GAIA GROUP: New Gaia Funds Accelerate Ethical Opportunities

Changing public attitude, increased demand from investors, and a firm realisation of growth opportunities have seen Environmental, Social, and Governance (ESG) issues climb the priority list for asset managers.

There is an expectation from PwC that ESG and non-ESG products will quickly converge and more than three quarters of institutional investors in Europe will veer away from non-ESG products completely by 2025.

The mantra behind this shift is that people now want to know that their money is being used to do good, with purpose and profit aligned, rather than mutually exclusive.

The practice of ESG investing goes back to the 1960s where some investors excluded stocks from their portfolio based on negative views around business activity, including tobacco production or any involvement in the apartheid regime. Socially responsible investment, as it was then, was re-labelled as ESG in 2005 and accelerated in 2012/13 when studies were published linking ESG strategy to strong financial performance.

Gaia Group – specialist South African asset manager with a strict focus on infrastructure and agriculture investments – has been concentrated on creating value through positive investment since its formation 10 years ago.

REALISING OPPORTUNITY

Last year, Chief Investment Officer, Dr Hendrik Snyman told Enterprise Africa that the company was growing by targeting climate infrastructure with renewable energy projects. A thorough understanding of engineering processes, industrial development, and project financing allows Gaia to maximise investment options through the project lifecycle.

Now, the company is busy raising funds to put to work in renewable, communication infrastructure, and climate action projects. It’s an exciting time, and Snyman is buoyant about opportunities in South Africa.

“Company-wise, we’re doing well,” he smiles. “The war in Ukraine and the prevalent power outages we face in South Africa are real concerns, but we are certainly still realising significant opportunities.”

After starting out in renewable energy, the company achieved success, becoming known for its Gaia Renewables 1 fund, listed on the Cape Town Stock Exchange, which holds an economic interest in the Tsitsikamma Community Wind Farm near Humansdorp in the Eastern Cape. More recently, Gaia broadened its scope to include telecoms infrastructure through its Fibonacci Fibre fund, again listed in Cape Town. Here, a new structure was formulated to provide investors with tax efficiency.

“Unlike developed markets, South Africa did not have a broad ADSL rollout and it’s only the very high-income areas that have access. Mobile data is extremely expensive because of the monopoly that the large telcos have. When fibre was launched, it was so much faster than ADSL and it is now cheaper than broadband mobile data,” details Snyman.

Last year, Gaia made its first investment into fibre to the home networks, buying up 54 fibre network sites diversified across Gauteng, KwaZulu-Natal and the Western Cape as a result of the first round of funding.

“The ISP has to pay a strong percentage to the fibre network owner,” he explains, adding that a different, economical arrangement was more suitable than a traditional listing as asset managers are not interested in buying entire fibre networks, especially those needing to build a new site or those with no potential buyer.

“We invested into that through a private mandate and we started to look at what was the most efficient and effective way to allow asset managers exposure to this asset class. 

“We provide the most effective and appropriate ways for our clients to invest into these networks. After reviewing the UK and USA, we decided that Real Estate Investment Trust (REIT) as a vehicle is the most appropriate way to do so. It is tax efficient and allows for gearing.

“We listed Africa’s first REIT in December last year. Our first tranche of investments was R120 million which we deployed by March 22. We deployed the second tranche of R150 million by the end of October. We are looking forward to deploying a third tranche of R500 million. It’s gaining speed quickly and has been really interesting. We have been figuring out how to make this asset class compliant with the REIT structure and legislation. It took us a while to understand the tax implications as it hasn’t been done in Africa. We have had tremendous interest in the sector. It is a great thing to do for the country in terms of impact, democratising access to internet rather than it being very expensive through mobile data.”

Fibre rollout is expected to continue at pace in South Africa after the government missed a 2014 target of having a fibre connection at every house in the country by 2020. President Ramaphosa has assured that investment will continue in order to drive economic growth and build Fourth Industrial Revolution capacity.

AFRICAN FOCUS

The strength of the ESG principles is clear to see across Gaia’s major funds, and the focus is unending, with the company providing funding that makes a real difference to the lives of people and communities in South Africa. Part of the Gaia investment proposition is delivery of a solution that encompasses ‘positive, sustainable impact on Africa and its people’.

