As more institutions and investors incorporate Environmental, Social, and Corporate Governance (ESG) standards into management benchmarks, impact financing is increasingly creating opportunities in emerging markets but some challenges persist.
ESG is an integral part of impact financing decisions that lead to long-term, sustainable benefits for clients and society, according to Andrew Carey, Co-Head of Impact Financing & Investing, Hogan Lovells.
The shift toward impact financing, according to Carey, has developed beyond socially responsible investing to include financing long-term sustainable growth, building for a low-carbon, climate-resilient and circular economy by channelling 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,” Carey said.
Since 2018 when the World Bank raised a green bond, it has expanded rapidly in value and usage because they can be evaluated using standard risk models, provide a risk-adjusted return that meets investors’ expectations, and offer investors the opportunity to be associated with a positive environmental outcome. The World Bank’s green bond helped to create the blueprint for the market.
However, industry analysts say, challenges still abound in terms of the projects regarded as ‘green’.
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“But with effective evaluation, tracing, certification and development of the right measurement metrics, these challenges can be addressed,” Carey said.
Beyond impact finance products that can be explored by investors and institutions, an innovative shift, according to Carey, 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.” One of the sessions that focused on why the impact financing sector has not attracted even more commercial investment explored how it can be addressed through innovation, creative thinking, and sharing of knowledge and experiences.
During the webinar, Carey highlighted how regulation, communication networks, and data all represented significant challenges for impact financing in emerging markets.
According to him, 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 as there is only so much regulation, innovation and technology can achieve.
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,” Yunus said.
Although enhancing the performance of the financial sector should be a major preoccupation of governments and industry leaders, analysts said 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, analysts said. 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, they explained.
Hogan Lovells Impact Financing & Investing provides clients with best-in-market support in this mission-critical area, helping them to stay ahead in this rapidly evolving sector through delivering innovative, efficient and scalable solutions to the challenges facing the impact economy and creating strong, strategic partnerships and collaborations to drive change, develop the market and mobilise capital.
