How domestic investors can drive Africa’s sustainable growth
Sustainable growth refers to the amount of growth a country can achieve without running into problems. The African continent is said to be far from achieving the sustainable development goals that were established some years ago.
In 2019, the SDG funding gap grew quickly to $4.2 trillion from the $2.5 trillion in 2019. There are investors in Africa who have about $1.9 trillion in terms of assets. The continent will need just a percentage of these assets in order to achieve sustainable development goals.
The assets of these domestic investors have been put in government securities and just a fraction of the assets have been invested in attaining sustainable development goals and other investments like infrastructure. Due to the rising inflation, most investors are not able to hit the target set for their returns.
In order for these investors to bounce back, they need to put their investments in different portfolios. Regulators in some countries permit that there is an expansion of asset allocation. In South Africa and Kenya for instance the pension funds can allocate up to 10 percent of their assets to alternative assets.
Also, in Nigeria, 5% of their tier 2 pension can be allocated to alternative assets, 2.5 % for Botswana, and 3.5% for Namibia. These assets that have been set aside can amount to $52bn which can contribute to attaining the Sustainable development goals. This shows how domestic investors can contribute to the development of the continent.
PERCEPTION OF RISK BY INVESTORS
Due to the perceived risk associated with SDGs and alternative assets, most domestic investors are reserved about investing directly in them. Blended finance is the strategic use of development finance that allows organizations with different objectives to invest alongside each other while achieving their own objectives.
Blended finance is one of the ways by which the perceived risks associated with the SDGs can be solved. Concessional capital and the use of risk mitigation are instruments of blended finance and this can offset the risk and increase the comfort of investors to participate in transactions.
16% of domestic investors residing in Sub-Saharan Africa are said to have participated in the blended finance captured by Convergence.
ACTING ON BLENDED FINANCE
One of the blended finance transactions that were made is the Climate Investor One (CIO). An $850m blended medium designed to speed the development of renewable energy infrastructure projects in emerging markets. The fund allowed for the participation of investors with different risk appetites and return requirements.
At the end of it all, the funds were used to finance engineering studies, environmental assessments, financial modeling, and other general development activities, which increased the profit of the project.
To achieve sustainable development on the African continent, the efforts of all stakeholders are required to close the funding gap and this can be done if blended finance is practiced by these domestic investors.
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