Time to Invest in Africa’s Green Growth Potential
By Andrew Ireland, Palladium
Among the many transformative events of 2020 so far — from COVID-19 to the renewed Black Lives Matter movement in the U.S. — another important shift is gaining momentum while attracting relatively little attention. Five years after the adoption of the U.N. Sustainable Development Goals, corporations and governments around the world are beginning to take concrete steps to disclose and rectify the social and environmental impacts of their operations. Companies from Apple and Microsoft to Blackrock and Delta Airlines are increasingly reshaping their global supply chains to address sustainability concerns and support the well-being of local communities, while committing to more ambitious emissions reductions targets on shorter timelines. Meanwhile, governments are continuing to grapple with how best to fulfil their commitments to climate change mitigation and biodiversity preservation. For example, the European Union plans to set a carbon cost for imports as soon as next year.
Moreover, the investment community at large is in the midst of a sea change in the kinds of assets that financial institutions are willing to hold. Concerns over the reputational and long-term financial risks of carbon-heavy investments have led more than 1,200 organizations worth over $14 trillion to divest either partially or fully from fossil fuels in recent years. This includes institutions with major endowments — such as the Norwegian Sovereign Wealth Fund, Ireland’s Strategic Investment Fund, and New York’s Pension Fund — as well as an increasing number of colleges and universities in the United States. Large corporations have also begun to integrate this thinking into their own strategies. Microsoft, as part of its climate change commitments, has announced a $1 billion Climate Innovation Fund to invest in new carbon mitigation and removal technologies, while Apple has committed to creating a “carbon solutions fund [that will] invest in the restoration and protection of forests and natural ecosystems globally.”
Moving Beyond Corporate Social Responsibility
Increasingly, these investments are not viewed as Corporate Social Responsibility-related giveaways, but rather viable opportunities to earn real returns. The IMF recently found that so-called “ESG” funds — those that incorporate environmental, social, and governance principles — perform at least on par with conventional funds, and companies with better ESG performance generally experience lower costs of capital and generate better future financial performance. At least two dozen investment funds have already dedicated over $2.5 billion to “green growth” opportunities in agriculture and forestry alone, and a recent analysis from the World Economic Forum (WEF) found that working to protect and restore the world’s natural capital could generate business opportunities worth $10 trillion per year and create 395 million jobs by 2030.
This shift has also been driven by a growing understanding of the risk that the status quo poses to the global economy. In the WEF’s 2020 Global Risks Report, business leaders and other respondents ranked the global, collective failure to act on climate at the top of the list, with biodiversity loss ranked third. Several other top risks, such as water crises, infectious diseases, and extreme weather, are inextricably linked to climate change and biodiversity loss. This concern for the economy’s dependence on a healthy natural world is well-founded: another recent WEF report found that “$44 trillion of economic value generation — more than half of the world’s total GDP — is moderately or highly dependent on nature and its services.” In this context, the $2.5 trillion annual financing gap for achieving the SDGs seems less like an insurmountable barrier to action, and more like a unique opportunity to generate shared value for shareholders, communities, and ecosystems alike.
Why Green Investors Should Look to Africa
As investors search out bankable opportunities within new green growth sectors, they would do well to look to Sub-Saharan Africa, where renewable natural capital assets account for around 25% of total wealth, higher than any other region. This figure does not even factor in opportunities to harness Africa’s renewable energy resources, nor the vast array of ecosystem services that African habitats provide, such as carbon sequestration and water filtration, that are only now beginning to be properly valued and priced. Crop and pastureland, renewable energy, timber and non-timber forest products, and opportunities based on protected areas and wildlife tourism all have the potential to generate returns in perpetuity, if managed properly. And with the right business models, ventures that tap into this economic potential also benefit local communities that depend directly on these assets, generating job opportunities, boosting incomes, increasing resilience, and incorporating the voices, perspectives, and expertise of indigenous and other resource dependent communities.
How Donors Can Help
In this context, donors and impact investors looking to support long-term and sustainable economic development throughout Africa would do well to focus on the natural capital opportunities available to investors. The business case for investing in Africa is increasingly clear, and as investors explore how to replace newfound gaps in their portfolios left after divesting from fossil fuels and other reputationally and operationally risky assets, donors should be prepared to provide them with the information, networks, pipeline, and technical support to move beyond “impact-neutral” alternatives to invest in African opportunities that proactively generate positive impacts.
Donor support to these potential deals should particularly focus on applying blended finance to lower the risks associated with such investment opportunities, such as untested business models, longer return horizons, and high implementation and scaling costs. From the forests of the Congo Basin to the highlands of Ethiopia, opportunities abound throughout the continent to invest in green growth sectors such as eco-tourism, sustainable timber operations, non-timber forest products, forest restoration, and increasingly, ecosystem services via carbon markets and water funds.
Such investments, when approached and structured properly, contribute to investors’ triple bottom line, while helping them respond to consumer demand for products that support, rather than damage, communities and the ecosystems on which we all depend. Palladium’s experience developing innovative financial instruments for enterprises focused on tech-enabled micro-forestry in Kenya, marine conservation off the coast of East and West Africa, and sustainable natural rubber production in Indonesia have shown that creative partnerships and approaches can help first movers overcome such barriers, generating demonstration effects that then bring additional investors to the table. Meanwhile, our own investment in the restoration of 40 hectares of forest in the Peruvian Amazon — allowing us to achieve carbon neutrality while supporting local indigenous communities in applying sustainable agroforestry practices on their lands — is generating important lessons learned applicable to similar collaborative efforts around the world, including in Africa.
As the world begins to “build back better” in a post-COVID economy, the international community has a rare chance to help the private sector use its unparalleled resources to generate social and environmental impact alongside continued financial returns. Africa, with its significant endowment of natural capital, should be a region of increasing interest to these organizations, and donors are well positioned to support investors to engage in these markets, creating jobs, boosting incomes, improving well-being, and protecting the natural world for decades to come.
- Markets and Trade