Norfund creates jobs and improves lives by investing in businesses that drive sustainable development. The establishment and growth of sustainable businesses have been the main drivers of global efforts to reduce poverty over the past 25 years.
Companies create jobs, pay taxes and supply goods to communities.
In most developing countries, the lack of access to capital is the main barrier to the establishment and growth of businesses. The growth of companies in these settings depends on risk-willing and patient investors.
Norfund contributes to the establishment and growth of sustainable companies that would not otherwise be initiated because of the high levels of risk involved.
Before any investment decision is taken, the development impact of a project is carefully considered. We invest only if a project is deemed to be commercially viable – as this is a prerequisite for creating lasting impact. The investment must also be additional.
Norfund’s investments are contributing to the achievement of the UN’s Sustainable Development Goals.
Jobs are vital to reducing poverty. 470 million new jobs must be created by 2030 if we are to achieve the development goals. Jobs generate income and help people to improve their knowledge and skills. We create jobs directly through Norfund’s portfolio companies and indirectly through the supply chains of these companies.
Economic and social development depends on a reliable and stable electricity supply. In Africa, 600 million people lack access to electricity. 40 percent of businesses in Sub-Saharan Africa report that access to energy is a major operational constraint. Power shortages are holding back economic growth and job creation, as well as the provision of education and health services.
Strengthening financial inclusion
67 percent of the adult population in Sub-Saharan Africa are unbanked, and only 21 percent of firms in the region have a bank loan/line of credit. Investments in financial institutions are clearly needed.
Despite these needs and the potential opportunities, private investors are often reluctant to invest in financial institutions because of reputational risks and perceived financial risks.
Tax revenue generation
Domestic resource mobilization is an important way to facilitate sustainable development. A tax base provides governments with essential resources to spend on infrastructure and public services, such as health and education.
Taxes and fees are paid by Norfund’s portfolio companies in the countries in which they operate, as well as by other companies in their value chains.
Norfund’s climate position
Norfund’s climate position outlines how Norfund will assess and address climate change going forward. The position has four main themes with related actions and targets:
- Investing in climate solutions
- Integrating climate across investments
- Avoiding fossil risk
- Building climate resilience
The European Development Finance Institutions (EDFI), which includes Norfund, have also outlined joint ambitions for Climate actions that are aligned with the Paris Agreement and have high disclosure standards.
We collect and monitor data continuously on the development impact indicators of Norfund portfolio companies. The companies report on the direct effects of their operations, based on the Harmonised Indicators for Private Sector Operations. These metrics identify both sector-specific effects (for example, energy production or financial services) and portfolio-wide effects (jobs, local purchases, and taxes).
Harmonised indicators for Private Sector Operations
Each year, Norfund collects data on development effects from our investees. Where available, we apply harmonised indicators for private sector operations, including on direct jobs, to reduce the reporting burden of investees and ensure comparability and transparency in development effects reported. Where available, Norfund applies indicators covered in the Harmonized Indicators for Private Sector Operations (HIPSO) and EDFI’s Harmonisation Initiative.
HIPSO is a collaboration among DFIs and IFIs with efforts initiated in 2008 to identify common development indicators. The first indicators were launched in 2013 and the total number of HIPSO indicators is now 44, with additional indicators under consideration. In addition, the Joint Impact Indicators, a sub-set of HIPSO indicators and the IRIS Catalog of Metrics, on Gender, Jobs, and Climate were recently launched in cooperation with the GIIN as further step forward for harmonised impact measurement and reporting.
In addition, Norfund participates in the EDFI Harmonisation Initiative on Impact Measurement and Responsible Financing (the Harmonisation Initiative), established in 2019 to facilitate consolidated EDFI reporting of key impacts, including open publication of many metrics. The initiative set out to focus on five key impacts to which private sector enterprises contribute, including Gender Equality (SDG 5), Decent Work and Economic Growth (SDG 8), Reduced Inequality (SDG 10), and Climate Action (SDG 13).
More info: https://indicators.ifipartnership.org
In addition, the case studies and independent evaluations we support give us valuable insights into the indirect development effects of our investments, such as the effects of job creation in the value chain, and the productivity effects of power generation.
Operating Principles for Impact Management
Norfund is a founding signatory to the Operating Principles for Impact Management. These principles provide a reference point against which the impact management systems of funds and institutions may be assessed. They draw on best practices from a range of asset managers, asset owners, asset allocators and development finance institutions and define nine Operating Principles. These principles address different stages of an impact investment that need to be carefully followed up.
Theories of Change
Norfund uses a methodology known as the Theory of Change for planning and evaluation. The Theory describes how and why a desired change is expected to happen. We have developed theories of change for each sector in which Norfund works, to explain the relationship between the input we provide to clients, the link to the Sustainable Development Goals, and the overall impact that we wish to achieve. These theories of change highlight other relevant effects of our investments.
Each theory of change has three components:
- A narrative that includes a problem statement, a hypothesis of change, and an assessment of the evidence base
- A diagram visualising the causal pathway, and details of the intermediary steps
- A framework for monitoring and evaluation
The figure below illustrates the “Theory of change” model which describes the relationship between the input Norfund provides to clients, the SDG targets, and the overall impact we want to achieve. The theory of change also highlights other relevant effects of our investments.
The Business Support facility is an important instrument in exercising active ownership and creating value add through technical assistance and grants.
The main objective of the Business Support Program is to strengthen the development effects of our investment activities and create value additionality. The facility also seeks to support our investments on cross-cutting issues as climate and environment (SDG 13), gender equality (SDG 5), human rights (SDG 16) and anti-corruption.
This facility is earmarked Norfund’s portfolio companies and potential portfolio companies. For this grant-based financing, portfolio companies take up to 50% of the project costs.
One of the most important obstacles to investments in developing countries is the insufficient supply of well-prepared and investment-ready projects available to investors, including Norfund. One reason for this is that private investors often lack sufficient capital to meet the investment requirements related to project development, such as environmental impact assessments and legal and technical studies.
In 2019, Stortinget therefore granted 100 million Norwegian kroner to a new facility for project development and risk mitigation, managed by Norfund – the Frontier Facility. This facility allows Norfund to take on higher risk when investing in early phase project development and reduce risk for commercial investors in the most demanding markets, especially in vulnerable states and the Least Developed Countries (LDCs). In these countries in particular, there is limited access to risk capital for project development and risk relief.
The facility is to be used for projects with a higher risk in comparison with investments from Norfund’s ordinary investment funds. Norfund is to use these funds to invest in project development that is promising, by providing loans that can later be converted into equity if the project can be matured and is ready for investment. Through this facility, Norfund can take a higher risk of loss of funds. This means that losses through the Frontier Facility must be expected.
The facility has two purposes:
- Enabling early phase project development within Norfund’s investment areas
- Risk mitigation for commercial investors that wish to invest in Norfund funded projects, throughout the project cycle
These projects are managed as a separate facility and are not included in Norfund’s overall portfolio valuation.