Climate-smart private equity investors take leadership in Africa



ImpactAlpha, Oct. 15 – Climate change poses an existential threat to our societies. Nowhere is this more apparent than in Africa – the most vulnerable continent to climate change, both in terms of impact and ability to mitigate damage. 

Africa’s private equity funds must become leaders in the global fight against climate change.

While environmental, social and governance standards have become the norm for private equity funds, attention to climate change remains at a relatively nascent stage. 

Mounting global pressure is pushing climate action in the private equity space from an emerging trend to a fundamental expectation.

Climate smart 

1. Opportunity lens. Investors on the continent ought to view climate change through the prism of opportunity, rather than seeing it as a threat. There’s often a perception that opting for climate-smart investment strategies constitutes a trade-off with performance. 

While it’s true that investment performance in certain sectors will be inevitably impacted by the policy responses taken to curb or adapt to climate change, we are in the midst of an innovation cycle where transformative and sustainable business models are gradually replacing their predecessors. 

Sectors such as renewable energy, climate-smart agriculture or climate-resilient infrastructure all constitute highly attractive opportunities in Africa.

2. Climate mandates. Institutional investors are increasingly asking fund managers to pay close attention to climate change at all stages of decision-making, from the investment process through to operations and management.

With climate change being gradually mainstreamed, private equity firms that take these considerations on board and demonstrate a willingness to engage on climate issues with their (potential) portfolio companies – whether in terms of measurement and monitoring, or impact of the business on the climate and vice-versa – will increasingly find themselves at an advantage when engaging with institutional investors. 

Fund managers who establish their credentials as leaders in this space will be well placed to raise additional funds in the future. The $850 million recently raised by emerging markets renewables investor Climate Fund Managers – above and beyond an initial target of $530 million – is a testament to the attention climate-smart investors are attracting.

3. Risk mitigation. There is a growing global momentum for monitoring, reporting and disclosure of climate-related risks and opportunities, with over 500 organisations having signed up to the Task Force on Climate-related Financial Disclosures’ recommendations.

From 2020, the 2,300 members of the UN’s Principles for Responsible Investment – who collectively represent some $80 trillion in assets – will incorporate two key indicators from the task force into their reporting frameworks and from 2022 large asset owners in the U.K. will be expected to report on climate change risk by 2022, with this potentially becoming mandatory.

This inevitably adds a new layer of reporting for private equity firms operating on the continent. But it also opens up an exciting opportunity for general partners to engage with their portfolio companies and help transform them into greener, better managed and ultimately more valuable businesses. 

CDC, for instance, has taken a highly involved role in helping investee company Jacoma, a Malawian farm, transition to climate-smart agricultural practices that allow local smallholders to manage resources better and protect themselves from extreme climate change.

Alignment 

These changes won’t happen overnight, and private equity firms will have to gradually go through a steep learning curve to meet these new expectations, but we’ve encouragingly already seen many players take steps in the right direction. 

Sharing of lessons learnt and best practice between firms that have developed a specific expertise in these areas and others will also play a key role in ensuring the industry is well positioned to onboard these developments.

Private equity firms sometimes overlook climate risk because of relatively short holding periods. However, by developing a deeper understanding of a company’s long-term risks and opportunities and implementing resilience measures we believe they will improve the attractiveness of assets and therefore exit opportunities. 

As a key driver of growth in Africa, the African private equity ecosystem has a tremendous opportunity to contribute to the achievement of the Paris Agreement and be a leader in the global fight against climate change. And with more and more consumers, investors and governments shifting their focus to these areas, it makes perfect sense to do so.


Michelle Kathryn Essomé is chief executive officer of the African Private Equity and Venture Capital Association.

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