Currently, coal is by far the largest contributor to South Africa’s energy mix. Oil, natural gas, and nuclear are smaller provisions, and renewables make up a trivial percentage. The opportunity is enormous, and transparent funds are vital in ongoing development.

“It doesn’t matter what the UK and US are doing to stave off climate disaster – if Africa, 17% of the world’s population – decides to energise using fossil fuels, then you have trouble,” insists Snyman. “We are saying that the focus should be on Africa, with an effective eco-system working together where a developer knows that they can sell.”

His proposal is that those planning, developing, and operating renewable energy assets must be able to sell at the right stage, and price, to ensure capital is reused and new projects can thrive.

“That secondary market in Africa is in its infancy and our fund concept is $200 million where we can buy interests in projects that have been developed so those developers can recycle their capital into new greenfield projects. That will start a snowball effect, with a vibrant ecosystem of people developing and funding projects, transferring skills, and selling projects.”

Efficiency and localisation in capital and project development cycle is essential he says.

“If you’re putting money into a greenfield project, you have to know who you are going to sell it to when it is operational, otherwise you have uncertainty and that is a real hurdle. There is a lot of focus on greenfield projects and everyone says we need to build more renewable energy plants in Africa, and that is obvious with 17% of the world’s population here but only 2% of the world’s infrastructure and renewable energy spending.

“Ghanaians should be running Ghanaian projects. They have a better understanding of risk in the country, and they need to know how to develop projects when the need arises in the future. A vibrant secondary market signals demand for projects and that draws people in to develop greenfield projects.”

ICFA SUCCESS

At the end of 2021, Gaia entered the International Climate Finance Accelerator (ICFA) programme in Luxembourg. A unique two-year programme that accelerates emerging fund managers focusing on key areas within climate action, Gaia was selected alongside four others – the only African organisation – to support brownfield clean energy projects to catalyse the development cycle and crowd in more actors at all stages of the development ecosystem, thereby providing widespread access to clean energy to fuel a vibrant and sustainable growing African economy.

In sub-Saharan Africa, access to electricity is required to rise above poverty, but around 600 million lack basic access. Just seven countries have populations where more than half are electrified. The result is that many businesses rely on expensive, dirty, unreliable generators to power operations.

“We are taking what we’ve learnt in Luxembourg and we will be expanding that into the commercial and industrial renewable energy space here,” says Snyman. “Where a renewable energy programme is dependent on government issuing RFPs and a tender process, we ask what is the most effective way for our investors to gain access to renewal energy on rooftops and commercial buildings, or people who want to buy directly from big producers. We are busy formalising the structure and will probably list towards the end of 22/early 23.”

HOLISTIC REPORTING

Going forward through 2023 and beyond, Snyman and team are keen to further embed ESG principles deep into the company’s culture, prioritising all three elements. Governance specifically is at the heart of discussions right now, following selection at the ICFA where Gaia was able to learn more about European regulations.

“In Europe, there are legislated requirements around reporting on your impact as much as you would on your financial status,” he says. “We have adopted that in its entirety as a good thing. Even though we don’t have to do it, we have decided that Gaia – subject to SA legislation with the funds we manage – is going to report on impact in line with European legislation. As part of that, we have hired a new Chief Risk and Impact Officer to look at our risk from an environmental, social, governmental, and impact perspective.”

Gaia sees this as a point of difference and something that asset managers will compete on in the future. “It’s positive,” says Snyman “and rather than seeing it as a business hurdle we see it as competitive advantage. We think that any investor, in addition to profit, should consider the impact that their money is making. We don’t believe that you have to sacrifice one for the other. We know you can profit with a purpose.”

Today, ESG investing can accelerate market transformation, and these market-led changes can act as a force for good, on a large scale. ESG is not just about regulatory compliance – it now incorporates transformation in business strategy, and is often a key enabler in profit maximisation. Gaia will carry on raising funds for the Fibonacci Fibre REIT, and Snyman is confident about the pathway forward.

“We have one large African government employee pension fund that has committed to investing. It’s positive for the country that we have these initiatives during dark times including the war in Ukraine, rising interest rates, stock portfolios being hammered, rolling blackouts – GAIA has a very positive outlook,” he concludes.