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With an additional USD$ 2.5 trillion a year needed to meet the SDGs, the AVPN Conference 2020 has emphasized the necessity of adopting a partnership-centered approach to engage a larger ecosystem to take action. One thing is clear: traditional philanthropy and funding alone will not be sufficient to successfully meet sustainability targets and accelerate climate solutions.
To meet those challenges, we should harness the potential of the still-nascent sustainable finance ecosystem, which offers significant impact opportunities while delivering commercial returns. Across industries, panelists at the Conference came together to reflect on the current state of the sector, offering their insights on how to engage more investors and develop resilience in the ecosystem.
Now More Than Ever, Investing Sustainably Is an Imperative
“Impact and sustainable investors can lead the way to our next normal”, says CEO, Amit Bouri, GIIN. The COVID-19 crisis has accelerated investors’ view of the importance of sustainable investment. Across panels, investors agreed that this reality represents an opportunity for them to restructure business models in order to mobilize capital towards greater impact.
“This is just very good business”, asserts Daniel Hanna, Global Head of Sustainable Finance, Standard Chartered. In the last few years, there has been a consistent trend of ESG (sustainable investment) portfolios outperforming non-ESG portfolios in equity returns, and the crisis has cemented the high potential of sustainable investments for attractive returns. It is becoming increasingly clear that sustainable finance is not just an environmental imperative, but also a smart business decision, resulting in stronger financial performance and more resilience.
However, efforts are still needed to attract more mainstream private investors to the sector, who are often deterred by perceived high risks, inefficiency issues, and a lack of knowledge about the market.
Building a Resilient Sustainable Finance Ecosystem
The following key principles, which emerged during fruitful panel discussions, offer a roadmap for stakeholders in the impact investing space to accelerate the creation of solutions that are sustainable and scalable, for a resilient sustainable finance ecosystem.
1. Designing Customized Structures
Markets with different needs and stages of development require different structures. While renewable energy is now a mature area of climate finance, the development of other areas, such as energy efficiency, climate-smart agriculture and green housing, requires more policies and regulations, taking into account differing national contexts.
Depending on their appetite for risk/return, “it’s also about designing structures that make sense for investors”, says Maud Savary Monet, Regional Director Asia Pacific, responsAbility. In this area, blended finance can offer an efficient way to reach the micro-level in emerging countries, combining lower-risk traditional investments like bonds and private equities with higher-risk investments into small scale early-stage SMEs and therefore addressing both the risk/return needs of investors and the capital needs of early-stage smaller initiatives.
2. Scaling Impact
In emerging markets, scaling sustainable investments remains a challenge, and climate finance in particular has yet to reach vulnerable communities in the Asia-Pacific. To scale impact in a significant way, panelists reaffirmed the importance of leveraging new technologies and product innovation, with big data, AI and tech for impact (clean-tech, health-tech, fin-tech) identified as exciting trends which would improve accessibility and affordability of products for low income populations.
In addition, sustainable finance must be democratized, with public markets getting involved, even with smaller capital. “The future of impact investment is activating your entire portfolio including public securities”, stresses Wendy Cromwell, Vice Chair of Wellington Management. To accelerate impact, we must welcome more publicly listed opportunities, like equities and fixed income securities, into this space.
3. Building on Transparency Efforts
To build confidence and resilience in the market, efficient impact measurement and reporting mechanisms are necessary. Sophisticated impact measurement practices, for example, with the use of logic chains and impact management projects to assess net impact, help avoid green-washing and ensure transparency in creating real impact, especially for newer areas of climate finance such as nature-based solutions and biodiversity. They are also needed to accurately communicate risk and manage expectations.
4. Deepening Public/Private Partnerships
Public actors are essential to the creation of a more enabling environment for sustainable finance. Governments and finance institutions can mobilize private capital effectively by de-risking opportunities for investors coming into this space, not only through capital and regulatory pressure, but also by offering technical assistance and sharing their know-how with stakeholders. ADB, for example, has developed a long-term lending structure to offset high utility costs for private sector power projects in the Pacific, allowing for more private capital to enter that space with lower risks. Investors should therefore look at partnerships with public actors for attractive sustainable investment opportunities.
The growth of the sustainable finance market in recent years is undeniable, with increasing demand for sustainable investing across all asset classes and markets. But much remains to be done to channel mainstream private capital to this sector and fully harness its potential. In the current climate, it has become imperative to capitalize on the growing interest for sustainable investments, and come together to build resiliency in the market and achieve a deeper impact.