ESG investments will fuel Africa’s post-pandemic recovery
Over the past year, the Covid-19 pandemic has anchored the growth of Africa’s developing economies, says Simon Rankin.
However, pandemic mitigation, aided by the global vaccine rollout, means African markets are turning to post-pandemic recovery. At the center of this recovery, the focus is on environmental, social and (ESG) governance, which has been demanded by investors, supported by continued government stimulus and supported by development finance institutions (DFIs) and banks. of multinational development.
Impact on Africa’s financing
Covid-19 has had both a very direct and negative impact on Africa’s growth. OMFIF and the Absa African Financial Markets Index found that in 2020, economic growth was minimal on the continent and that there had been a significant disruption in supply chain finance due to the pandemic.
This has had a severe impact on some of the most vulnerable economies such as Angola and Zambia, which lack the macroeconomic opportunities of countries like South Africa and Egypt. With the exit from the pandemic being a key goal for Africa, new financing models are needed to support those affected and ensure that Africa’s smooth recovery is sustainable both financially and environmentally.
Development finance institutions have an important role to play
This is where DFIs come in. DFIs have long been essential providers of finance in Africa, providing riskier, longer-term investment capital that tend to focus on sustainability, with measures type ESG who seek to “ attract ” commercial lenders.
While some differences lie in the specialties of DFIs, with some focusing on a subset of countries, sectors or currencies, most DFIs invest in all areas to ensure and improve a prospect’s success.
As investment vehicles, DFIs can fill funding gaps on projects that banks might turn down due to concerns about the risk or duration of an investment, as most banks tend to focus more on shorter investment loans and less risky projects.
However, where the right opportunity exists, a co-loan or hybrid model can step in to seize the opportunity. Banks can lend jointly with DFIs, with banks holding most of the shorter-term securities and DFIs holding or guaranteeing the rest. This model has many applications and can be structured in many ways that can propel Africa’s post-pandemic recovery in a sustainable manner by turning a possible loan denial into a successful application.
The rise of the co-loan?
DFIs have traditionally worked twice. On the one hand, their investments in the continent have been facilitated by the banks – so-called wholesale loans. DFIs lend money to an African or international bank with connections on the ground, which then lend money to the agreed framework using an integrated infrastructure. Since these loans are funded by DFI, they are traditionally sustainable in nature, closely follow the ESG requirements of the lender, and require reporting and validation.
DFIs have also used a direct lending structure, in which the DFI bypasses banks and invests directly in companies on the ground in Africa. These are usually larger deals, in which the DFI can afford to invest the time and resources necessary to ensure that the project fits its model.
Therefore, the relationship between banks and DFIs in Africa lends itself to a hybrid model of financing medium-sized enterprises, which DFIs would not otherwise be able to reach. Co-loans can be seen as bridging the gap between wholesale programs and direct loans, thereby increasing market penetration and discretion on a tailor-made basis.
The combination of capital from DFIs, which can be used to make riskier investments, with capital from a national or international bank, reaches more companies while alleviating some of the bank’s reporting and validation requirements. Ultimately, DFIs and banks have the same goals in Africa, which is to succeed in financing Africa’s future in a prolonged and sustainable manner.
Like a green Ferrari
The pandemic has been a turning point for most countries around the world when it comes to ESG standards. What was traditionally a niche market that investors didn’t pay too much attention to is now the backbone of most investment strategies. DFIs are at the forefront of sustainable development in emerging economies and have always promoted an ESG style agenda, but what is changing is the on-the-ground willingness of projects in Africa to ensure they meet standards. ESG, defined long ago as IFC protocols.
Investments that were not considered “ bankable ” ten years ago, such as renewable projects, are suddenly funding hot spots due to pressure from the investment community for ESG investments.
For example, Lake Turkana, a wind power project in Kenya, is like a green Ferrari delivering a huge amount of renewable and sustainable energy to Kenya. The wind project increased Kenya’s national power generation capacity by 17% by providing clean, reliable and low-cost energy. A DFI-led project would now likely be jointly funded by commercial investors and DFIs.
This structure can also be used to support small businesses. SMEs are essential to Africa’s growth, and it is only by supporting the growth of entrepreneurs and SMEs that Africa can eradicate poverty and take it to the next level. Hybrid loan structures that manage the risk that banks do not want to take on, coupled with investments in ESG and sustainability projects will pave the way for Africa’s future.
By Simon Rankin, Principal at Absa CIB