Mobilizing national savings is critical to meeting Africa’s development needs, and the continent’s sovereign wealth funds (SWFs) are one of the key sources of finance that can support Africa’s sustainable development. These funds represent an increased pool of assets that can be used to support domestic investments tailored to the types of long-term investments needed to support economic growth and shared prosperity in African countries.
Globally, both the number of investors and assets under management (AUM) have increased significantly. The amount of SWFs and private pension funds under management increased from $11 trillion in 2015 to $15 trillion in 2020. In Africa, growth in AUM by SWFs increased by 76% and the number of investors increased by 54%. According to PwC, African SWFs managed $300 billion in 2020, making them an important source of investment capital for the continent.
The COVID-19 pandemic has exacerbated the immense development challenges facing Africa. According to the World Bank, COVID-19 has pushed 40 million people in sub-Saharan Africa into extreme poverty, eroding many recent development gains. Furthermore, climate change could push an additional 43 million people below the poverty line by 2030. Reversing these trends will require unprecedented levels of investment to accelerate economic development and create jobs.
Investor appetite for impact investing was surging even before the COVID-19 pandemic. With assets under management reaching $2.3 trillion in 2020, impact investing has the potential to mobilize private capital to address the region’s most pressing social, economic, and environmental challenges. We estimate that the appetite for impact investing around the world is even greater, reaching up to $26 trillion, or about 10 percent of global capital markets. Much of this enthusiasm revolves around investments that deliver market-rate financial returns and positive social impact. Investments of this scale can make a significant contribution to tackling challenges such as climate change and achieving the Sustainable Development Goals.
From funding infrastructure to strengthening health systems to supporting affordable housing development, opportunities abound for investors looking to make an impact in Africa. The African Development Bank estimates that infrastructure financing on the continent requires about $170 billion a year, while solving Africa’s housing backlog will require $2 trillion over 10 years. Additionally, achieving universal, affordable, and high-quality broadband internet access in Africa by 2030 will require an investment of $100 billion to connect approximately 1.1 billion new users. While this may seem daunting, the potential benefits are considerable. For example, Africa’s internet economy could contribute $180 billion to GDP by 2025 and up to $712 billion by 2050.
Africa’s SWF potential is largely untapped. As in other emerging markets, governance challenges are a major impediment to the flow of SWF funds into long-term sustainable development sectors that have the potential to structurally transform African economies. Just remember the infrastructure sector. The annual funding gap is $170 billion, but over five years (2016-2020), flows to African SWFs were only $130 billion. This points to the need for innovative sources of finance and the mobilization of private capital to complement SWF financing.
IFC’s recent partnership with Senegal’s SWF, FONSIS, to develop 20,000 homes within 10 years is one such innovative mechanism. Under the partnership, IFC and FONSIS will acquire housing from developers and provide housing to low-income families through a lease-to-own scheme. IFC and FONSIS plan to mobilize and attract additional investment from domestic and international institutional investors to support this rent-to-own platform.
In addition to innovative public-private partnership mechanisms, the use of robust independent governance frameworks is key to attracting private capital into impact investing. Most African SWFs are already doing this, but it takes time and effort to establish a reliable track record. The continent’s SWFs need to take concrete steps to strengthen their capacities, strengthen governance systems and operate transparent processes to enhance accountability.
To promote transparency and help grow the impact investing market, IFC worked with external stakeholders to develop operating principles for impact management. This operating principle is currently adopted by 158 public and private funds and institutions in 38 countries. These principles support the development of the impact investing industry by establishing a common framework for the governance of impact investing and promoting transparency and trust. For example, we are required to disclose our impact management processes annually.
Working with established impact investors, including signatories to the Impact Principles, helps African SWFs connect, learn and gain significant impact investing experience. By promoting an institutional framework that strengthens collaboration among experienced impact investors, African SWFs will be better equipped and better positioned to unlock significant private capital, pool scarce resources, and contribute to accelerating Africa’s development.
