.)

(ii) Infrastructure: The effect of infrastructure on economic growth is now widely recognized among practitioners and policy makers. Infrastructure generally refers to integrated systems for electricity, transport, telecoms, water supply, and housing. There is a great amount of evidence that increased quantity and improved quality of infrastructure can directly increase transportation and growth. For instance, improved transportation infrastructure in rural areas can: (i) improve access to markets for agricultural outputs (ii) facilitate private investment, and (iii) improve jobs and income levels.

Insufficient infrastructure has a clear impact on African countries’ competitiveness, and infrastructure appears to be one of the most important factors for this situation. Research shows that poor road, rail and port facilities add 30 to 40 percent to the costs of goods traded among African countries.

In recent times, various enterprises are seeking to address this challenge and provide innovative and inclusive solutions for Africa’s infrastructure challenges, more notably in the energy, water and ICT sectors.

(iii) Social and Human Development Challenges: As a predominantly traditional society, equality between genders in several places in Africa still has a long way to go. Women in Africa tend to have considerably less education levels than men, access to lower income and lower opportunities generally. For example, research shows that women account for more than 60 percent of the region’s adult illiterate population and of the 31 million African children that never attend school, majority of them are girls.

(iv) Environmental Challenges: the environmental challenges generally address issues around natural resource areas (i.e.: Land and Water), waste management, as well as mitigating risk against climate change and natural disasters.

Actions to Support the African Impact Investing:

(i) Innovative Collaboration: it is important build an ecosystem through consultation networks, information and investments platforms.

Policy actors along this chain of initiative should provide multi-stakeholder engagement and consultation to address the fragmentation of the market. To add, these actors can also initiate or leverage information portals and networks to learn the concerns of stakeholders, create roundtables and disseminate important information.

Development organisations and other actors within this ecosystem should support impact measurement and impact evaluation initiatives. In addition, they can build awareness and knowledge products on impact investing potential and success stories.

(ii) Catalyse Increased Impact Investment: to create the needed impact investment/s policy actors amongst others need to create dedicated impact investment platforms, this will allow local high net-worth individuals to enter the market.

Create capacity building programs and or subsidies to help entrepreneurs become more prepared for investment/s.

Development organisations and other actors in the ecosystem provide grants to early-stage impact enterprises.

(iii) Create Enabling Environment: it is imperative for policy actors to support and or develop networking platforms for impact enterprises. Additionally, it will be useful to create co-finance early-stage impact entrepreneurship platforms.

Development organisations and other actors in the ecosystem should provide technical assistance and business development support for entrepreneurs, businesses, policy makers and new impact investors. They can also promote collaboration and standardization. Finance incubators and accelerators.

Spotlighting Opportunities for Business in Africa:

 (i) A growing and urbanizing population: Africa’s population is estimated to be around 1.2 billion people and this figure is expected to reach 1.7 billion by 2030. More than 80 percent of the continent’s population growth over the next few decades is expected to occur in cities, making it the fastest-urbanizing region in the world. Simultaneously, incomes are rising across several part of the continent, creating new business opportunities in the consumer market.

   As a whole, it is expected that annual spending by African consumers and businesses to reach an average of 6.66 trillion (USD) by 2030, an increase from 4 trillion (USD) in 2015. Trends such as these are developing growing markets in multiple sectors where African indigenes have unmet needs, including food, beverages, pharmaceuticals, healthcare and education to name a few.

(ii) Africa is industrializing:

An African industrial revolution is well on its way as manufacturers ramp up production of all things from food processing to automobiles. It is estimated that African industries have the opportunity to double production to almost 1 trillion (USD) within a decade. Up to three-quarters of that growth is expected to come from manufacturing to replace imports and meet increasing local demand. Yet there is also an important opportunity to develop manufacturing exports and make Africa the world’s next great manufacturing hub as industries shift away from China to more lower-cost regions.

(iii) Africa is pushing to close its infrastructure gap:

 As already discussed in this article that poor infrastructure is one of the core setbacks to investment and growth in Africa. For example, almost 600 million Africans lack access to the electricity grid. And yet while Africa’s infrastructure still lags behind that of other developing regions, improved progress has been made: Africa has seen its annual investment in infrastructure doubled to an estimate of around 80 billion (USD) yearly since the beginning of this century. That represents a big opportunity for investors and entrepreneurs with the imagination to help solve the infrastructure challenges in Africa.

(iv) Innovations to unleash agricultural and resource wealth:

Africa has a long history for its abundant resource in both agriculture and mineral resources. Till date, though, Africa has struggled to convert these resources into shared wealth and sustained economic development.

New innovations and investments promise to change that picture and create exciting growth opportunities for business. For instance, in oil and gas, the African continent is rich in unexplored, high-potential regions, and the continent has high unmet demand for energy. It is estimated that the domestic gas market in Africa will grow by 9 percent a year to 2025, by which time the continent could use up to 70 percent of its own gas.

(v) The potential of increasing digital and mobile access:

Research shows that the African continent experienced the world’s fastest rate of new broadband connections between 2008 and 2015, and mobile data traffic across Africa is expected to increase sevenfold between 2017 and 2022. In addition, it is estimated that Africa has more than 120 million active mobile money accounts, and over 50 percent of the global total; this has leapfrogged many people over traditional banking products. Such trend will allow companies to have improved productivity, speed up transactions, and access broader markets, and could add an estimated 300 billion (USD) to the continent’s GDP by 2025.

In conclusion, this article has addressed a handful of challenges facing the African continent, presented some solutions, discussed impact investing and its role largely within the within the agribusiness space and or agro-industry.

Impact investing offers incredible opportunity. The forces of entrepreneurship and innovation changing the world can now be harnessed to tackle humane, social and environmental issues. While the impact investments market in Africa is gradually gathering motion, leadership, coordination and focused action is required for the sustained growth of the sector. Government leadership, in particular, is needed to remove barriers, build capacity, catalyse investment activity and harness the power of financial markets to address critical social challenges.