AIIM: African opportunities appeal to impact investors

AIIM’s head of ESG, Dean Alborough, says that managing risk is key to achieving impact in Africa – and the standardisation of reporting will make life easier for fund managers.

This article is sponsored by African Infrastructure Investment Managers

For investors seeking to put their money to work in driving positive impacts, Africa offers unparalleled opportunities. In particular, the twin challenges of tackling climate change, while improving energy access for the 600 million Africans who lack electricity, mean a flood of investment in renewable power infrastructure is required. The African Development Bank estimates that up to $525 billion will be needed up to 2030.

Dean Alborough, head of ESG at African Infrastructure Investment Managers, believes that appetite for investments that address the continent’s infrastructure deficit will continue to grow. He tells Infrastructure Investor that a robust framework for managing both risks and positive impacts is essential for operating effectively on the continent – and he welcomes the growing momentum towards the standardisation of impact reporting.

Dean Alborough

Why is Africa an attractive market for impact investors?

Africa is very diverse across the 54 countries, which each have their own set of priorities and challenges, but overall Africa is one of the world’s most underserved markets from an infrastructure perspective. There’s a structural imbalance between the demand for core services, such as transport, water, logistics and digital, and the supply of those services. And because investors are working from such a low base on the continent, the impact that capital can have is much higher than in many other markets.

So, as a global impact investor, if you’re looking across the world and you’re serious about creating positive impact in underserved markets, then Africa has to be a key consideration for capital allocation. And the international investors that do allocate relatively large sums towards infrastructure in Africa tend to be very much geared towards the impact output agenda. DFIs at this stage might be a little bit ahead of the curve in terms of understanding impact, but very quickly large pension funds are matching the DFIs’ level of granularity in terms of the information they’re looking for.

What is AIIM’s strategy for realising impact opportunities?

From a strategic perspective, like many others, we use the UN Sustainable Development Goals as a top line set of goals. And we link our focus areas to the SDGs and also very specifically to the SDG targets. We’ve also adopted an ESG and impact management framework – this informs what we invest in and what actions we look to take with an investment.

“If you’re serious about creating positive impact in underserved markets, then Africa has to be a key consideration for capital allocation”

When we looked at the breadth of the challenges in Africa, we wanted to answer a few key questions: “What are the biggest global challenges that we can contribute to? What are the key challenges locally for us? And where can we as a business make the biggest difference?” So, in answering those questions, we came up with five key focus areas: climate change, diversity, decent work, sustainable infrastructure and governance.

We have a group of assets that are more obviously in the impact investing space. However, across our portfolio, in all our assets, we try and unlock impact wherever we can. So, it’s not a case of “these are our ‘impact assets’ and we’re not interested in achieving impact with our other assets”. We simply recognise that in some assets those positive impacts might be less tangible. To be honest to the market, we’re not going to go out and claim every single asset as impact investments in the purest sense.

How does AIIM manage and measure impact?

To operationalise our strategy, we implement a globally benchmarked environmental and social management system, which governs the risk management and positive impact management through the investment cycle.

Managing the risk is just as important as driving a positive impact – you have to ensure the positive impact actually happens without unintended consequences and negative impacts. So, on the risk side, we adopt and apply a set of international standards and guidelines. These are pretty extensive and they cover all the elements of risk we encounter in private markets.

In practice, positive impacts are actually very tightly linked to risk management. People talk theoretically about impact and risk management as if they’re separate, isolated domains. But if you work with a portfolio company on the ground to seek a positive impact, you very quickly find yourself also having discussions with them around managing negative impacts in their business as well.

$525 billion

Amount required up to 2030 to meet the target of universal electricity access, as estimated by the African Development Bank

From a positive impact perspective, we use the theory of change approach – we identify the end impact and outcomes we’re looking to achieve, and work backwards from that to identify the key metrics to be tracked. We use the approach at a sector level. So, for example, we’ve developed a theory of change for the power sector and another one for digital infrastructure. We find that developing these on a sector level makes it more practical to use the theory of change across a large set of portfolio companies.

Investors are prioritising climate change. How does this affect your approach to operating in Africa?

The effort to combat climate change is the most important global trend that influences impact investing in Africa. This trend will shift investor appetite to low carbon power supply, especially towards renewables. We’re quite fortunate, because unlike a lot of other asset managers, our exposure to fossil fuel assets is quite limited, especially relative to the listed space.

We want to be part of the solution for a 1.5 degree world and we want to accelerate the energy transition. So, we’re targeting renewables as much as we can. The impact thesis is that renewable energy promotes economic growth, improves livelihoods and mitigates climate change. We’ve invested heavily in scaling renewables in South Africa through our IDEAS Fund. We’ve invested through the fund in 28 renewable energy facilities, which generated 29 percent of all renewable power in South Africa in 2020. We’ve also invested in several portfolio companies that provide off-grid power, mainly through solar, to homes and small businesses in various African countries.

And how does AIIM approach the management of climate change risk?

We’re implementing the Task Force on Climate-Related Financial Disclosures framework. The TCFD has certain pillars – governance, strategy, risk management, and metrics and targets – that you need to deal with in order to say that you’re managing climate risk.

From a strategy perspective, in private market investments, much of the transition risk is actually dealt with upfront in the fund’s investment strategy. You’re linking the fund’s mandate to identify climate risk with strategic outcomes. A lot of that affects sector selection. We input climate risk into our actual fund strategies at a really base level. And climate mitigation and adaptation analysis is dealt with through the rest of the investment process.

Then in terms of risk management, we apply the materiality approach. We carry out a prioritisation exercise of climate risks across our assets. We use various climate risk forecast data to identify, calibrate and understand those risks for future climate scenarios. We’ve built in, using the TCFD framework and our ESG management system, climate risk right through the investment cycle – the screening phase, the due diligence phase, the investment transition phase, the asset management phase, and also the exit phase.

In terms of ESG and impact reporting, do you see data standardisation becoming a reality?

There is a real impetus now for the standardisation of ESG and impact metrics. We saw the five leading standard setters coming together with a shared vision last year and now the World Economic Forum has endorsed the IFRS Foundation’s proposal for a Sustainability Standards Board. So, it seems like IFRS is taking a lead position in this consolidation, and the other standard setters look like they’re willing to collaborate to come together. It’s moving very quickly.

Will adapting to standardised reporting requirements present a burden for AIIM?

I don’t foresee a major issue for us in adapting. The strategy we took in developing metrics was to use globally standard metrics as much as possible. My expectation is that standardisation might only shift maybe 10 percent of the metrics we use.

It’s actually going to be a huge step forward for us, because what happens practically at the moment is that every capital provider has their own nuanced set of data that they want to see. You then get this friction up the data chain, where some shareholders aren’t really aligned and then fund managers within an LP structure can’t really align. Standardisation should do away with most of that friction.

Ultimately for us, as a fund manager, collecting data will be that much easier. Our fellow shareholders will be aligned and the management in the portfolio companies will recognise that “this is standard data, we need to provide it, we need to perform on it”.

But there is going to be additional work for some African companies, because any international capital that comes into Africa is going to have these reporting requirements attached to it. Some companies are going to have to get up to speed on proper data collection. A lot of these companies are very sophisticated, but there’s also a whole set – especially small and medium-sized businesses – that are not yet geared for this. They will need to understand what data they need to collect and why they need to collect it. They’re going to have to start having data systems, like they have financial reporting systems, and they’re going to have to articulate this reporting properly to capital providers.