Venture Capital

Opportunities and Challenges of Impact Financing in Emerging Markets

Read more at www.proshareng.com

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.

 


Related News

1.      What is an Environmental, Social and Governance Fund?

2.     Citi Launches $150m Impact Investing Fund for US-based
Firms Applying Innovative Solutions

3.     Lafarge Earmarks $8m to Environmental Sustainability

4.     Sahara Power Tackles Carbon Emission through Cycling in
Egbin Power

5.     NGX Limited Launches Enhanced Brokers Performance Ranking
Report

6.     What are Derivatives in Financial Markets Trading?
Understanding the Basics and Risks

7.     Q1 2021 GDP Growth will Woo New Issuers into the Nigerian
Capital Market

8.     April 2021 Domestic and FPI Report: Activity Level
Declines on Weak Sentiments from Retail Investors

9.     Domestic and Foreign Portfolio Participation in Equity
Trading – April 2021

10.  President Muhammadu Buhari Headlines NGX Group’s The Stock
Africa Is Made Of

11.   Review of Electricity Tariff and Petrol Subsidy Removal
would Shape Nigeria’s Inflation in 2021

12.  Riding the Bull Wisely – By Marc Van de Walle

13.  NGX Group to Launch “The Stock Africa Is Made
of” Campaign

14.  Dangote Cement Plc Releases 2020 Combined Annual and
Sustainability Report

15.  Transcorp Hotels Plc Targets 60% Occupancy Rate and N17bn
Revenue in FY2021

16.  Transcorp Hotels CEO Dupe Olusola Rings NGX Digital Closing
Gong

17.  NGX Promotes Capacity Building for Trainee Clerks Across
Asset Classes

18.  Domestic and Foreign Portfolio Investment: Retail
Investors Drive Activity Level in March 2021

 Proshare Nigeria Pvt. Ltd.

Read more at www.proshareng.com

Show More

Related Articles

Back to top button