CHRIS AHLFELDT: Thinking small can make impact investment big to close Africa’s finance gaps
We need to act fast while Africa falls behind in funding to battle climate change
17 October 2022 - 18:50
byChris Ahlfeldt
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A recentClimate Policy Initiative reportestimates that climate finance for Africa needs to grow nine times to meet climate goals by 2030. Africa’s climate finance in 2020 came to just 11% of the $227bn needed annually to meet climate goals by 2030. The same gap is clear in many other areas of need, from youth unemployment to lack of access to housing, as defined by the UN Sustainable Development Goals (SDGs).
The situation is not helped by the Covid-19 pandemic’s magnification ofwhat the UN Development Programmedescribes as the “scissors effect” funding gap for SDGs, in which investment resources decrease while the financing needs of developing countries increase.
To bridge these gaps we need to act fast, and we need to do things differently. Specifically, there is an opportunity for the impact investment community to work with traditional investors to unlock catalytic investments that get help to the places where it is needed most.
Investors seeking impact are already channelling money into projects designed to create jobs and improve access, quality, affordability, diversity and inclusion — and more. For example, the black-owned private equity firm Summit Africa has launched asocial infrastructure fundfocused entirely on financing infrastructure in health care, education and housing —with the latter aiming to tackle the undersupply of secure, affordable and quality housing in previously disadvantaged areas.
According to the 2022 edition of the AfricanInvesting for Impact Barometer, published by the University of Cape Town’s Graduate School of Business and RisCura, there has been a notable increase in the impact investing market in Africa. It has more than doubled to $64.3bn of assets under management since the last 2017 survey of asset managers was conducted.
Impact investment themes are also increasingly aligned with the SDGs. Top of the list is “decent work and economic growth” (SDG 8), targeted by 71% of impact investors surveyed by theGlobal Impact Investing Network. This is followed by “no poverty” (SDG 1) with 62% respondents. More than half (57%) of those surveyed reported “affordable and clean energy” (SDG 7) as a major target activity.
Now we need to scale these approaches and collaborate across industries to build a more resilient postpandemic world in which the investment system values and supports measurable impact on the ground. Somewhat counterintuitively, a deliberate focus on small-scale investments and ventures could make all the difference because these projects can often add up to have a big effect across multiple SDGs at once.
These opportunities often fall within the “missing middle” of enterprise finance as they are too large for microfinance, too risky or small for traditional investors, and do not match the exponential return expectations of venture capital firms.
Innovative financing
Traditional investors tend to favour large infrastructure investments to deploy large amounts of capital, while the smaller grassroots projects struggle to get funding due to higher risk profiles and administration costs. For example, it is far easier for independent power producers on the continent to access financing for renewable energy projects than for many customers to get affordable loans to fund solar home systems with back-up batteries or efficiency retrofits.
Often, innovative finance mechanisms are needed here to help balance the risk for both traditional and impact investors. For example, social bonds — also known as a pay-for-success or social benefit bonds — raise funds for new and existing projects with positive social outcomes and have led to an explosion in issuances globally, reaching $147.7bn in 2020, a 720% increase over the previous year, according toBloomberg.
In SA, the Johannesburg-basedTrust for Urban Housing Finance listed the country’s first social bond, Urban Ubomi, on the JSE’s sustainability segment in 2021. The proceeds have improved access to funding for previously disadvantaged property developers and increased the supply of affordable inner-city housing. The trust’s social bonds have financed 111 smale and medium-sized enterprises and 176 buildings with more than 5,500 affordable units. While this fund supports disadvantaged property developers, an impact opportunity remains to also support tenants living in these affordable housing units to finance their own homes and efficiency upgrades.
Innovative financial solutions can also make a powerful impact in bringing clean and affordable energy to more people while solving reliability issues given the load-shedding and frequent outages faced by many utility customers. For example,inclusive utility investmentsleverage green bonds to give customers access to low-cost financing for home energy and water efficiency retrofits regardless of income, credit score or renter status.
The retrofits are screened so that a customer’s utility bill decreases even after financing for retrofit costs are added to their monthly bill. In SA, GreenCape set up theAlternative Service Delivery Unitto facilitate community-led energy services in informal settlements. The unit uses three interrelated fundamentals of modern service delivery: social inclusion/mobilisation; customised technical design; and financial sustainability, to enable energy service solutions designed at the customer level.
High returns and measurable impact
Another success story is in East Africa where SunFunder, which specialises in providing innovative loans for the off-grid sector, is working alongside traditional investors to scale investment in clean energy. It offers local currency debt to cover solar company costs associated with inventory, construction and asset finance for solar home systems, solar lighting and income-generating assets.
SunFunder shows how to successfully deploy catalytic capital to scale up commercial investments in impact, and has unlocked $135m in funding for solar projects while helping millions of people gain access to clean energy in East Africa. Its success led to a recent acquisition by international impact investor Mirova, which aims to build on its energy transition expertise in Africa.
Examples such as SunFunder, the Alternative Service Delivery Unit and the social infrastructure funds are helping to dispel the myth that investing for impact inevitably comes at a trade-off with profit. They and others are also demonstrating how focusing on customer needs and taking an innovative approach can create a significant and sustainable impact that makes a measurable difference in people’s lives. These are both lessons worth learning as we work together to meet the SDGs by 2030.
