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‘We all fail if we don’t win together’

03 March 2020

As the most unequal country in the world, South Africa is at a tipping point to deepen the role of financiers and the private sector in creating more positive social and environmental impact.\ ______________________________________________________________________________________________________________________

By Tine Fisker Henriksen

The unprecedented civil unrest in Chile towards the end of 2019 was driven by inequality and had a severe knock-on effect to that country’s economy. Where Chile has a Gini coefficient of .48, South Africa remains the most unequal country in the world with a Gini coefficient of .63. The higher – not the better; it’s a number that increasingly demands action. With the GSG Impact Summit to be hosted in SA this coming spring – the biggest impact investing event on African soil to date – it’s an opportune moment to accelerate the positive social and environmental impact of finance and business.

This increasingly seems possible; there is an urgency around tackling poverty, inequality and unemployment among traditional investors, government, and other key private sector players. It’s no longer uncommon to hear talk of ‘impact intentionality’ and ‘impact measurement’ in the mainstream financial sector. Intentionality, as positive impact should not be accidental, and measurability as you ‘can’t manage what you can’t measure’.

Impact investing is changing the conversation

Broadly defined asinvestments made with the intention to generate positive, measurable social and environmental impact alongside a financial return (GIIN), impact investing has been gathering momentum in South Africa – although there is some distance still to travel. According to the most recent African Impact Barometer, South Africa leads the continent in terms of having the largest amount of assets invested for impact ($399.54 billion), but that this is still only a small fraction of available assets in the country.

The bulk of these assets reside with the country’s pension funds. At the end of 2016, the total value of retirement funds in South Africa was estimated at over R4trillion. That is a significant pool of capital that could contribute towards reducing poverty and creating jobs. While there are some good examples of pension funds starting to embrace impact investing, for example, the Asset Owners Forum convened through BATSETA, few of the largest pension funds are considering long term investments into the real economy.

Part of the reason for this may be that impact investing remains new to the market. Also, there is a relatively widespread misconception that impact investing can mean taking a hit on returns. But, says Ndabe Mkhize, Chief Investment Officer at the Eskom Pension and Provident Fund (EPPF), “the two are not mutually exclusive”. For instance, investments in township and rural shopping centres in lower income areas, have had a positive impact on society and been a stellar performer in an environment of low returns from listed markets.

Speaking at the Impact Investment Forum in Johannesburg towards the end of last year, Mkhize said that the EPPF is increasingly talking about intentionality and measurability – and that this approach should be embedded in the mandates of all pension funds. When the larger players – both public and private – signal their commitment to impact investing, this will go a long way toward convincing others to start on this path.

The EPPF is not an outlier. It represents a global shift towards impact investing by pension and provident funds. Far from being seen as the riskier option, failing to take the risks of climate change and rampant inequality into consideration when making investment decisions, is increasingly being called into question.

In Australia, for example, state-run retirement funds, that are estimated to own an average of around 14% of every S&P/ASX 200 listed company, are going against government policy to use their financial might to push for governance, environment and social responsibility in big business. Norway's colossal wealth fund announced last year that it would dump around $7.5 billion of shares in oil and gas production and exploration companies, while the Government Pension Investment Fund in Japan — the world's largest — requires asset managers to integrate ESG into investment analysis.

Sharing risk to drive results

In South Africa, National Treasury’s Jobs Fund is a small but significant example of what can happen when government and the private sector come together to share risk and drive results. Najwah Allie-Edries, Head of the Jobs Fund, says that the fund reduces the risk to asset owners making impact investments by, for instance, providing guarantees for early stage financing forinnovative job-creating SMEs in key sectors of the economy.

SMEs are largely underserviced by traditional financiers as they are considered high risk, and yet they are a vital part of the economy, Allie-Edries argues. SMEs contribute some 35%-50% of South Africa’s GDP and more than 60% of new jobs in the informal sector are in the SME space, so finding ways to galvanise funding for this sector is key in the fight against poverty, unemployment and inequality.

The Infrastructure Fund, first announced in 2018 with government setting aside R100 billion in seed funding, is seeking to take a similarly innovative approach to boost construction and prioritise water infrastructure, roads and student accommodation as a catalyst for further investment. Simultaneously, the PIC launched the Project Development Partnership Fund, an impact investing fund that focuses on investing in companies that solve socio-economic challenges.

One of the key questions is to identify how to de-risk impact investing by bringing together different pools of capital and incentivise significant players such as pension funds to increasingly take part in building an impact investing sector.

‘Opportunities multiply when they are seized’

To effectively tackle widespread inequality and climate breakdown – it is critical that government and the private sector as well as civil society, small business, labour and individual investors are engaged and collaborate – and we will need to adapt and stretch existing financing mechanisms.

The cost of not doing anything – as the situation in Chile has shown us – might be greater than the potential cost these new approaches may entail. We need to find reliable ways to make sure that every Rand invested in this country is having multiplier effects, helping us to build a country where everybody wins. At the GSG Summit in Johannesburg in September, the eyes of the World will be on South Africa to position itself as a leader in building inclusive markets. We have six more months to put our best foot forward.

Tine Fisker Henriksen is the Innovative Finance Lead at the UCT Graduate School of Business’ Bertha Centre for Social Innovation and Entrepreneurship