OMAI’s Head of ESG, Dean Alborough, penned an article for Green Economy Journal exploring the importance of private capital in driving the ESG agenda. Dean discusses how the current pandemic has triggered a chain of political and economic trends which have encouraged investors to adopt portfolios grounded in ESG principles at a far quicker pace than previously anticipated.

The increasing uptake of ESG principles represents a paradigm shift in the investment landscape. Through the pandemic ESG funds have demonstrated equal, if not higher returns and better downside protection. At the beginning of the pandemic, sustainable funds attracted record inflows in the first quarter amid market turmoil, and figures from the Investment Association reveal investors have pumped nearly $4bn into ethical funds in 2020 so far, significantly more than the $3.2bn recorded for the whole of 2019. Whilst some detractors have argued that ESG investing is simply a bull market phenomenon, increasingly more companies are beginning to integrate ESG strategies into their business models, indicating that the trend is here to stay. So what role can private capital play in achieving green economy outcomes?

Two critical roles include acting as a partner to governments and shifting the development trajectory. Private capital can partner with governments to identify and fill financing gaps in sectors where government budgets are exceeded, with an ability to mobilise international capital. Private capital also acts on behalf of the end investor ion the street, with investors’ expectations rapidly shifting away from the unsustainable development trajectory set by the industrial revolution to a new sustainable, low carbon and socially inclusive development trajectory.

The opportunity for private capital to play a significant role in Africa is immense, not least because the continent faces an annual funding gap of between $500 billion and $1.2 trillion to realise the UN Sustainable Development Goals. Moreover, less than 13% of impact investing capital is directed to Africa. This has paved the way for increasing private sector involvement in deploying capital to achieve ESG outcomes across the continent.

Take African Infrastructure Investment Managers’ (AIIM), IDEAS Managed Fund, launched in 1999, which invests in roads, railways, housing, and renewable energy infrastructure in the SADC region. AIIM is a member of Old Mutual Alternative Investments (OMAI), and through its IDEAS Fund has so far invested in 28 assets across South Africa’s renewables sector – including large scale solar power plants and wind farms. Combined, these assets generate some 24.5% of the total clean energy on South Africa’s grid.

Beyond South Africa, AIIM has also recently acquired a minority stake in BBOXX, a next generation utility platform, providing affordable and reliable clean energy to off-grid communities. As a result of the transaction, BBOXX has since expanded to provide clean energy and other utility services to an additional 250,000 people in Rwanda, Kenya and Democratic Republic of Congo.

The impact of such projects spearheaded by the private sector are significant. Over 600m people in Africa lack access to electricity. High grid connection costs, coupled with an increasing need for power, make off-grid solar a compelling alternative for rural communities with unreliable grid access. Deploying private capital to plug the gap in energy generation helps stimulate economic development in rural and peri-urban communities by creating new markets through the entry point of electricity.

Similar ESG principles are making their way onto the government agenda. President Ramaphosa’s recent economic recovery plan, announced on 15th October 2020, committed R1 trillion ($60 billion) in funding towards infrastructure investment over the next four years, including a major increase in energy generation, half of which he intends to generate from renewable sources.

The private sector delivers impact across the ESG spectrum, not just in terms of climate action. A key area being social inclusion. Take South Africa’s over-burdened public schooling system which faces many challenges, including sub-standard infrastructure, poor functionality of governing boards and teacher absenteeism. Since 2011, OMAI has invested in South Africa’s education sector through its Schools and Education Investment Impact Fund of South Africa. Following a debt investment by the Fund and a consortium of investors, construction began in 2017 on a new school, St Christopher’s School in Kidds Beach in the Eastern Cape. The school opened in 2018 with 171 learners; in its second year the school exceeded its target of 380 learners to achieve a growth rate of 140%, breaking the 400-learner mark. With fees less than R20,000 per annum, the school provides access to quality, affordable education for lower-and middle-income families.

In addition to achieving social outcomes, the school runs off renewable energy, consisting of 65 x 330W solar rooftop panels with a 57V lithium polymer battery bank, allowing it to go 100% off grid with no dependency on Eskom power at all.

There are, however, many challenges in exporting ESG objectives across the continent. The reality is many African nations have not declared national contributions to emissions reductions, placing even greater value on the role of private capital in driving the ESG agenda forward.

This extends to other areas of high carbon-emitting fuel sources. South Africa has historically anchored itself to a reliance on coal, which is expected to account for just under half of its energy mix by 2040. Zambia has a dependence on coal exports. Both countries face significant economic risks as the world transitions away from coal power generation.

Many investors have positions in fossil fuels that are difficult to move away from in the short-or-medium term. We are now confronted with the challenge of how to transition from these assets in a swift and non-volatile way, whilst also protecting the jobs and livelihoods of those who work within the industries. Fossil fuels are not simply limited to power generation, there is an entire supply chain at work - from exploration to transport and pipelines to port terminals.

Despite the difficulties in driving ESG objectives, institutional investors across the globe acknowledge that ESG risk management is here to stay. Increasing calls to implement common reporting standards on ESG performance as a way of accurately measuring progress further this message.

In many ways, Covid-19 has been the wake-up call some investors needed to realise the value of integrating ESG principles in their portfolios. As nations across Africa battle mounting debts, contractions in GDP and loan defaults, the role of the private sector in driving the ESG agenda forward is now more important than ever. The investing landscape is changing at an incredibly swift pace and CIO’s should be aware of these seismic shifts now, putting money to work with strong ESG risk management and identifying the ever-growing investment opportunities in green economy assets.