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
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
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.
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
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
"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
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.