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July 21, 2011
Sustainable Investment in Sub-Saharan Africa Is Growing
    by Robert Kropp

A report by IFC finds that private equity and sustainability initiatives undertaken in South Africa have led to $125 billion in sustainable investment in Kenya, Nigeria, and South Africa.

The continent of Africa has been described as the last frontier of investment. According to a 2010 report by McKinsey Global Institute (MGI), 60% of the world's uncultivated, arable land is in Africa, and commodities such as oil and raw materials are plentiful there as well.

Investors have taken notice. The same report found that foreign direct investment in Africa increased from $9 billion in 2000 to $62 billion in 2008. However, to what degree have the economies of Africa heeded the words of President Obama, who in 2009 told 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"?

According to a new report commissioned by IFC, "As an investment destination, the continent's numbers are compelling." Per capita Gross Domestic Product (GDP) has grown for 15 consecutive years. The continent's combined GDP is expected to reach $2.6 trillion by 2020, and the middle class is growing rapidly.

The report, entitled Sustainable Investment in Sub-Saharan Africa, also describes many of the challenges still present on the continent for sustainable investment (SI), and investment in general. Infrastructure is poor in many parts of the continent, regulatory regimes are often insufficient when they haven't failed completely, and political unrest contributes to investor unease.

Despite such challenges, interest in the last investment frontier is only likely to grow, and the report surveys private equity investors, asset owners and asset managers, and other key stakeholders as to what environmental, social, and corporate governance issues (ESG) are likely to be important for them when deciding whether to invest in Africa.

The most important factors for investors turned out to be attractive risk-adjusted returns, corporate governance, political risks, and corporate reporting.

The report found that sustainable investment in Kenya, Nigeria, and South Africa stood at over $125 billion in December 2010, which equals 20% of total assets under management in the three countries. Only the European Union has a higher percentage of total assets under management invested in sustainability, and the amount invested in Africa is the fourth highest of all global markets.

The country responsible for most of the sustainable investment activity is South Africa, which, according to the report, "accounts for 95 percent of SI in Sub-Saharan Africa." A significant reason for this, the report states, is the "huge asset base" of the Government Employees Pension Fund (GEPF) as well as the involvement of other institutional investors.

The involvement of GEPF and development finance institutions (DFIs) is a contributing factor to the pronounced role that private equity (PE) plays in sustainable investment in the region. Private equity in sub-Saharan Africa grew from $800 million in 2005 to over $2.2 billion in 2008, and 92% of PE investors expect growth to continue. Unlike other regions of the globe, PE funds in sub-Saharan Africa tend to have greater experience in the integration of ESG factors, due to demand from clients such as GEPF.

South Africa has been noteworthy on many fronts by the degree of its embrace of sustainable investment. In February 2010, the Johannesburg Stock Exchange (JSE) began requiring its more than 450 companies to produce integrated reports, and the Integrated Reporting Committee (IRC) was formed to develop guidelines for capturing the materiality of ESG factors.

This week, the Code for Responsible Investing in South Africa (CRISA) was launched, making South Africa only the second country to encourage institutional investors to integrate ESG issues into investment decision-making.

John Oliphant, Head of Investments and Actuarial at GEPF as well as chairman of the committee that drafted CRISA, predicted that institutional investors will adopt the Code.

"As long-term investors with fiduciary duties, we simply cannot afford to ignore the importance of integrating sustainability issues, including ESG, into long-term investment strategies," Oliphant stated. "As institutional investors we have the ability to influence and encourage the companies in which we invests to apply sound governance principles and to care for the environment in which they operate."

IFC's report notes that while regulatory frameworks in Kenya and Nigeria currently focus on issues relating to corporate governance, efforts such as the Extractive Industries Transparency Initiative (EITI), which supports improved governance in resource-rich countries through the verification and full publication of company payments and government revenues from oil, gas, and mining, as having positive impact on the growth of sustainable investment in the region.

To increase sustainable investment in sub-Saharan Africa, the report recommends that the investment case for sustainability be made in language relevant to investment practitioners. The streamlining of ESG reporting requirements will reduce back-office costs and improve investment returns and transparency. Leveraging local knowledge can help blend global best practice with local realities.

Also, the investment case can be articulated more effectively through case studies demonstrating the advisability of ESG uptake by PE funds in the region, and by regular surveys of SI marketplace activity and performance.

The report notes that the Africa Sustainable Investment Forum (AfricaSIF) plans to release in 2011 a report that more inclusively addresses the state on sustainable investment throughout the entire continent of Africa.


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