Opportunities and challenges of impact financing in emerging markets
Sunday June 13, 2021 / 3:00 AM / By Andrew Carey* / Header image credit: international banker
Institutions and investors are increasingly integrating environmental, social and corporate governance (ESG) standards into management benchmarks. ESG is an integral part of impact financing decisions that lead to long-term, lasting benefits for clients and society. The shift to impact finance has grown beyond socially responsible investing to include financing for long-term sustainable growth, building a low-carbon, climate-resilient economy and circular by channeling funds to well-governed, responsible and ethical companies.
Impact financing involves a wide range of financial products, including fixed income bonds, venture capital, private equity, and social and development impact bonds. In terms of share of value, private equity and private debt are the most common products adopted by impact investors. Nonetheless, investing in innovative businesses and ventures in sustainable agriculture, affordable housing, healthcare, energy, clean technology and financial services has been a priority for several impact investors. .
For example, the 2018 green bonds of the world Bank helped create the market model. Green bonds have grown rapidly in value and use because they can be valued using standard risk models, offer a risk-adjusted return that meets investor expectations, and offer investors the opportunity to be associated with a positive environmental result. Since this issuance, there has been an increasing use of green bonds by multinational companies and green bonds and loans have become a mainstream investment product along with other innovative products such as social and sustainability bonds and loans. . However, challenges still abound in terms of what we consider to be “green” projects. But with effective assessment, tracing, certification and development of appropriate measurement measures, these challenges can be overcome.
Beyond impact finance products that can be explored by investors and institutions, an innovative shift towards gender balance, net zero economy, technology, data and expanding entrepreneurial capacities while working together to boost education will produce the desired outcome of impact finance on the economy and livelihoods.
Recently, financial experts spoke at Hogan Lovells’ Financing and Impact Investing webinar on “Financing and Impact Investing: The Need for Innovation”. I was part of the session that focused on why the impact finance sector has not attracted even more business investment. We also explored how it can be addressed through innovation, creative thinking, and the sharing of knowledge and experiences.
During the webinar, I highlighted how regulation, communications networks, and data all pose significant challenges for impact financing in emerging markets. Regulation, innovation and technology are limited. Without the proper alignment in terms of disclosure, capacity building, clarity and reliable data, the value of impact financing may not be felt for many years.
Addressing some important issues regarding impact financing, Yunus Social Business President and Co-Founder and Nobel Peace Prize Laureate (2006) Prof. Muhammed Yunus explained during the webinar why innovative thinking is crucial , what tools to use and how to balance competing needs to raise capital towards international goals. He spoke about this in the context of women’s empowerment, especially in developing countries.
“Putting a strategic focus on one type of banking microfinance and empowering women in entrepreneurship is a step in the right direction. Finance has always stimulated creativity; our goal should be to empower people and empower them. At Grameen Bank, we have started giving small loans to women making bamboo furniture in Bangladesh. We realized that these loans could impact women who would never be granted such financial leverage by mainstream banking institutions (due to the perceived high risks) and help these women establish a successful business model while boosting the local economy, ”said Professor Yunus.
Although improving the performance of the financial sector should be a major concern of governments and industry leaders, regulators should improve their oversight role in order to strengthen the capacity of the financial sector to allocate resources to the productivity of the sector. economy.
Ultimately, a particular part of impact funding is measurability. Measuring the considerable impact of investments made by certain companies can be complex, even when certain elements of the business model are changing for the better. But with simplified sustainability reports, statistical analysis and benchmarking, measurement will be possible. Likewise, financial regulations and investment principles must be aligned with the needs of sustainable development.
*Andrew Carey is Co-Head of Funding and Impact Investing, Hogan Lovells.
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