Big payday from social projects, says Sanlam

Amid a US-led squeeze on funding for “green” projects, pension funds may just be the solution, says Sanlam Investments head of ESG and impact Teboho Makhabane.

In recent months, a number of banks and asset managers have abandoned environmental social and governance (ESG) initiatives, including the Net-Zero Banking Alliance and Net Zero Asset Managers initiative, as the political climate in the US turned hostile.

While funders in Europe and South Africa have not followed the US, this has nonetheless raised questions over the depth of “green capital” available for ESG-type projects, given the reluctance of the world’s largest economy.

“In South Africa, there are some obvious answers, starting with the R5.8-trillion in pension funds in this country,” says Makhabane. “This is money which could be deployed to projects addressing social problems, like climate, unemployment and water quality.”

Any talk of deploying pension fund money for social projects tends to raise the hackles of investors, however, as this evokes the spectre of “prescribed assets” – an idea proposed by the ANC to mandate pension funds to invest their capital in specific infrastructure projects.

This would force pension fund trustees to invest in Transnet or Eskom, as many in the ANC initially suggested, which would compromise the retirement savings of pensioners.

Makhabane’s suggestion is different, in that it is about deploying capital to where it could make most impact, without compromising investment performance.

“There are a lot of misconceptions around this. For one thing, the perception has been that these social impact projects deliver lower returns and come with higher risks. But that isn’t the case, if you look at the success of these funds.”

Traditional impact investing – deploying capital for the dual purpose of achieving a return and addressing a social problem – is a well-established feature of the global investment market, including in South Africa, and one that has largely not led to the sort of capital losses some fear, she says.

She cites Sanlam’s Property Impact Fund, a R4bn fund launched last year which aims to finance township retail malls, affordable housing, education infrastructure, such as schools, and health-care facilities, such as clinics.

“We started this fund looking to make a difference to the ‘missing middle’,” she says. “So we will finance schools that will cater to the majority of taxpayers earning between R5,750 and R36,000 a month who want to send their kids to something better than a government school but can’t afford Bishops, for example.”

And yet the fund, which is largely exposed to South Africa’s working middle class, is expected to provide a sizeable return, similar to that of a typical commercial property fund which invests in offices in places like Rosebank or Sandton.

“We expect this fund to make a 13.5% annual return, which illustrates that [we] wouldn’t have to sacrifice investment returns for impact,” she says.

There are, of course, other reasons for aversion to projects like this. Many of these projects are long term, for instance, and not listed on any exchange like the JSE. This means that not only are pension funds prevented from investing more than 15% in these projects, but it is often harder for those funds to sell quickly, if they need to.

Yet Makhabane says this makes these projects uniquely suited to pension funds, which typically have longer-dated liabilities to pensioners, which gives those funds scope to invest over a longer time horizon.

Green funds now ‘mainstream’

A number of asset managers have had similar funds in South Africa, which have done well over a long period. Futuregrowth is perhaps the most notable example, with a wide range of development funds in rural projects, including township malls and transport infrastructure, such as taxi ranks and bus terminals.

Makhabane says Sanlam has plans to launch a number of other impact funds too. “It is becoming far more mainstream now, and my hope is that every investment fund we launch makes an impact of this sort,” she says.

While that property fund falls squarely in the domain of “social projects”, more capital is also being allocated to “green infrastructure” projects, including solar, wind and even ocean-based economy projects.

Initially, says Makhabane, funders required a higher return to finance these climate projects. But as these projects have proliferated, it has become easier to raise funding particularly for climate mitigation – a boon for South Africa’s renewables sector.

“It used to be, a few years back, that funders would demand higher returns for these projects as the risk was seen to be higher. But the business case, I think, is now clearly well established, so it’s far easier to do that today. Which is why we see so many renewables projects coming online and taking the pressure off Eskom,” she says.

This trajectory is evident in the figures, which show that by January, solar and wind power accounted for 16.2% of South Africa’s electricity generation, nearly tripling its contribution since 2018. By contrast, coal, which accounted for 90% of power seven years ago, has seen its share decline to 74.9%.

Which is just as well, given the eye-gouging price hikes Eskom plans to extract from consumers. From this month, the power utility will charge customers 12.7% more for power – but over the five years to 2027, the planned hike is a numbing 77%.

“This illustrates how the economy is shifting,” says Makhabane. “It is in the renewables sector that we see jobs being created. So any institution that wants to be part of where this country is going has to embrace it.”

_{Top image: Sanlam Investments’ Teboho Makhabane. Picture: supplied.}