Assessing return on impact investments in Africa

As emerging markets continue to present unique challenges and opportunities, investors are increasingly focusing on assessing medium-term horizons in sectors such as food and beverage and renewable energy. One critical aspect being evaluated is the delicate balance between financial returns and climate resilience. Harshvardhan Sanghi from Deep Science Ventures sheds light on the factors driving higher return potential for adaptation and dual-benefit projects when compared to traditional mitigation efforts. Adaptation and dual-benefit projects hold a significant advantage in solving immediate problems that stakeholders face. Whether it is ensuring food security or reliable energy supply, these projects address pressing needs that customers are more willing to pay for. By catering to immediate concerns, such projects enjoy clear business models and often benefit from blended capital stacks comprising of various funding sources like World Bank capital and government investments. Additionally, adaptation and dual-benefit initiatives are inherently more resilient to climate impacts, making them increasingly attractive in the face of rising climate risks. Distinguishing between adaptation, dual benefit, and mitigation projects is crucial in understanding the return and risk profiles associated with each. Adaptation projects, like air conditioners to combat heat, focus on immediate problem-solving without necessarily addressing carbon emissions. Dual-benefit projects, such as distributed solar energy, offer a blend of renewable energy and resilience against power outages. Sanghi emphasizes that the returns and risk profiles become more favorable as projects lean towards adaptation and dual-use solutions due to their alignment with critical needs. Investors face the challenge of assessing the profitability and viability of medium-term investments in sectors like agriculture and renewable energy, which typically have return periods ranging from 5 to 10 years. To navigate this challenge, funds are exploring longer-term instruments, with some venturing into forever funds that do not have expiry dates. By aligning with government policy incentives and signals, investors reduce risks and position themselves for potential off-ramps where larger investors or agencies may acquire their projects. In frontier markets like Africa, where patient capital and long-term returns are essential, the private sector assesses markets by predominantly focusing on return metrics like IRR, TVPI, and ROI. The narrative surrounding Africa presents the region as higher risk but potentially higher return, prompting investors to seek alternative avenues for generating profits. However, investors encounter new challenges in managing currency risks, political instability, and exchange rate fluctuations, necessitating robust risk management strategies. In conclusion, as investors navigate the complexities of emerging markets, the emphasis on balancing financial returns with climate resilience remains paramount. By strategically investing in adaptation and dual-benefit projects that address immediate needs while aligning with long-term sustainability goals, investors can unlock new opportunities and contribute to Africa's growth trajectory.