Impact investing is about funding ventures that generate financial returns along with social or environmental benefits that are measurable. The term was first used in 2007, and since then, the idea of the company not only making money but also effecting a positive change in the society and the markets has been the emphasis of the approach.
The main difference between impact investing and philanthropic giving is that the former carries an expectation of financial return in addition to the social good.
The strategy, for a resource-rich continent with a rapidly growing population and large-scale access to energy, education, and health sectors, such as Africa, is full of promise.
Why Africa Has the Best Conditions
Structural elements have put Africa in a position to be a perfect stage for impact investing, such as the following:
◾The planet’s nearly 65% of fertile land is in Africa, and it contains a wide range of mineral deposits, like gold, platinum, cobalt, and diamonds, which open the door for the development of the agricultural and resource sectors.
◾The majority of Africa’s population, i.e., over 60%, is made up of people of under 25 years of age.
◾Economic growth projections are optimistic: the average GDP growth is expected to be 3.8-4.2% in 2024 and 2025.
These elements point to the fact that a younger population, plenty of resources, and increasing prosperity could be strong enough to fuel bold entrepreneurial initiatives if the right people get access to capital and support.
The Size of Impact Investment in Africa
Worldwide, the market for impact investing is expanding fast. The Global Impact Investing Network (GIIN) reported that the total assets managed in the impact investing domain exceeded $1.571 trillion in 2024.
Africa is becoming a continent where impact-specific investments constitute a significant portion of foreign capital flows. In 2024 alone, foreign investment shot up to $97 billion, with almost $22 billion going to impact-driven investments.
At different times, about $8 billion has been deployed in Africa through impact investments.
How Impact Investors Are Fueling African Entrepreneurship
On their own, impact investors are not merely providing the capital to businesses. Oftentimes, they are completely transforming industries and facilitating the social change that is the result of their investments.
Impact initiatives divert funds into socio-economically beneficial sectors, such as clean energy, agriculture, education, health, and climate resilience.
One substantial part of the money, for instance, is spent on clean energy, i.e., on solar, wind, and mini-grid power solutions for communities that need reliable electricity but are lacking.
In agriculture, the investors pledge support to agribusinesses that enhance the livelihoods of smallholders and contribute to food security.
Such a commitment makes it possible for the startup founders to solve current issues while building enterprises that have the potential for growth.
Many impact funds purposely set their sights on early-stage companies, which are usually led by local entrepreneurs, and thereby promote innovative thinking.
As an illustration, Novastar Ventures (through its East Africa Fund I and Africa Fund II) amassed $200 million to support startups in sectors like off-grid energy, agritech, mobility, digital education, and others that cater to the needs of low-income populations.
Similarly, AgDevCo is investing in the agriculture sector across several African countries, where it is offering debt and equity to small and medium agribusinesses.
The existence of these avenues means the entrepreneurs have the chance to get the money they need, a feat which would have been difficult if they sought it from traditional investors who are only concerned with short-term financial returns.
Initially, many African startups were able to attract investors only if they were supported by foreign or non-African founders.
Impact investing, however, is a factor that has been changing this situation. Over the last years, there has been a significant increase of funds that have placed their money into the companies which have African founders and usually require the fulfillment of strict social-impact criteria before investing.
The change leads to the creation of a more sustainable and fair entrepreneurial ecosystem in which local talent and local solutions are the driving forces.
Besides financial returns, impact investing entails social outcomes. Thus, investors employ indicators such as job creation, social inclusion, access to essential services, and environmental sustainability to measure the impact.
Moreover, several impact funds are on par or even surpass the expected financial return levels whilst providing social benefits.
The model acts as a bridge between the profit-driven private sector and the mission-driven philanthropy, which is a hybrid that can create the change that lasts, and still be financially sustainable.
Problems and the Way Farther
The promise is there. However, the road of impact investing in Africa is strewn with difficulties.
Non-impact traditional venture capital and private equity (VC & PE) investments still overshadow impact investing in terms of volume. As an illustration, the Africa Venture Capital Association (AVCA) reported in 2023 a total of $4.5 billion in VC funding across 603 deal transactions, which is still quite small when compared to similar regions.
Besides that, a good number of African economies are characterized by under-banking and informality. The poor state of the infrastructure, administrative problems, and limited exit options are the main impediments that the respective economies have to face.
On top of that, faithfully measuring social or environmental impact, while still ensuring financial viability, makes things more complicated. Currently, there is no universally practiced impact-reporting framework, and at times, the returns might be lower than anticipated.
Nevertheless, the tide is changing. Due to the global support for sustainable finance, more institutional investors, development finance institutions, and local funds are willing to commit their capital towards Africa’s journey to prosperity.
The Reason Why This Is Important to Entrepreneurs and to Africa
Once entrepreneurs in Africa gain access to capital that recognizes social good just as much as profit, they get the liberty to try out new things, to create businesses that fit local realities, and to expand their solutions for genuine problems.
Money is not the only thing that impact investors usually bring to the table. Their aid may also comprise operational guidance, networks, mentorship, and long-term commitment. This is particularly important for early-stage founders who are going through complicated markets.
The mix of growth potential and social mission is what brings the parties’ interests into alignment: entrepreneurs will be able to raise successful businesses while making jobs, improving living standards, and strengthening local economies.
For Africa, it means a future where economic growth is not exclusive but inclusive, where resources are used to build communities, and where business success is linked to social progression.
Conclusion
Impact investing is not charity. It is a deliberate redefinition of the investment concept, whereby the financial return and the social impact are considered as two sides of the same coin.
This method is enabling entrepreneurs across the continent to come up with viable business models that not only solve but also help in tackling the major issues: energy poverty, food insecurity, lack of infrastructure, educational gaps, among others.
With the money coming in, local talent growing, and the community of funds and institutions supportive of socially responsible investing increasing, Africa is moving forward in accomplishing her potential.
Provided this momentum keeps up, accompanied with more backing, wiser policies, and strict evaluation, then impact investing could be one of the main features of Africa’s entrepreneurial and developmental narrative.
