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July 01, 2010
As African Economy Grows, Sustainability Advocates Look to Leapfrog Investment as Usual
    by Robert Kropp

A McKinsey report finds that economic growth is on the upswing in Africa, and AfricaSIF is launched to encourage sustainable investment on the continent.

Foreign investment in Africa, which had been on the upswing as recently as 2007, suffered greatly at the hands of the global financial crisis of 2008. However, according to a recent report by the McKinsey Global Institute (MGI), "Africa's economic pulse has quickened, infusing the continent with a new commercial vibrancy."

The MGI report, entitled
Lions on the Move: The Progress and Potential of African Economies, found that the Gross Domestic Product (GDP) of the continent rose by 4.9% over the past decade. The collective GDP of the continent stood at $1.6 trillion in 2008, about equal to that of Brazil or Russia.

Consumer spending in Africa reached $860 billion in 2008, and the continent now has 20 companies with revenues of at least $3 billion.

While the continent is one of the richest regions of the world in terms of resources—the report notes that 60% of the world's uncultivated, arable land is in Africa, and commodities such as oil and raw materials are plentiful there—the report also found that "the commodity boom explains only part of Africa's growth story." While natural resources did claim 24% of the growth in GDP, other sectors, including wholesale and retail trade, transportation, telecommunications, and manufacturing, experienced significant growth as well.

According to the report, such factors as improved political and economic stability, along with microeconomic reforms, led to the emergence of a vital private business sector whose improved economies of scale led to increased investment. Foreign direct investment in Africa increased from $9 billion in 2000 to $62 billion in 2008, which, the report notes, equals foreign investment in China when corrected for GDP.

Furthermore, the report also found that the rate of return on foreign direct investment in Africa is higher than in other developing countries.

Most importantly for the continent's critical infrastructure needs—the report estimates that $118 billion per year must be invested in infrastructure in order to maintain economic growth—private investment in African infrastructure projects has been growing at a rate of 13% per year since 2000. The current shortfall of $42 billion in infrastructure funding could be overcome, the report suggests, through increased investment and improved efficiency measures.

If the continent's infrastructure funding needs can be met, and if recent gains in political and macroeconomic stability can be maintained, the growth potential for Africa is considerable, and opportunities for investment could be many. According to the report, the combined annual revenue for four industry sectors—consumer industries such as retail, telecommunications, and banking; infrastructure; agriculture; and resources—could reach $2.6 trillion by 2020.

Also by 2020, the number of African households with discretionary income is expected to reach 128 million, and consumer spending could be as high as $1.4 trillion by then. By 2030, 50% of the African population is expected to be living in cities, and by 2040, the number of Africans of working age will be 1.1 billion.

The report concludes, "Global executives and investors cannot afford to ignore the continent's immense potential. A strategy for Africa must be part of their long-term planning."

The question then becomes, what form will foreign investment in Africa take? As Graham Sinclair, co-founder of the recently established
AfricaSIF, said, "Africa needs capital, but it does not benefit from capital that does not develop our continent sustainably."

And as President Obama noted in a 2009 speech before the Ghanaian Parliament, "Together, we can partner on behalf of our planet and prosperity, and help countries increase access to power while skipping—leapfrogging—the dirtier phase of development."

Launched at the
Johannesburg Stock Exchange (JSE) on June 9, AfricaSIF aims to encourage investment in Africa that incorporates environmental, social, and corporate governance (ESG) factors. Speaking at the launch, Sinclair said, "AfricaSIF aims to attract new capital in new ways to Africa and help to grow sustainable investment on the continent by taking a long-term interest in Africa’s economic development."

The goal of AfricaSIF is to create a network of investment practitioners and stakeholders who integrate ESG factors into investment decision making. In its advocacy for sustainable investing, AfricaSIF joins a global network of more than 200,000 members of such Sustainable Investment Forums as the
Social Investment Forum (SIF) in the US, the UK-based UK Sustainable Investment and Finance, and the European Sustainable Investment Forum (Eurosif).

The continent is not without sustainability initiatives upon which AfricaSIF can build. Last month, the JSE began requiring its more than 450 companies to produce integrated reports, and announced its collaboration with four other South African organizations in forming the Integrated Reporting Committee (IRC) to issue guidelines on good practice in integrated reporting. And in 2009,
Sustainable Capital, a Mauritius-based investment firm, launched the Africa Sustainability Passive Equity Fund, which aims to provide institutional investors with sustainable investment exposure to the African Continent.

AfricaSIF plans a series of launch events throughout 2010, including events scheduled in New York and Boston.


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