In this article, Dr. Frank Aswani, the CEO of the African Venture Philanthropy Alliance explores the potential of Sustainable Finance to power Africa's development and the opportunity cost of not getting Sustainable Finance right in Africa.
The world has vastly changed over the last few years. Staying abreast of all these rapid global changes can, in itself, be a challenge. But change is inevitable, and so is evolving along with it if we want to thrive. The African continent stands at the cusp of an emerging new world, a new way of doing things with vastly changing systems and structures; and people’s perspectives on how they want to live. This shift makes it necessary to re-examine everything and respond with appropriate, sustainable solutions especially as it pertains to the development required for the African people to competitively participate in this new order:
- The SDG financing gap: The financing needed to achieve the continent’s SDGs greatly surpasses all current development finance flows and is currently estimated at between $500 billion - $1.2 trillion annually. Further, the supply of social investment capital remains significantly mismatched with demand from social enterprises and impact businesses.
- Declining social investment financing: Social sector funding in Africa traditionally comes from two main sources - Governments and Overseas Development Agencies (ODA's). Both remain deficient and are currently under pressure due to declining aid, growing government debt, and changing priorities of donor countires.
- Effects of the COVID-19 pandemic: The COVID-19 pandemic exacerbated inequality and set developing countries' efforts to meet the SDGs several steps back. It will also be harder for them to rebound from the effects of the pandemic as they “lack domestic financial systems to provide reserves, which may accelerate global financial inequalities”. For instance, according to the International Monetary Fund, the number of people living in extreme poverty across Sub-Saharan Africa rose to over 32 million in 2021.
- The Challenge Climate Change poses to Africa: The continent is the most vulnerable to the effects of Climate Change despite contributing only 4% of carbon dioxide emissions. Yet, it receives the least amount in Climate Financing. According to AfDB, Africa alone will need US$ 20– 30 billion per year over 10 to 20 years for climate change adaptation. The Climate Crisis will affect areas that stand at the centre of the continent’s areas of development - agriculture, healthcare, water, productivity, all made worse by an increase in conflict.
These challenges may seem daunting but they present a significant opportunity to broaden funding sources by strategically engaging all financing players, including the vast pools of private resources available across Africa, through Sustainable Financing.
At AVPA, we use the European Union definition of Sustainable Finance: the process of taking environmental, social, and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.
Environmental considerations might include climate change mitigation and adaptation, biodiversity conservation, pollution prevention, the circular economy, among others. Social considerations could refer to issues of inequality, inclusiveness, labour relations, investment in human capital and communities, as well as human rights issues. The governance of public and private institutions – including management structures, employee relations, and executive remuneration – highlight governance considerations, which have a fundamental role in ensuring the inclusion of social and environmental considerations in decision-making processes.
In 2020, AVPA published an 18-country study that mapped the diverse field of social investment across East, West, and Southern Africa. The report highlighted that aid donors, DFIs, and sustainability aligned fund managers are the largest providers of social capital across these regions deploying billions of dollars annually. Additionally, Corporate Social Investors (CSIs) across sub-Saharan Africa largely support basic services such as healthcare and education.
In each of these regions, hundreds of institutions are deploying capital to achieve ambitious social and environmental goals. Yet the capital from these and public funding sources remains deficient. This calls for us to broaden the funding base to include private financial and capital markets in a way that fosters the growth of fair, inclusive, and sustainable economies.
To achieve meaningful progress, the continent needs an ambitious shift in funding sources and structures that includes the adoption of new innovative financing models like green bonds, climate financing, social impact funds, revenue based financing and more. These strategies would be especially effective in addressing the gaps seen in agriculture, food security, power generation, clean water and sanitation, to name a few. Encouraging funding and investments in these areas will create “long term value creation and impact”.
Although the concept of sustainable financing is still growing, there are many countries and organisations successfully implementing ESG initiatives. South Africa was the first African country to issue a green bond in 2012 and is developing a green finance taxonomy, a governance framework, and a benchmark climate risk scenario for use in stress tests by the financial sector. The Central Banks of Seychelles and Mauritius are some of the institutions that have set up the Network for Greening the Financial System in order to help strengthen the global response required to meet the goals of the Paris Agreement The African Ministerial Conference for the Environment, alongside international institutions, has recently put forward the African Green Stimulus Programme, in partnership with the UN Environment Programme.
These are just a few of the initiatives already underway on the continent but we need many more of these across Africa. To this end, AVPA has been organising various initiatives to help build capacity, increase awareness and drive partnerships that will hopefully help unlock new capital for social impact. One such initiative is a Dialogue Series on Sustainable Financing that brings together key actors to discuss the challenges and opportunities of this financing model across Africa. Key insights from these discussions include:
- Good governance remains a critical component to long-term success of business growth across Africa
- Peer-to-peer learning, tools, resources, and training is needed to help organisations embed ESG thinking and practice into their day-to-day operations
- Financial institutions are not seen to be providing enough sustainable financing
- For African SMEs to scale, sustainable financing needs to be prioritized as they constitute the back bone and growth engines of economies across Africa
AVPA will use the information gathered during the Dialogue Series on Sustainable Financing to complement and strengthen services provided to a large pool of social investors. In particular, AVPA is already rolling out: robust capacity building programs, curated networking opportunities, and expanded deal flow live sessions, designed to help investors, across the entire Continuum of Capital, deploy funds more strategically, at the scale and speed needed to meet the SDGs.
The remaining years to 2030 will determine whether Africa will achieve its Pan-African vision of ‘an integrated, prosperous and peaceful Africa, driven by its citizens and representing a dynamic force in the international arena.’ (African Union, 2015). To do this, environmental, social and governance considerations must be at the heart of every investment decision if we are to finally realize the true African Renaissance.
The third instalment of the Sustainable Financing Dialogues is taking place on 24th February 2022 under the sub-topic Driving Africa’s Development Through Sustainable Finance: The Role of Financial Institutions. Participation is open to all upon registration using this zoom link.
Reference List
European Commission. (2020, March 7). Overview of sustainable finance. https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/overview-sustainable-finance_en
Harrington, K. (2017, November 21). The role of financial services in helping to meet the UN Sustainable Development Goals. EY Financial Services Thought Gallery. https://eyfinancialservicesthoughtgallery.ie/un-sustainable-development-goals/
OECD (2020), Global Outlook on Financing for Sustainable Development 2021: A New Way to Invest for People and Planet, OECD Publishing, Paris, https://doi.org/10.1787/e3c30a9a-en.
Selassie, A. A., & Hakobyan, S. (2021, April 12). Six Charts Show the Challenges Faced by Sub-Saharan Africa. IMF. https://www.imf.org/en/News/Articles/2021/04/12/na041521-six-charts-show-the-challenges-faced-by-sub-saharan-africa
