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Commentary

Four for 2024

David Grimaud, CEO, Bamboo Capital Partners, makes the case for stronger commitments to impact investing to deliver on the UN SDGs.

Those sceptical about ESG investing, of which impact investing is often seen as part, have recently publicly argued in influential media outlets such as the Financial Times, that ESG investments have had their day and they are essentially pushing against the unstoppable forces of capitalism and so will die out soon. We strongly believe that reports of the death of ESG are exaggerated.

The reality is that in the last few years large flows of public and private capital have been invested in projects and companies with strong ESG credentials. In the coming years, the signs are that this trend is set to continue and accelerate – which should not be surprising as it is a rational and enlightened response to the escalating climate and biodiversity crises we find ourselves in.

The drive towards ESG investing will be given a boost when advanced draft regulations around measuring and reporting on environmental and social impact are codified, enacted and rolled out across the world. For example in early December last year, before the start of the UN Biodiversity Conference (COP15), public consultation commenced on the draft GRI (Global Reporting Initiative) Biodiversity Standard, approved by the Global Sustainability Standards Board (GSSB) which has responsibility for setting the world’s first globally accepted standards for sustainability reporting. On November 2023, the draft revised Global Reporting Initiative (GRI) standards on climate change and energy were published ahead of COP28 (the climate COP). The International Sustainability Standards Board (ISSB) regulations will require Digital Product Passports. The EU Digital Product Passport, will be launched in 2026. This will create a digital environment which would enable data-exchange mechanisms and transparency throughout our supply chains to address political and environmental challenges.

In terms of impact investing, defined as investments made with the clear intention to generate positive, measurable social and environmental impact alongside a financial return, some additional trends are helping overcome some of the barriers that have limited the growth of the sector. Technology is becoming the backbone of numerous impact business models in finance, healthcare, education, agribusiness, and clean energy – allowing for more scalability. Public-private partnerships in the field of impact investing are helping de-risk impact investments in emerging and frontier markets: we see a lot of international NGOs and UN agencies seeking to join forces with the private sector to channel capital where it is most needed, with parties bringing complementary capabilities. Blended finance impact funds are progressively creating a track record and credit history demonstrating the viability of investing in geographies and sectors that have previously been considered as too risky by most investors. I am convinced that impact investing will become part of the mainstream financial eco-system. There is no way back, and it is going to grow quickly.

Looking ahead to how the ESG and impact investing community can re-double its efforts to deploy public and private capital in frontier markets, there are four key themes for 2024.

Channelling capital to emerging and frontier market SMEs

Blended finance investments essentially use public funds to de-risk and catalyse private investment into positively impactful projects which otherwise would be perceived as too risky by private investors due to their geographies, sectors or size. At the moment, it is not being deployed enough in the least developed countries (LDCs) – that is the world’s 47 poorest countries. According to the OECD, between 2012 and 2017, of the private finance mobilised by official development finance, approximately only US$9.3 billion, or 6%, went to the LDCs, whereas middle-income countries received more than 70%. We need to rebalance this. Our investment activities demonstrate the viability of investing in SMEs in emerging and frontier markets and create a track record which further helps SMEs access credit in our target geographies after completing one or several rounds of financing from the funds that we manage.

In 2024 and beyond, the impact investing community needs to seek new opportunities to blend capital for maximum impact. More partnerships are needed with development finance institutions and governments to design blended vehicles that direct significantly more private investment toward priority UN Sustainable Development Goals *SDGs). Investment funds can be constructed that protect private investors and build confidence in new frontier markets and enable billions in commercial capital to benefit underserved communities.

Financial inclusion for underserved customers

According to the World Bank, around two billion people across the world lack access to basic financial services. This severely limits opportunities to manage daily life, cope with unexpected difficulties, develop entrepreneurial skills, and plan for the future. An estimated 14-20 million SMEs in developing markets lack proper financing to grow.

Fintechs can be a powerful channel to accelerate financial inclusion. In 2024 key global stakeholders must unite in their efforts to support fintechs in accelerating sustainable growth and development in underserved communities and developing economies, ensuring inclusive access to financial services for all. Fintechs are key to contributing to progress on female employment and empowerment. A 2022 report for the IMF entitled ‘Fintech, Female Employment, and Gender Inequality’ found that fintech development generates significant welfare improvement for women. Not only do fintech companies reach female-led enterprises that have typically been financially excluded, but they also work with firms in service sectors that traditionally hire more female workers, helping to boost women’s employment. And the growth of fintechs not only increases the number of female employees in an economy’s workforce, but it also raises the ratio of female relative to male employees – particularly in sub-Saharan African, Asian and European countries.

