While green investments have been growing globally and certainly in Asia, in the wider finance universe it has been more talk than action, said panelists at the Responsible Business Forum in Singapore on Friday.
“We’re on the cusp of driving blended finance for sustainability, but there’s this false sense of momentum,” said Helene Li, co-founder of upcoming investment platform GoImpact, which connects investors and other stakeholders interested in impact investing.
While there is no lack of capital or the intention for this capital to be channelled into funding projects to achieve the United Nations’ Sustainable Development Goals (SDGs), hype alone will not mobilise the private sector into providing the US$2.5 trillion needed yearly to fund their attainment.
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Speaking to Eco-Business on the sidelines of the forum, Petra Daroczi, ESG ambassador, Thomson Reuters, who moved to Asia a year ago, found the lack of awareness about green financing to be shocking.
Asian investors are afraid that sustainable investments offer smaller returns, said Daroczi, who works with them to integrate environmental and social factors into investing practices. “Their philosophy is that if they can get a 15 per cent return from a coal mine, they’d rather do that than take 10 per cent from a sustainable rubber plantation.”
Yet with the newly released report by the Intergovernmental Panel on Climate Change that warned of the urgent need to cut emissions or risk environmental catastrophe, the case for green finance has never been stronger. What will it take to get investors moving, and how?
Experts on a panel about innovative financing for the SDGs—a set of 17 goals to eradicate poverty, improve living standards and protect nature—discussed strategies on how to build momentum and action when it comes to green financing. Here’s what they said.
1. Matchmake investors to the right projects, at the right stage
Each investor has interests and risk appetites that are different to the next, and those matching the financier to the right project need to take this into consideration.
Reconciling the finance industry’s lower risk appetite following the 2008 financial crisis to green development projects is key, said Andrew Johnstone, chief executive officer of the Singapore-based Climate Fund Managers, which manages the US$500 million Climate Investor One initiative.
Johnstone elaborated that the majority of developmental projects supporting climate action or the SDGs are based in low- to middle-income countries and are therefore considered higher risk by investors. Furthermore, different stages of a project’s lifecycle come with distinct risk profiles, from development to construction and operation, with early-stage development typically considered the riskiest for investment.
This is where Climate Investor One—a blended finance facility that uses public or philanthropic funds to reduce the overall risk of the project—can come in. Johnstone said that his firm helps match investors to a project stage with a risk level acceptable to the investor. In particular, it links up public funds that are willing to take higher risks for more impact to early stage development to help get projects off the ground.
“But it’s the same project, and what [Climate Investor One’s blended finance approach] does is to provide an end-to-end financing solution that expedites its delivery,” he explained.
2. Work with NGOs
Keith Lee, sustainable finance engagement manager for the World Wide Fund for Nature (WWF), appealed to the finance industry and project developers to work with civil society. NGOs understand the local context of the communities they’re embedded in, and can recommend the best tools and approaches to investing to ensure the resulting impact is in line with targets to keep global warming under two degrees, he said.
Secondly, NGOs are good at bringing partners from different sectors together so that a range of interests are taken into account, Lee said, adding that this “landscape” approach has been particularly useful in agriculture and land restoration projects.
“Using this approach we can create a solution for [project developers] to bring to financiers and say: here’s a project that addresses multiple SDGs and if you bring a blended finance instrument, here are the cash returns you can expect, here are the conservation benefits and the social welfare benefits,” he said.
“And by doing this, we present a much more appealing, scaleable solution to financiers.”
3. Financiers are “driven by fear and greed”. Use it.
Quoting a saying that financiers are “driven by fear and greed”, Lee said it is critical to help the finance industry understand that climate risks can affect their investments, whether it’s by creating stranded assets or restricting market access for the companies they hold stakes in.
This is also why capital owners can be powerful drivers of change. They have the authority to influence their fund managers to invest in projects that are environmentally sustainable and creates positive impact, added Li. “We need more such enablers because there is ready capital. Once we can mobilise this group in an organised manner, we will see banks and institutions integrate green financing into mainstream product offerings,” she said.
Their philosophy is that if they can get a 15 per cent return from a coal mine, they’d rather do that than take 10 per cent from a sustainable rubber plantation.
Petra Daroczi, ESG ambassador, Thomson Reuters
On the other hand, financiers want returns on their investments and have a fiduciary duty to do well for their clients. That’s why there needs to be myth-busting around the misconception that there is no business case for sustainable investment, said WWF’s Lee.
But Johnstone said that the perception of performance versus sustainability is evolving. “I don’t think investors are thinking of this in terms of doing good versus doing well. It’s well recognised now that if we don’t do good, we’re going to do badly, and to avoid doing badly, you’ve got to get the environmental, social and governance components right.”
4. Pitch to the right crowd
When it comes to private capital funding the SDGs, ultra high net worth family businesses is one group that has not been tapped, said GoImpact’s Li. “They sit on a huge pool of capital and are able to take a little bit more risk than pension funds.”
In order to reach this crowd, there must be channels and “conduits” that show them the financial products available for the right level of risk, she said.
Solving major challenges as outlined by the SDGs will require long-term projects and even deploying relatively new technologies that increase the element of risk, said Johnstone, also observing that this called for long-term capital investors that are bold and willing to accept long-term repayment. “That’s pension capital.”
“The custodians of these pension funds are looking after the long-term benefit of the pensioners, so they’re not guided by fear and greed but by risk management frameworks and shareholder values,” he said.