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Investors’ interest in sustainable finance has reached a fever pitch, with the impact investing sector doubling in size over the last 2 years, according to Global Impact Investing Network’s 2019 Report on Sizing the Impact Investing Market. As sustainable finance moves from niche to mainstream markets, it has piqued the interests of MNCs, while policymakers see an opportunity to make greater reforms to harness the financial sector’s power in unlocking the potential of sustainable finance in building a more climate-resilient future.
At the AVPN Virtual Conference 2020, I heard from public and private sector representatives across Asia, who highlighted the key challenges they face in the current sustainable financing landscape and the importance of having coherent policies and regulations to accelerate the uptake of sustainable finance. Emphasis was also laid on having open policy dialogues at local, national, and regional levels that could lead to more innovative financing approaches and efficient allocation of resources. Citing Niall O’Conner, Centre Director at the Stockholm Environmental Institute, he says that “for sustainability to scale, we must share experiences, funds and resources must be managed efficiently and ensure that broader stakeholder support is guaranteed.”.
The Reform Needed for Green Investing
“Regulations have been a key driver for Sustainable Finance and ESG adoption over the last decade,” says En Lee, Head of Sustainable and Impact Investments at LGT. Yet, there is a lack of proper benchmarking in identifying ‘sustainable business practices’, resulting in the sustainable finance industry being entwined in a web of inconsistent financial structures, policy frameworks and disclosures. Businesses may see this as an opportunity to practice ‘green washing’ to receive support and investments, as Wendy Cromwell, Vice Chair of Wellington Management mentioned coming across several ‘impact bonds’ or ‘green bonds’ of varying quality which fall short of the green investing standards of the investment management firm.
As such, there is a need for more progressive regulatory frameworks. Speaking from a regulator’s perspective, Ruenvadee Suwanmongkol from the Securities and Exchange Commission (SEC) Thailand, sees ESG reforms as a crucial factor to achieve the SDGs 2030. On a national level, policymakers have embarked on projects to establish standards for sustainable investing and business practices. For example, the SEC is working with the Asian Development Bank to set up local assessment centres in Thailand to ensure that climate-related investments are “Pure Green” and adhere to local standards for sustainable business practices.
Elevating the Influence of Private Sectors
While public-private collaboration is vital in ensuring robust financing strategies, Joseph Pepping from the Bank of America highlighted that sustainable finance could be better led by the private sector as investors have been taking on the role to efficiently mobilise resources and drive the demand for ESG-integrated issuances over the last decade.
However, herein lies the difference between the public and private sector’s expected returns: while the public sector aims to increase impact, the private sector aims to increase returns, with many fund managers holding the mandate of maximising returns without undue risk of loss. As Robert van Zwieten, Managing Director of the Asia Pacific region at Convergence noted, while the capital and financial technology exists and is willing, “what we often find is that there is a translational gap between the various sources of capital, be it public, private, or philanthropic, and the ultimate beneficiaries to achieve the SDGs.”
To effectively engage the private sector in financing sustainable development, Ms Suwanmongkol proposed improving investors’ understanding of sustainable projects and impact through capacity-building to complement their current exclusive search for high yield. “For effective engagement and cooperation with industries and investors, a platform for seamless information dissemination is required for financial products.”
While building investors’ capacity to engage with the public sector, governments must set measures in place to (i) reduce the perceived risks in investments and/or (ii) increase returns to enhance the appeal of investments.
A presentation highlighting how the blended finance approach increases the appeal of sustainable investments to the private sector, by Robert van Zwieten of Convergence at the Public-Private Solutions Sandbox session.
Badlishah Bashah, Securities Commission Malaysia, for example, recommended the use of incentives and subsidies to reduce risks in green projects and mentioned green sukuks[1] as a means of assurance in contrast to traditional financing methods.
Fakhrul Aufa, PT SMI, on the other hand, introduced blended finance[2] as an approach to catalyse private investment. As one of Indonesia’s Special Mission Vehicles (SMV) under the Ministry of Finance, PT SMI serves as a catalyst to accelerate national infrastructure development in Indonesia. The “SDG Indonesia One” platform is established to achieve the SDGs, utilising blended finance schemes to channel public and private funds from 32 partners into the various infrastructure projects, raising over US$3 billion in the process while promoting inclusive development in the economy.
Traversing the endless potential of sustainable finance, policymakers are now presented with greater opportunities to tap into multiple sources of capital. “We have a potential breakthrough moment for sustainable finance to mainstream and to show that as we are recovering from the COVID-19 pandemic, we have the ability to better build a more resilient, inclusive and sustainable future in Asia and beyond.” En Lee concludes.
Learn about the best practices on developing policy and regulatory frameworks and the approaches policymakers can take in scaling climate-financing solutions at the sessions on “Regulatory and Policy Approaches to Catalyse Green Sustainable Finance” and “Public-Private Solutions Sandbox”.
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[1] Green Sukuks – shariah-compliant securities backed by an underlying pool of assets. In contrast with traditional financing methods, Green Sukuk provides assurance that the money will be used for specific purposes.
[2] Blended Finance – discussed as an alternative investment that supports a project before it reaches full commercial viability. By tapping into philanthropic capital, it provides the opportunity for engagement of mainstream capital at earlier stages.
