The African Venture Philanthropy Alliance (AVPA) is a pan-African network for social investors collaborating to increase the flow of capital into African social investments and ensure its effective deployment for maximum impact. The State of Innovative Finance in South Africa 2023 report provides an expert overview of innovative finance in South Africa. It identifies bottlenecks and opportunities for innovation, scalable interventions and areas for future research. The findings inform recommendations to further enable capital mobilisation and deployment.
South Africa’s SDG Index Score is 63.7 out of 100, ranking 108 out of 163 countries. The country is on track to achieve only two of the 17 SDGs (SDG 5: Gender equality and SDG 12: Responsible consumption and production) by 2030.
Meanwhile, South Africa faces significant social challenges, from rising youth unemployment and increased pressure on utility infrastructure to unacceptable levels of stunting malnutrition.
Traditional sources of social investment funding, such as aid/philanthropy and government funding, are under increasing pressure and either declining or not growing fast enough to keep up with growing social needs.
We therefore need to explore other sources of capital (especially private capital) and learn new approaches, including innovative methods such as blended finance, catalytic capital and impact investing.
Definitions
Innovative finance
Innovative finance is a range of non-traditional mechanisms to raise new funds for development, or optimise the use of traditional funding sources through ‘innovative’ projects such as micro-contributions, taxes, public-private partnerships and market-based financial transactions. The aim is to narrow the gap between the resources needed to achieve the United Nations (UN) Sustainable Development Goals (SDGs), and the resources available.1
Impact investing
Impact investing is investing with the intention to generate positive, measurable social and environmental impact together with a financial return. Impact investing can target a range of returns from below market to market rate, depending on the investors’ aims.2
Catalytic funding
Catalytic funding is the provision of resources to an investment fund or vehicle designed to mitigate risk and improve the fund’s overall viability to attract new investment for development goals. These intermediaries pool resources and distribute risks among investors and are primary vehicles for blended finance.3
Methodology
The research aimed to explore the business case and capacity for innovative finance and to assess the status of innovative finance in South Africa. The methodology included:
- Stakeholder interviews: More than 40 practitioners in innovative and sustainable finance in South Africa were interviewed.
- Desktop research: Published documents were reviewed (journal articles, reports, newspaper articles, website pages, and research and industry insights).
- Data analysis: Data collected from the stakeholder interviews was analysed thematically to identify patterns and map the state of innovative finance and impact investing in South Africa.
Key findings
- R10.4 trillion South Africa’s retirement industry and the big five banks have significant capital and assets available, estimated to be more than 10.4 trillion, 167% of South Africa’s nominal gross domestic product(GDP) in 2021.
- Impact investing can achieve both financial returns and social impact without necessarily forfeiting returns.
- Increasing awareness and education around impact investing is needed to attract more market participants and build understanding among traditional investors.
- A standardised IMPACT MEASUREMENT FRAMEWORK is necessary to identify and prevent future impact washing.
- Pressure must be placed on the government to create a favourable regulatory environment for impact investing to enable suitable financing and support SDG targets.
- Innovative finance solutions can be used to alter the risk-return profile of impact investments.
- EARLY-STAGE IMPACT CAPITAL should be leveraged to scale projects, allowing commercial capital to be invested later.
- Challenges in impact investing include a lack of standardisation, capital flow, execution, investor awareness and disabling regulatory and macroeconomic environment.
Recommendations and key action points
1. Greater impact awareness and education
- More academic institutions should offer courses on impact investing.
- More case studies need to be shared.
- Impact communities of practice should be created to enhance peer-to-peer learning, break down investor silos and develop greater collaboration among investors along the capital continuum(grants,debt and equity).
2. Better Standardisation and improved impact measurement
- More research and training on measuring impact.
- Market players should share their measurement experiences and key mitigating factors.
3. Support the mobilisation and deployment of more catalytic pools of capital
- Encourage the building of catalytic funds and players.
- Increase education and training on catalytic capital.
4. A balance of regulatory involvement and market correction
- Establish better dialogue between impact investing and market players and National Treasury.
- Provide clearer tax guidelines for public benefit organisations.
- Investigate regulatory regimes that create an enabling environment.
Conclusion
- SDG challenge
- Due to Fiscal pressures and low GDP, South Africa faces challanges in achieving its SDGs.
- Private-sector capital
- The private sector, which has access to significant capital, must step in to provide investment.
- Impact investing
- Impact investing offers a suitable approach to achievung the SDGs, but there are challanges, including a lack of standardisation, capital flow and awareness.
- Using innovative finance
- Innovative finance solutions can alter the risk-return profile of impact investments to make them attractive to traditional investors.
- Education
- Educating and awareness can attract more market participants and make traditional investors comfortable with impact investing.
- Opportunity or government
- The government has the opportunity to become the biggest catalytic investor and test innovative finance tools in their projects to reduce corruption and achieve predefined outcomes.
What this means for CSI
- Embracing innovative finance requires significant mindset shifts. Development and corporate social investment (CSI) practitioners need to embrace debt and equity alongside grants as capital available for impact, while the private sector must believe that converging profit and purpose is possible. Impact is not achieved via CSI alone but also by how we choose to do business.
- Impact investing in South Africa isn’t short of capital, it is short of risk capital, which can be provided by grants – the only risk-seeking form of capital. CSI practitioners need to evolve to see themselves not just as traditional philanthropists, but also as catalytic investors who ask themselves how much each CSI rand deployed is unlocking in follow-up private capital for impact.
- CSI needs to help test new markets, products and services and crowd in private impact capital, while also helping to scale proven impact models.
- CSI must not only measure its success by tracking outcomes from grants deployed, but also capital leveraged or unlocked from other social investors, especially private capital providers.
Find out more
- Download The State of Innovative Finance in South Africa.
- For further information, contact AVPA CEO Frank Aswani at Faswani@avpa.africa
- Global Impact Investing Network (GIIN), ‘What is impact investing?.’ ↩︎
- OECD, ‘Non-ODA flows to developing countries: Innovative financing for development.’ ↩︎
- USAID, ‘Catalytic Funding.’
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Source: The original version of this article was published in the Trialogue Business in Society Handbook 2023 (26th edition).
