Building a Future for Sustainable Finance – a report on the 2013 FT/IFC Sustainable Finance Conference
The deepening of capital markets through private and public sector co-operation would be another big step forward in the overhaul of the infrastructural deficit identified within emerging markets. Consequentially this would boost SMEs future prospects, who are typically the largest contributors to national output and almost exclusively the main source of employment. Limitations from the misconceptions of the phrase ‘green projects’, coupled with the prevailing culture of short-termism must be reformed in order to bolster such co-operation. Doing so would help design the much needed environment for long-term growth for emerging market economies, which in turn should help alleviate absolute poverty (currently affecting an estimated 1.2 billion people globally) by 2030.
Appropriately, both issues of ‘Sustainable and Responsible Investment’ (SRI) and ‘Environmental, Social and Governance (ESG) dominated the agenda of the FT/IFC Sustainable Finance Conference. James Cameron, Non-Executive Chairman of Climate Change Capital stated that the problem was not a lack of money, but rather the lack of its (allocation) investment into SRI and ESG sectors. Indeed in the context of $130 trillion held as private capital presently, the equivalent of $1 trillion must be invested in clean energy every year according to Nick Rouse, Managing Director of Frontier Markets Fund Managers. To achieve this, the narrative should be to demystify and de-emphasise the existing false perceptions surrounding the word ‘green’ in the eyes of investors as a premium or novelty asset class. Furthermore, Alex van der Velden, CIO at Ownership Capital described the ‘safe bubble’ of the conference, articulating that at the heart of the fund management industry many are sceptical about the benefits of ESG. In the long run however, investors must realise that companies with strong ESG ratings are not only ethical investment opportunities, but do add value to building well-diversified portfolios.
Post the 2008/2009 financial crisis, recent evidence highlights that private investors are avoiding longer term investment horizons and are almost always seeking shorter term horizons; consequently there is a growing short run vs. long run imbalance. The danger is that this may not be an aberration. This myopic culture within the investment selection process fails to see the big picture: that alongside long-term support boosting asset classes with low market capitalisation and improving liquidity- above average bottom line returns are very realistic.
Of course, infrastructural projects in these markets do involve risk, but returns will be higher for all parties if innovative, adaptable ideas are backed with financial support. As Michael Eckhart, managing director of Citibank pointed out, bridging the ‘delivery gap’ is an important step.
It is also noteworthy to state that the art of effective communication and networking between developed and emerging markets is vital to opening new markets and transferring knowledge in both directions. This is particularly true if projects such as the ones nominated for the 2013 FT/IFC Sustainable Finance Awards; Interswitch in Nigeria and Alqueria Dairy in Columbia (both aiming to make profits and equally help eradicate poverty) are supported.
Projects like these provide vivid examples of how to combine new technology effectively to the everyday needs of the poor. Interswitch, an electronic transaction switching and payment processing company, has based much of its business model around the comparison of low banking penetration rates of about 21% with 80% of the population (in Nigeria) having mobile phones. Its SMS service is linked to customer debit card accounts which generates a One Time Password (OTP) for every transaction. Consequently this has aided 80,000 ‘base of the pyramid’ citizens to make transactions easily and more affordably. Our argument however, is the multiplier effect this will have for these same customers who can now progress into middle-income earners and increase the demand for other Interswitch services.
The Private sector vs. Public Sector
Both private and public sector institutions must regain confidence in one another and co-operate in order for ESG compliant companies to be sufficiently funded to provide a sustainable future for emerging markets. This is especially the case where public sector debts are high and private sector investors discount ESG projects. Valuable projects that are being set up are overlooked by investors who find it difficult to benchmark risk profiles, because of the limited empirical data. Emerging markets ought to be supported further by the public sector primarily in providing the tools and incentives for private investors and capital markets to deepen, whilst emphasising the long term importance of ESG projects. However, governments in emerging markets, in a similar way to the IFC, must act as catalysts instead of intervening; because we know state intervention can cause market and price distortions.
Reasons for optimism
Despite remarks by Martin Wolf of the Financial Times on the paradoxical nature of the phrase ‘sustainable finance’; progress even if slow, is being made. The Sustainable Stock Exchanges initiative was launched not too long ago, chiefly to promote new investments for sustainable companies and increase the availability of information related to ESG. Furthermore it was through the World Bank’s “50:50” campaign, we witnessed over 50 countries and 86 private companies huddle together to highlight the importance of public private sector collaborations on this very same issue. Justine Greening backed this movement up by saying government funds recently set up must be joined by private sector investment. In summary, as a quarter of African countries grow at a rate of over 7%, these markets show great potential for the discerning investor. Today, investors not only have an opportunity to make a handsome return in the long-run, but the ability to make a difference.