According to the Global Impact Investing Network (GIIN), the fastest-growing and largest category of impact investing assets under management by investment source is from pension funds and insurance companies. Pension funds that are putting money in impact investing are from the developed world and very little is happening in terms of the investments of the African pension funds.
In many places, pension funds are riding on DFIs and other fund managers to make investments especially in developing countries including Africa. In 2011 while I was working with the Danish International Investment Funds (IFU), together with project development team, we innovated the model that was aimed at attracting the Danish pension funds for impact investments.
These efforts resulted to the first of such collaboration which was the Danish Microfinance Partners that was a $D90 million fund that invests in micro financing institutions in Africa, Asia and Latin America.
The fund was co-managed by both IFU and Maj invest, a traditional investment management company on behalf of the Danish State and the pensioners. Today, there are more than 10 such collaborations in different impact sectors and managing over $1 billion.
Pension funds are characterised by their appetite to provide long-term and patient capital. Traditionally, the funds have been focusing on investments in real estate, publics equities and government securities and for the progressive funds, they have considered investment in private equity but at a very limited scope.
Due to the nature of the funds and the regulations that govern the funds, there are normally limitation on the assets classes that the funds can invest.
For insurance in many Africa jurisdiction, the key assets classes include equities. property, cash and debt. In some markets the regulators, go further by defining the percentage of the assets under management that could be invested and this limit the innovativeness of the funds in how they can allocate their resources.
The regulators objective is to safeguard the pensioners and the believe is that funds should be passive and should be diversified.
Despite the above, in the recent past there is an emerging trend where pension funds are looking at impact investing as a new asset class for investment. Impact investments are investments that strives for financial return as well as social or environmental impact. Impacts outcome are considered and the 17 Sustainable Development Goals (SDGs) also the “global goals” are forming a basis for such investment.
This trend is expected to be on the rise in the near future across Africa mainly due to pensioners asking for more than financial returns as well as the fact that more and more investors are moving towards responsible investments.
The African pension funds should also copy their counterparts in the developed markets in investing in the impact investing sector. To head to this direction, a good example is the Investing4Growth Fund (I4G), This is a fund which a consortium of five UK pension funds who have committed £250 million collectively to go towards socially and environmentally impactful investments.
This model of working in a collectively offers more scope in expertise and sharing the risk between funds as well as mitigating risks as well as managing the fears of contributors and regulators over new markets.
Another alternative for the African pension fund to invest in the impact sector could be through funds of funds. This is where they will be working with fund managers who are overseeing impact funds.
This strategy is favourable because most impact investing opportunities in developing countries are smaller in size, require high level of hand holding, providing a mix of rates of return, and sometimes unclear prospects for exit.
Other than the return and risk drivers to diversification on the impact investing by the pension funds, democratization of pension funds’ investments is happening at a very fast pace in the continent.
This is the situation where members are pushing the fund managers to consider responsible investments as they are keen to make a difference in the world which is requiring the funds to provide social and environmental outcomes.
African pension funds should consider SDGs as a way of business as the 17 goals provides a powerful solution for the funds on engaging beyond the ESG model of responsible investments as the SDGs provides an opportunity for businesses to make a positive contribution to society and a strong business case for making positive changes.
SDGs should be in the fund’s board agenda to be able to meet their client’s dual interest of enjoying a decent pension while living in a prosperous, just and peaceful society. This can only be achieved by participating in impact investing.