Opportunities and Challenges of Impact Financing in Emerging Markets

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Sunday, June 13, 2021 / 03:00AM / By Andrew Carey* / Header Image Credit: International Banker

 

Institutions and investors have increasingly been incorporating Environmental, Social, and Corporate Governance (ESG) standards into management benchmarks. ESG is an integral part of impact financing decisions that lead to long-term, sustainable benefits for clients and society. The shift toward impact financing has developed beyond socially responsible investing to include financing long-term sustainable growth, building for a low-carbon, climate-resilient and circular economy by channeling funds towards well-governed, responsible and ethical enterprises.

 

Impact financing involves a wide range of finance products including fixed income, venture capital, private equity, and social and development impact bonds. In terms of value share, private equity and private debt are the most common products adopted by impact investors. Notwithstanding, investing in innovative businesses and enterprises in sustainable agriculture, affordable housing, healthcare, energy, clean technology, and financial services has been a major focus for several impact investors.

 

For instance, the 2018 green bonds of the World Bank helped to create the blueprint for the market. Green bonds have expanded rapidly in value and usage because they can be evaluated using standard risk models, provide a risk-adjusted return that meets investor expectations, and offer investors the opportunity to be associated with a positive environmental outcome. Since that issuance there has been a steadily growing use of green bonds by multinational corporations and Green Bonds and Loans have become a mainstream investment product together with other innovative products such as Social and Sustainability-linked Bonds and Loans. Nonetheless, challenges still abound in terms of the projects we regard as 'green'. But with effective evaluation, tracing, certification and development of the right measurement metrics, these challenges can be addressed.

 

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 capabilities for entrepreneurs while collaborating to boost education will produce the desired result of impact financing on the economy and livelihood.

 

Recently, finance experts spoke at Hogan Lovells Impact Financing & Investing webinar themed "Impact Financing and Investing: The need for innovation."  I was part of the session that focused on why the impact financing sector has not attracted even more commercial investment. We also explored how it can be addressed through innovation, creative thinking, and sharing of knowledge and experiences.

 

During the webinar, I highlighted how regulation, communication networks, and data all represented significant challenges for impact financing in emerging markets. There is only so much regulation, innovation and technology can achieve. Without a 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 salient issues regarding impact financing, Chairman and Co-Founder of Yunus Social Business, and Nobel Peace Prize Winner (2006), Professor Muhammed Yunus, elaborated during the webinar on why innovative thinking is crucial, the tools to use, and how to balance competing needs to mobilise capital towards international goals. He spoke about this in the context of empowering women, especially in developing countries.

 

"Placing a strategic focus on a microfinance type of banking and empowering women in entrepreneurship is a step in the right direction. Finance has always spurred creativity; our aim should be to empower people and allow them to become self-sufficient. At Grameen Bank, we started to give small loans to women making bamboo furniture in Bangladesh. We realised that these loans could make an impact for women who would never be granted such financial leverage by the regular banking institutions (due to the high perceived risks) and help these women establish a successful business model while boosting the local economy," Professor Yunus said.

 

Although enhancing the performance of the financial sector should be a major preoccupation of governments and industry leaders, regulators should improve their supervisory roles to strengthen the financial sector's capacity to allocate resources to the productivity of the economy.

 

Ultimately, a peculiar part of impact financing is measurability. Measuring the extensive impact of investments made by certain companies could be complex, even when some elements of the business model are making positive changes. But with simplified sustainability reporting, statistical analysis and benchmarking, the measurement will be possible. Likewise, financial regulations and investment principles need to align with sustainable development needs.

 

*Andrew Carey is the Co-Head of Impact Financing & Investing, Hogan Lovells.

 

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