Financial inclusion is also the key to unlock access to other essential services in emerging and frontier markets, such as energy, healthcare, information and communications, through tech-based models where the delivery of these services is enabled through mobile payments, reaching out to previously underserved customers.

The time for coordinated action and collaboration among policymakers, the private sector and the international community has arrived. This effort may start with sustainable investors exploring ways to maximise and adapt the support and offer that they provide to fintechs, but it can’t end there: all stakeholders in the sector must work together to leverage tech-led financial inclusion to reduce global inequality in access to financial services – which creates the conditions for better access to other essential products and services.

The just energy transition

To meet the needs of a growing global population and reduce carbon emissions at the same time and thereby address the escalating climate emergency, the world needs to accelerate investment into renewables to hasten their deployment.  In 2024, the impact investing sector needs to renew its determination to drive more capital in this vital area.

Off-grid solar energy solutions are a powerful complement to the expansion of the grid with clean energy systems replacing the use of traditional fossil fuel sources for household’s energy needs in remote areas of emerging and frontier markets.

There are a number of innovative companies operating in Africa which are leveraging Africa’s growing access to mobile money to provide solar energy and clean and heating cooking solutions to off-grid communities across the continent.

A number use pay-as-you-go models and mobile money, thereby avoiding the barrier of upfront payment which has typically prevented low-income households from accessing these products and services.

Along with increasing access to essential services like energy for underserved communities, the tech-led financial solutions being developed and deployed by such innovative companies also help advance global climate-related goals. These technologies can play a critical role in supporting the deployment of renewable energy solutions that reduce greenhouse gas emissions, boost climate resilience and adaption, and mitigate the impacts of climate change.

However, we need to commit more strongly to on this type of investment in renewable energy to accelerate the just energy transition as countries pivot from fossil fuels to meet climate targets.

The UN Secretary-General, António Guterres, has outlined a five-point roadmap to speed-up renewables deployment. These include making clean energy technology available globally and developing storage solutions like batteries, expanding access to renewable components and materials through sustainable and ethical practices, reforming policies to promote renewables as well as shifting fossil fuel subsidies to renewables and investing trillions in renewable technology and infrastructures. As global community we need to make progress on all this in 2024.

Mobilise capital into Nature-based Solutions

Nature-based Solutions (NbS) are critical for addressing climate change yet remain under-invested. Mobilising capital will require innovation and well-coordinated public-private partnerships and blended finance solutions. The 2022 UN Biodiversity Conference (COP15) in Montreal concluded with an  agreement adopting the Kunming-Montreal Global Biodiversity Framework (GBF), which outlines a broad set of actions required to halt and reverse nature loss, including investments in nature-based solutions in developing countries.

NbS are at the heart of new blue-green resilience impact investments. For instance, by harnessing the power of natural solutions that have evolved over millions of years to survive extreme weather and other threats, such as restoring mangrove forests – which act as natural barriers against sea-level rise and storm surges – we can help strengthen the resilience of at-risk communities while promoting sustainable agriculture that improves food security and generates economic growth.

The 2023 UN Climate Conference (COP28) in Dubai with Global Stocktake noted the importance of “ensuring the integrity of all ecosystems”, including the oceans, mountains and the cryosphere, as well as sustainable agriculture, resilient food systems and climate action. COP28 also emphasised the role of biodiversity, nature and carbon credits (in many ways looking to build and learn from voluntary carbon markets experience). For example, at COP28 the World Bank launched a road map for scaling high-integrity forest carbon credits in 15 countries. These credits could be worth up to US$2.5 billion, with the potential for up to 90% of the results-based payments to be made to indigenous populations.

There are also two draft global frameworks in this area, the Global Reporting Initiative (GRI) Biodiversity Standard and the Taskforce on Nature-related Financial Disclosures’ (TNFD) risk management and disclosure framework, which aims to enable organisations to report and act on evolving nature-related risks. The TNFD guidelines are due out in September 2024. We know from the published draft guidelines these will focus on the importance of nature for the resilience for societies, economies, business and finance.

Bamboo Capital Partners’ parent company, Palladium, has been working for almost 60 years to mobilise capital and implement projects that have lasting positive social, environmental, and economic impact, including through NbS.

2024 and beyond

I am determined that these four pillars of our work in 2024 will quicken the pace of progress towards the SDGs.

The financing gap to achieve the SDGs in developing countries is estimated to be US$2.5 trillion per year. If we still hope to achieve the SDGs by 2030, more innovative and sustainable financing solutions are required. As investors, policymakers, community leaders and individual contributors, we must all rally behind this cause and double down on investment and impact capital deployment.

We are only beginning to see the transformational power of impact investing. The impact investing community needs to scale and increase its efforts to increase the capital flowing into sustainable mission driven companies and community projects in frontier markets to drive social and environmental progress.

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