• Ahlfeldt is founder and director of Blue Horizon Energy Consulting Services and a co-convenor of the UCT Graduate School of Business’s Bertha Centre for Social Innovation and Entrepreneurship Impact Investing in Africa short course.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
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CHRIS AHLFELDT: Thinking small can make impact investment big to close Africa’s finance gaps
We need to act fast while Africa falls behind in funding to battle climate change
A recent Climate Policy Initiative report estimates that climate finance for Africa needs to grow nine times to meet climate goals by 2030. Africa’s climate finance in 2020 came to just 11% of the $227bn needed annually to meet climate goals by 2030. The same gap is clear in many other areas of need, from youth unemployment to lack of access to housing, as defined by the UN Sustainable Development Goals (SDGs).
The situation is not helped by the Covid-19 pandemic’s magnification of what the UN Development Programme describes as the “scissors effect” funding gap for SDGs, in which investment resources decrease while the financing needs of developing countries increase.
To bridge these gaps we need to act fast, and we need to do things differently. Specifically, there is an opportunity for the impact investment community to work with traditional investors to unlock catalytic investments that get help to the places where it is needed most.
Investors seeking impact are already channelling money into projects designed to create jobs and improve access, quality, affordability, diversity and inclusion — and more. For example, the black-owned private equity firm Summit Africa has launched a social infrastructure fund focused entirely on financing infrastructure in health care, education and housing —with the latter aiming to tackle the undersupply of secure, affordable and quality housing in previously disadvantaged areas.
According to the 2022 edition of the African Investing for Impact Barometer, published by the University of Cape Town’s Graduate School of Business and RisCura, there has been a notable increase in the impact investing market in Africa. It has more than doubled to $64.3bn of assets under management since the last 2017 survey of asset managers was conducted.
Impact investment themes are also increasingly aligned with the SDGs. Top of the list is “decent work and economic growth” (SDG 8), targeted by 71% of impact investors surveyed by the Global Impact Investing Network. This is followed by “no poverty” (SDG 1) with 62% respondents. More than half (57%) of those surveyed reported “affordable and clean energy” (SDG 7) as a major target activity.
Now we need to scale these approaches and collaborate across industries to build a more resilient postpandemic world in which the investment system values and supports measurable impact on the ground. Somewhat counterintuitively, a deliberate focus on small-scale investments and ventures could make all the difference because these projects can often add up to have a big effect across multiple SDGs at once.
These opportunities often fall within the “missing middle” of enterprise finance as they are too large for microfinance, too risky or small for traditional investors, and do not match the exponential return expectations of venture capital firms.
Innovative financing
Traditional investors tend to favour large infrastructure investments to deploy large amounts of capital, while the smaller grassroots projects struggle to get funding due to higher risk profiles and administration costs. For example, it is far easier for independent power producers on the continent to access financing for renewable energy projects than for many customers to get affordable loans to fund solar home systems with back-up batteries or efficiency retrofits.
Often, innovative finance mechanisms are needed here to help balance the risk for both traditional and impact investors. For example, social bonds — also known as a pay-for-success or social benefit bonds — raise funds for new and existing projects with positive social outcomes and have led to an explosion in issuances globally, reaching $147.7bn in 2020, a 720% increase over the previous year, according to Bloomberg.
In SA, the Johannesburg-based Trust for Urban Housing Finance listed the country’s first social bond, Urban Ubomi, on the JSE’s sustainability segment in 2021. The proceeds have improved access to funding for previously disadvantaged property developers and increased the supply of affordable inner-city housing. The trust’s social bonds have financed 111 smale and medium-sized enterprises and 176 buildings with more than 5,500 affordable units. While this fund supports disadvantaged property developers, an impact opportunity remains to also support tenants living in these affordable housing units to finance their own homes and efficiency upgrades.
Innovative financial solutions can also make a powerful impact in bringing clean and affordable energy to more people while solving reliability issues given the load-shedding and frequent outages faced by many utility customers. For example, inclusive utility investments leverage green bonds to give customers access to low-cost financing for home energy and water efficiency retrofits regardless of income, credit score or renter status.
The retrofits are screened so that a customer’s utility bill decreases even after financing for retrofit costs are added to their monthly bill. In SA, GreenCape set up the Alternative Service Delivery Unit to facilitate community-led energy services in informal settlements. The unit uses three interrelated fundamentals of modern service delivery: social inclusion/mobilisation; customised technical design; and financial sustainability, to enable energy service solutions designed at the customer level.
High returns and measurable impact
Another success story is in East Africa where SunFunder, which specialises in providing innovative loans for the off-grid sector, is working alongside traditional investors to scale investment in clean energy. It offers local currency debt to cover solar company costs associated with inventory, construction and asset finance for solar home systems, solar lighting and income-generating assets.
SunFunder shows how to successfully deploy catalytic capital to scale up commercial investments in impact, and has unlocked $135m in funding for solar projects while helping millions of people gain access to clean energy in East Africa. Its success led to a recent acquisition by international impact investor Mirova, which aims to build on its energy transition expertise in Africa.
Examples such as SunFunder, the Alternative Service Delivery Unit and the social infrastructure funds are helping to dispel the myth that investing for impact inevitably comes at a trade-off with profit. They and others are also demonstrating how focusing on customer needs and taking an innovative approach can create a significant and sustainable impact that makes a measurable difference in people’s lives. These are both lessons worth learning as we work together to meet the SDGs by 2030.
• Ahlfeldt is founder and director of Blue Horizon Energy Consulting Services and a co-convenor of the UCT Graduate School of Business’s Bertha Centre for Social Innovation and Entrepreneurship Impact Investing in Africa short course.
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