30 August 2017
South Africa is making strides in building a green economy. But in order to succeed, it needs innovative funding strategies.
By Dr François Bonnici.
More than 600 million people across Africa lack access to clean, safe and affordable energy. According to the Africa Progress Panel, it will take until 2080 for every African to have access to electricity if we continue as we are.
Despite this gloomy outlook, lights are switching on across the continent, thanks to the ingenuity of energy entrepreneurs. But to keep delivering, the green economy needs a helping hand.
The green economy is of course about more than access to energy. Entrepreneurs are channeling their know-how in multiple useful ways: building worm farms; turning waste oils from restaurants into bio-diesel and fertilizer; and conserving scarce water resources. Nonetheless, they face considerable obstacles. The greatest of these are finance and mentorship.
When a green business is trying a new, innovative, or untested green business model, the risks are often higher, and the payoffs less certain. Thus, even though small green businesses offer significant potential in terms of social, environmental, and economic impact, they remain largely under-served in terms of access to finance. But without sufficient funding opportunities, green businesses can't grow and maximise their impact. From an investor perspective, financing early-stage small or growing businesses is inherently risky and often requires hands-on involvement and costly technical assistance.
Anthony Hall, from Social Investment Africa, a local impact investor, explains: "The disproportionate costs of originating investment into small grassroot businesses excludes many of them from the attention of investors."
To build a thriving green economy in South Africa, private investment is needed particularly at smaller ticket sizes and in small businesses. Small businesses have already been identified as a key element in the country's economic future. According to the Global Entrepreneurship Monitor (GEM) report, South Africa ranks 17 out of 65 countries surveyed in its job creation expectation rate through entrepreneurship. Seventy-two percent of respondents viewed entrepreneurship as a good career option, and SMEs contribute 36% to GDP. Investing in small businesses is therefore an excellent opportunity to grow the green economy.
One inventive solution is the Green Outcomes Fund (GOF), a collaboration by the Bertha Centre for Social Innovation and Entrepreneurship (UCT Graduate School of Business), The World Bank, WWF-SA, and GreenCape. It uses an innovative financial structure to encourage local investment for small green businesses. It aims to incentivise local, South African fund managers to increase investment in small green businesses that make a demonstrable contribution to the country's green economy, as well as job and enterprise creation. The Fund provides pure or reimbursable grants to these fund managers, in exchange for the achievement of pre-agreed green outcomes. These outcomes-payments primarily help cover the costs associated with originating and investing in small green businesses.
Greg Macfarlane, Principal of Edge Growth, believes GOF funding will be a catalyst to raise additional funding from impact investors, which "will in turn dramatically increase Edge Growth's ability to invest in green SGBs who would otherwise have not had access to such capital".
There's an important take-home message here. It's not only about funding, but in how the funding is raised and managed. Funding is not enough; we require innovative funding models. The Green Outcomes Fund blends different types of capital to create greater social and environmental impact, which is a key development in green funding. A blended approach - i.e. mixing concessional, or below market returns, with commercial return expectations - should encourage local investment funds to increase their funding to green SGBs and facilitate technical, yet business-oriented support, to green initiatives.
However, in order to be attractive to funders, green outcomes must manifest and be measurable in a set of verifiable metrics. To address this, the team behind the Green Outcomes Fund developed a set of green metrics that can be selected as potential payment triggers, these relate to, for instance, clean energy, green jobs, CO2 emission reduction, water, waste and land management.
"More and more, global funders are realising the importance of participation in activities that will have a long-term effect on our environment. By partnering with local stakeholders, the efficiency of reaching pre-defined outcomes becomes more attainable," says Friedrich Meisenholl, manager at Business Partners, an affiliated funder.
"We've been able to show that with such upfront support, we can welcome deserving enterprises into the investment community," says Hall.
If South African investors and entrepreneurs work together on great ideas and innovative funding models, it's likely we can keep those lights switching on. With support and a little ingenuity, perhaps - through a thriving green economy - maybe we can offer solutions to some of South Africa's major socioeconomic and environmental challenges.
Dr François Bonnici is the Director of the Bertha Centre for Social Innovation and Entrepreneurship, a specialised centre at the UCT Graduate School of Business.
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