Opinion: Too high-risk, too low-return? Why impact investors should rethink their attitudes to Africa

Let’s be honest: there is a lot of private capital in the world, but it’s not flowing to where it’s needed most. This is particularly evident in Africa. You could be forgiven for thinking: “Hold on – there is money and there are developmental challenges, so let’s connect one with the other and get things done.” 

If we were able to shift just 3.7% of the US$100 trillion of global assets under management held by institutional investors each year, that would be sufficient to enable us to achieve the Sustainable Development Goals (SDGs). It seems simple, and in many ways, it should be. So, what’s going wrong, and more importantly, how can it be fixed?

Investors used to the safety of more developed markets are hesitant to invest in African projects due to a general perception of high risk. Questions abound around legal and regulatory issues typically associated with younger democracies, and a lack of the appropriate financial and indeed trade infrastructure limits the efficient flow of goods and services. All things considered, this situation makes for riskier bets and perceived lower returns on investments.

The counterpoint is that with risk comes opportunity, and there is tremendous opportunity in Africa.  Africa is rich in resources – natural and human – but the continent gets a bad rap. A different investment approach can change this. With the right de-risking measures in place, supported by greater contextual awareness, market intelligence, clear and transparent data, and with the right partners that conduct due diligence, just as in any investment, these opportunities need not necessarily mean greater risk.

Creating credible and reliable information

To start with, credible and reliable information is critical for any investor looking to make money in any market. The more trusted information they can glean on a given investment the better. It reduces the scope of uncertainty and enables more confidence in the fundamentals required for smart investment decisions. Conversely, a lack of information, or potholed and unreliable information, has the opposite effect. It disables smart decision-making, generating mere speculation. 

This is why a repository of country-specific market intelligence is a first important element needed to improve Africa’s investment climate. Busy investors on the other side of the world inundated with investment opportunities don’t have the time or inclination to spend weeks and months trying to establish facts that are commonplace and easy to find in more developed markets. There is a clear gap where local agencies can play a role in identifying challenges, sourcing relevant information, and presenting ready-made investment opportunities to global investors. UNDP’s Africa Sustainable Finance Hub (ASFH) is working with countries and regional partners to create country-specific market intelligence for investors to gain insights on the opportunities in Africa through the SDG Investor Map. Data produced through these maps identifies investment opportunity areas where investors can both partner and contribute to national development targets while achieving commensurate financial rewards. Money going where it’s needed most, where it will provide the greatest returns for investors, is a sustainable win-win scenario.
 

Seeing the big picture

A second element needed to improve the African investment ecosystem is to take a holistic view, recognising that investments don’t happen in a vacuum. There are investment opportunities at all levels, ranging from small and medium-sized enterprises (SMEs), which account for roughly 80% of all jobs in Africa, to medium- to large- scale corporations and all the way up to the large-scale government investments in infrastructure, such as roads and energy where public-private partnerships could be established.

There are also investment opportunities across interrelated sectors which means that investors need to think about their investments in the context of upstream and downstream value and supply chains and the complementary investments that contribute to overall success. For governments, this means taking an integrated approach to financing their development plans, taking into consideration public and private capital from both domestic and international sources and the enabling environment that they can create for a healthy investment ecosystem. 

To achieve impact, we must realise that the SDGs are interconnected. No one goal can truly succeed without progress on others. Efforts to end poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests. This means that partnerships are critical to achieving real progress. 

Busy investors don’t have the time or inclination to spend weeks and months trying to establish facts that are commonplace and easy to find in more developed markets

Impact investing that considers the whole ecosystem will generate exponential changes across all 17 SDGs and exponential benefits capable of creating new markets and new investment opportunities over both the short and long term. July 2023 saw stakeholders from across the continent gathered at the inaugural Africa Impact Summit in Cape Town, giving a rare opportunity for investors and businesses across Africa to share on-the-ground insights into the state of investing on the continent from national and regional perspectives and to connect and collaborate to grow the  opportunities of impact investing. 

During the Summit, ASFH launched the Africa Investment Insights Report, which provides an overview of the private sector investment opportunities with the potential to deliver on SDG targets across the continent. The report presents more than 150 SDG investment opportunities from ten diverse economic contexts in Eastern Africa, Southern Africa and Western Africa. These investment opportunities’ financial and impact potential is significant, with indicative returns of 15-20% and most investment opportunities generating a new positive outcome for individuals and communities who would otherwise be underserved, creating new market opportunities and strengthening economies.

The report also makes the case for public-private partnerships in support of impactful investments, as it establishes that most investment opportunities require risk-sharing arrangements and public financing support to be successful, especially for last mile populations and marginalised communities. 

By seizing the moment and playing an active role in shaping the investing agenda and various protocols in favour of broader developmental impact, Africans can ensure that private capital is not only attracted to the continent but channelled to where it is needed most. Together we can put the impact into impact investing.
 
Joanne Manda is senior SDG investment adviser at the United Nations Development Programme (UNDP) Africa Sustainable Finance Hub
 

Header photo by senivpetro on Freepik

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