State of ESG and impact investing in South Africa

The impact investing industry has grown in stature in Southern Africa over the last ten years, and impact investors the world over have developed a particular interest in Sub-Saharan Africa due to the region's substantial potential for investments that deliver promising social and environmental impact.

According to the Global Impact Investing Network (GIIN), investor allocations to impact investing that deliver on specific environmental, social or governance outcomes - and not just screen for ESG risks - now stand at more than $1 trillion globally.

According to the 2022 edition of the African Investing for Impact Barometer, there has been an obvious uprise in the impact investing arena in Africa. Investment amounts have exceeded two-fold growth to $64.3bn of assets under management since its last 2017 survey of asset managers was conducted.

ESG versus impact investing

Asset managers use Environmental, Social and Governance (ESG) and impact investing considerations to invest in projects that positively impact society and the environment.

ESG looks at a company's environmental, social, and governance practices alongside traditional financial measures. Some asset managers invest only in sectors focused on specific ESG themes, such as climate change-themed investments. An investment fund may exclude investments into businesses manufacturing weapons and ammunition or mining or processing fossil fuels.

In certain jurisdictions, such as the European Union, ESG regulations require EU companies, countries, organisations, and trading partners to adhere to the bloc's regulations and legislation around ESG. For example, the EEU Carbon Border Adjustment Mechanism (CBAM) is seeking to address carbon leakage risks by introducing a carbon price on imports of specific carbon-intensive goods from outside the EU, such as iron and steel, cement, fertiliser, aluminium, and electricity.

The table below lists some ESG factors that investors take into consideration:

Impact investing (also known as thematic investing) aims to help a business or organisation produce a social benefit. Impact investors channel money into projects designed to create jobs and improve access, quality, affordability, diversity, and inclusion. According to the Association for Savings and Investment (ASISA), impact investments include infrastructure, sustainable agriculture, renewable energy, micro-finance, and essential services such as housing, healthcare, education, and job creation. These projects require manager expertise, longer investment horizons, and measurements proving the impact achieved.

South Africa is the regional impact investing hub

South Africa forms the pillar of impact investing in Africa. According to the Global Impact Investing Network, it boasts the most significant number of impact investors and the most impact capital disbursed of any country in the region.

Despite the volume of impact investing activity in South Africa, impact capital represents a small part of the overall South African investment picture. Interestingly, the term "impact investing" is less commonly used or understood in South Africa than elsewhere. However, the GIIN 2022 report affirms that,

"Whether or not investors self-identify as impact investors, South Africa has had more deals and capital disbursed by [both] development finance institutions (DFI) and non-DFI actors than all other markets in the region combined."

Why South Africa must prioritise impact investing

Impact investors have many opportunities to operate in South Africa and to leverage return-seeking investments to drive job creation, economic development, and opportunities for disadvantaged populations. Impact capital is desperately needed to address South Africa's triple challenges of poverty, inequality, and joblessness. Impact investing can target underserved communities and drive development in high-potential sectors, which include education, energy, tourism, financial inclusion, and agriculture.

According to Chris Ahlfeldt, co-convenor of the UCT Graduate School of Business's Bertha Centre Impact Investing short course,

"Examples such as SunFunder, the Alternative Service Delivery Unit and social infrastructure funds are helping to dispel the myth that investing for impact inevitably comes at a trade-off with profit. They and others are also demonstrating how focusing on customer needs and taking an innovative approach can create a significant and sustainable impact that makes a measurable difference in people's lives. These are [both] lessons worth learning as we work together to meet the UN Sustainable Development Goals (SDGs) by 2030."

Defining true impact

Impact investors' dual mandate to realise both financial, and social and environmental returns requires a strong focus on measuring impact as part of their core activities. As in the rest of Southern Africa, most impact investors in South Africa create tailored metrics for each portfolio company to capture individual impact and reduce administrative burdens accurately.

Asset managers, regions, countries, and companies have different definitions of ESG, so one of the biggest challenges is defining ESG and impact investing. There is a growing complexity surrounding ESG analysis and an upsurge of financial products sold as ‘socially responsible’.

There is also the danger of 'greenwashing' by companies and individuals that make false or unsubstantiated claims that hoodwink consumers or investors into believing a company's goods and services have a significant positive environmental impact than what is true.

Is ESG a fad or an investment approach that will last?

The ESG landscape is rapidly expanding, with regulators worldwide reviewing their reporting requirements with indications that reporting is shifting from voluntary to mandatory. Analysts argue that with climate change threats, social disruption, and increased governance risks, it's clear 'ESG' and investing for impact is more than a passing craze.

Another reason ESG and impact investments are unlikely to be fads is the return on investments (ROI) they are delivering. Andrew Lee, global head of sustainable and impact investing at UBS Global Wealth Management, told Bloomberg News, 

"We see anything that we offer to our clients and that we've labelled as 'impact investments' as squarely delivering market rate or better types of returns."

Climate change finance is increasingly on the geopolitical agenda as nations prepare to attend the COP 27 UN climate summit this month (November).

"Wealthier countries bear a moral responsibility to help poorer nations recover, adapt and build resilience to disasters," according to UN secretary-general António Guterres. "Let's not forget that 80 per cent of emissions driving this type of climate destruction are from the G20".

There will no doubt be a renewed battle over how much financial support rich countries provide to developing nations to help with the consequences of rising global temperatures. Russia's invasion of Ukraine has fuelled energy and food prices and the broader inflation crises. At the same time, US-China relations are fractured, meaning wealthy nations will be less likely to fulfil any emerging market pledges (a 2015 pledge for $100bn annual help to poorer countries still needs to be fulfilled). But that doesn't mean ESG issues will be any less relevant in the years to come.

Indeed, while global climate finance may be left wanting, parts of the global environmental ecosystem have an over-abundance of private funding, which has seen sky-high green asset valuations.

Meanwhile, mainstream environmental, social, and governance funds have swelled, despite the anti-ESG backlash. This trend is likely to continue globally and grow in South Africa in the years to come.