Public-private blended finance initiatives need to be stepped up to overcome the reluctance of mainstream institutional investors to make impact investments in the high-risk regions where they are most needed, according to a recently published report by the Impact Taskforce, a G7-backed think tank.
Nick Hurd, the taskforce’s chair and a former UK minister, said on launching the report that the gap between rhetoric and delivery on the mobilisation of private capital to meet the UN sustainable development goals (SDGs) needed to narrow “visibly” over the next decade.
The taskforce was established in July 2021 under the UK presidency of the G7 group of rich countries with a brief to provide recommendations on how best to accelerate the volume and effectiveness of private capital targeting climate and other related UN sustainable development goals (SDGs).
The ‘Time to Deliver’ report’s authors called on input from the taskforce’s 120 members and other experts from public and private investment institutions and other stakeholders in some 40 countries.
Mobilising private capital
The private sector is expected to play a major role in meeting the vast investment requirements for tackling global warming and meeting other SDGs.
According to the International Energy Agency, around $4 trillion of clean energy investment is needed every year until 2050 to keep global warming to within 1.5°C of pre-industrial levels. An additional $2.1 trillion per year is needed to meet the SDGs in education, health, roads, electricity, and water and sanitation in emerging markets alone, the International Monetary Fund estimated in 2019.
These sums look slightly less daunting when compared with the estimated $250 trillion of capital held by private institutions globally. Directing even a small fraction of that towards impact investments would make a significant contribution to meeting development challenges.
Progress has been made – the International Finance Corporation has estimated $2.3 trillion of assets can be classified as having been made “with the intent to contribute to measurable positive social or environmental impact, alongside financial return”.
More investment vehicles needed
However, the taskforce said mainstream institutional investors understandably remained reluctant to divert funds from plentiful relatively low-risk investment opportunities, primarily in developed countries, to high-impact investment opportunities in regions such as sub-Saharan Africa, perceived as higher-risk investment destinations.
Over 70% of climate finance was still being invested in the country of that investment’s origin, the report noted.
The taskforce called on multilateral development banks (MDBs) and development finance institutions (DFIs) to step up efforts to increase the supply of investment vehicles in emerging markets suitable for institutional investors. MDBs and DFIs had the ability to generate investable pipelines, provide de-risking support such as subordinated capital or guarantees, and to share years of relevant performance data, the report said.
“MDBs and DFIs need to step up efforts to increase the supply of investment vehicles in emerging markets suitable for institutional investors.”
“Building on decades of experience and track record, particularly in emerging markets, multilateral development banks [MDBs] and development finance institutions [DFIs] can – and must – play an even greater role expanding the flow and pace of capital to people and places too often ignored by financial markets. That role is particularly important to help convert commitments from institutional capital to solutions that advance the SDGs into real and meaningful action,” Laurie Spengler, a taskforce member and chief executive of Courageous Capital Advisors, said at the report’s launch.
The debt-for-nature swap that enabled Belize to restructure its privately held external debt and generate finance for environmental protection was an example of what could be achieved, according to the taskforce. As part of that structure, the US International Development Finance Corporation provided political risk insurance that enabled Belize to repurchase $553 million of sovereign debt at a discount.
The taskforce warned that ‘silos’ created between investments in environmental and social goals in the developing world also needed to be broken down to avoid leaving the poorest and those facing discrimination behind.
Urgent impact measurement improvement required
As part of a two-pronged approach, the taskforce also looked at measures to improve transparency, harmonisation and integrity in impact measurement and reporting.
This is a major bugbear for investors seeking sustainable finance opportunities, who are currently faced with a patchwork of incomplete and non-standardised institutional and corporate datasets and regulations that make it hard to distinguish genuine impact investments from greenwash.
In Europe, these issues have been thrown into sharp relief by delays in implementing the European Union’s Sustainable Finance Disclosure Regulation [SFDR] framework.
“Investment decisions are being taken today with incomplete information. We need to transform the quality and transparency of data on impact,” Hurd said.
The report said disclosure of non-financial information, in particular, “remains unfit for purpose” at a time when the growth of ESG markets has led to increased demand from investors for material non-financial data.
“There remains a need to build trust in the integrity of ESG and impact claims. The risk of greenwash – and the consequent damage to shareholder value and trust – is very real,” the report said.
To ensure investors have better data on which to base their decisions, the taskforce recommends the introduction of mandatory accounting for impact by businesses and investors to harmonised standards.
As part of this effort, it recommends support for the International Sustainability Standards Board (ISSB), a body formed in November 2021 by the International Financial Reporting Standards Foundation (IFRSF) to create a global reporting ‘baseline’ for sustainability disclosures for financial markets.
The taskforce also said sustainability reporting requirements needed to be suitable for implementation by small and medium-sized enterprises (SMEs).
SMEs form the backbone of most economies and the supply chains of many large companies but often lack the resources of large institutions and corporations to handle complex sustainability reporting, potentially slowing the adoption of global standards and risking ambiguous impact reporting, according to the report.