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August 24, 2011
AfricaSIF Co-Founder Describes Challenges to Sustainable Investment in Africa
    by Robert Kropp

Graham Sinclair talks with about a recent report he authored on sustainable investment in sub-Saharan Africa, and the challenges to mainstreaming the practice on the continent.

Last month, reported on a new study of the current state of sustainable investment in sub-Saharan Africa.

Commissioned by IFC, the study surveys private equity investors, asset owners and asset managers, and other key stakeholders on the environmental, social, and corporate governance issues (ESG) that would be important for investing in Africa. Overall, the study found, "As an investment destination, the continent's numbers are compelling."

The study was authored by Graham Sinclair, co-founder of the Africa Sustainable Investment Forum (AfricaSIF) and Principal of SinCo, a South Africa-based investment advisory firm. Sinclair spoke with recently about the report, as well as the case for sustainable investment in sub-Saharan Africa.

"We're hoping that people will read the report and be impressed by the amount of activity in Africa," Sinclair said, "And that they can go from a situation of an information vacuum to realizing that some of their preconceptions about Africa are misplaced."

"There are unique characteristics of sustainable investment in sub-Saharan Africa, particularly the role of private equity," he continued. The report found that private equity (PE) 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.

"The model characteristic of investment in Africa is capital to small, growing businesses on growth trajectories," Sinclair said. "The capital behind the private equity shops has been DFI (development finance institutions)-funded, which means that ESG (environmental, social, and corporate governance) is being integrated."

Development finance institutions such as IFC invest in sustainable businesses in developing economies to foster growth, reduce poverty, and help achieve the Millennium Development Goals (MDGs).

"Next week, AfricaSIF is hosting a Master Class on ESG investment in Africa," Sinclair said. "In many ways, it's very experimental stuff, building the practice from the ground up. But in another way, it's also advanced, because of the influence of the development financing world. The concept we're puzzling over is how to develop the countries and create jobs at the same time while preserving the environmental endowment we have."

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. South Africa alone accounts for 95% of the total, in large part due to the influence of the Government Employees Pension Fund (GEPF).

"The institutional investor market is really big here," Sinclair said, "And South Africa is a G-20 economy on the continent. Add to that the role played by the government's sovereign wealth pension fund, and the size of sustainable investing in sub-Saharan Africa starts to make more sense."

On the other hand, Sinclair continued, "There are close to 14,000 different retirement funds, and among those in Kenya and Nigeria there is very little awareness. Even in South Africa, by count of funds, there's little awareness; but by count of assets, because of the sovereign wealth pension fund, there's larger awareness."

Commenting on the findings of the report in a SinCo press release, Sinclair stated, "Further research is needed to benchmark ESG impact, but there is no doubt billions of dollars today are seeking investment opportunities in the region."

Asked by about the state of ESG research on the continent, Sinclair said, "Some of that is getting the international providers in the game. MSCI is on the ground here, and we're potentially doing a project with Trucost. So there has been some looking into it. But at one level it's still about getting the major ESG research and analysis shops to get Africa more properly on their radar. There's no doubt that they cover controversial issues, or cherry-pick elements, but robust coverage of the largest companies just does not exist today."

A recommendation made by the report is that a benchmark index of sustainable investment in Africa be launched, to "spur the development of new portfolios and products that specifically integrate ESG factors."

"The JSE (Johannesburg Stock Exchange) Socially Responsible Investment (SRI) Index has been very helpful," Sinclair said. "Our view is that to improve the level of understanding of Africa's investment destination, the role of sustainable investment, and how ESG factors affect it compared to the rest of the world, an index would go a long way."

Asked to describe impediments to the uptake of sustainable investment on the continent, Sinclair said, "All the usual subjects crop up: the knowledge gap, unfamiliarity, costs, the case for sustainable investment. But what might not be immediately apparent in the report is that in Africa there are fewer skills. In the main, you can build a team fairly easily in a place like Boston, but it's much harder to do so in the major cities of Africa."

"There's often a feeling of solidarity in African situations where people are mindful of the implications," he continued, using as an example the necessity for job growth. "To get the right trend of growth is often seen as an extra ask."

However, he continued, "From the 160 interviews we did for the report, we found a real interest from the average African investment professional to learn from what's happening in other places. I wish more people from the Northern Hemisphere would see, and think about things like knowledge sharing and technology transfer."

"It's a great opportunity we have, but there's concern too," Sinclair concluded. "Africa has gotten the rough end of the deal in the past, and there's caution about having seen this play out before when it didn't work out."

"I think this is a great opportunity for sustainable investment people to take the lead in thinking how sustainable investment could be at the forefront of a system in Africa."


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