January 14 – Environmental, social and governance funds have had a rough ride in the past two years, attracting criticism from regulators for greenwashing, and from social investors for investing in companies that may be good at managing the increasing risks from climate change, but they do nothing to solve it.
Growing awareness of the shortcomings of mainstream ESG may be fueling interest in impact investing as an alternative. Earlier this year, the Global Impact Investing Network (GIIN), a US non-profit advocacy group, said the market was worth $1.64 trillion.
Amit Bouri, director general of the GIIN, says that there is “an undeniable momentum” behind the industry, which is to allocate “capital in a way that actually drives progress on the world’s most pressing problems.. . in a way that can achieve the financial objectives and reach. impact objectives.”
GIIN was created with seed funding from the Rockefeller Foundation in 2009, specifically to build the global market for impact investing, helping investors to “sharpen their focus on the role that investment capital can play a role in adapting to climate change,” says Bouri.
In the early days, these were philanthropic foundations, development financial institutions and wealthy individuals. But that has changed. “Most of the activity is now from private investors,” he says, such as large pension funds, insurance companies, global banks and wealthy individuals.
Maria Teresa Zappia, deputy general manager of BlueOrchard, impact investors, agrees. “Impact investment is (about) pursuing social and environmental growth alongside financial returns. It is not philanthropy. It has a very clear vision that there must be a financial return, combined with the impact return,” she says, ensuring that fiduciary responsibilities are always fulfilled.
BlueOrchard, which has $3.5 billion under management, was acquired by asset manager Schroders in 2019, in a deal that valued the 20-year-old Swiss company at more than 100 million pounds, according to the Financial Times. By December 2021, BlueOrchard had invested more than 9 billion pounds in more than 90 countries, helping 230 million poor and vulnerable people in emerging and frontier markets to have access to financial and related services.
“You’re really refining your investment universe, so there’s effectively an additional selection and filtering of investment opportunities,” Zappia explains. However, “it doesn’t have to be a dilemma between high impact and low returns.”
A key area where there is great opportunity for impact investing is in climate adaptation financing. A big theme in the last two COPs has been how people in frontier and emerging economies, who are most at risk of climate change, are also ill to protect themselves. Many of these economies are even more dependent on fossil fuels.
According to the United Nations Environment Program (UNEP), annual adaptation costs in developing countries alone will double by 2030, to $140 billion per year.
Beyond funding for large infrastructure projects, such as sea walls, to prevent storms, there is a great need for more innovative climate adaptation strategies, such as more resilient crops, new irrigation systems and processes water efficient industries. This requires more investment in the startups that create these game-changing technologies, businesses that often struggle to find capital from conventional sources.
“There is a wide range of climate solutions that are very climate impact investments, but that are underfunded,” says Bouri.
In rural Kenya and India, Bouri says, impact investing has supported programs that rent solar panels on a subscription model, and that have transformed village life. Investors are also looking to support small and medium enterprises (SMEs) that are trying to radically transform mobility with electric rickshaws and scooters.
Most impact investing is in partnership with public sector sources, such as multilateral development banks, which provide catalytic financing to help reduce risk for private investors.
BlueOrchard recently announced a partnership with Finnfundan impact investment company that is 95% owned by the Finnish state, to provide $20 million in debt investment to help telecommunications provider Africa Mobile Networks expand its service to another 35 million people in Africa sub-Saharan
Another example is the German development finance agency GIZ, which, among other initiatives, manages the Private Adaptation Investment Bootcamphelping seven impact investors build a portfolio in the area of climate change adaptation, and providing one-on-one technical assistance, peer learning and networking opportunities for 15 adaptation SMEs from Kenya and Nigeria.
U Landscape Resilience Fund (LRF) is an impact-driven public-private partnership that mobilizes private climate finance for smallholder farmers and vulnerable landscapes. With a commitment of $25 million from anchor investor Chanel, the LRF provides investment, good loans and technical training to SMEs and projects focused on adaptation, giving them better access to private investors. It aims to mobilize $100 million by 2026.
Root Capital, meanwhile, is a non-profit organization with a focus on rural livelihoods and has so far invested more than $1.6 billion—mostly from foundations and individuals—in agricultural businesses that build rural communities. more prosperous and resilient, by providing credit and capacity building.
BlueOrchard is also creating a new market for tailored and affordable weather insurance that covers small farmers against extreme weather events, which can devastate both crops and livestock which are often the family’s only source of income. In addition to weather data, farmers also receive advice on the effective use of fertilizers and how to select crops that are much more suited to the current weather situation. For investors, while each insurance policy is relatively small, the returns come in the large number of people who take the offer.
BlueOrchard also invests in “insuretech” companies such as Skymet Weather Services, which provides weather and crop yield information service to the insurance sector in India, using more than 4,000 automated weather stations. The investment helped expand the network, and now reaches 20 million farmers, allowing them to better manage the impact of weather and climate events on the harvest through smartphone-based insurance .
Bouri also sees a growing role for corporations – more often seen as investee rather than investor – in the market. A company can look for ways to introduce regenerative agriculture into part of its supply chain, he says, and can commit to partially financing this by investing its assets and then collaborating with other impact investors.
“They also have a lot of assets and are increasingly thinking about how they can invest their capital to have a positive impact,” he explains.
It is another untapped channel that could allow a stream of new finance to flow to help communities adapt and build resilience for an unpredictable future.
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