Sustainable Finance and Impact Investing , livre ebook

Sustainable Finance and Impact Investing
Sustainable Finance and Impact Investing
Alan S. Gutterman
Sustainable Finance and Impact Investing
Copyright © Business Expert Press, LLC, 2021.
Cover design by Charlene Kronstedt
Interior design by Exeter Premedia Services Private Ltd., Chennai, India
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopy, recording, or any other except for brief quotations, not to exceed 400 words, without the prior permission of the publisher.
First published in 2021 by
Business Expert Press, LLC
222 East 46th Street, New York, NY 10017
www.businessexpertpress.com
ISBN-13: 978-1-63742-002-7 (paperback)
ISBN-13: 978-1-63742-003-4 (e-book)
Business Expert Press Finance and Financial Management Collection
Collection ISSN: 2331-0049 (print)
Collection ISSN: 2331-0057 (electronic)
First edition: 2021
10 9 8 7 6 5 4 3 2 1
Description
The term impact investing first appeared in 2008. Today the most commonly used definition is investing made with the intention to generate positive, measurable social and environmental impact alongside a financial return. A wide range of individual and institutional investors that have already entered the impact investment marketplace and continued growing enthusiasm can be expected given that feedback from investors indicated that portfolio performance has generally met or exceed their expectations for both social and environmental impact and financial return.
Established companies have been compelled to respond to calls by institutional investors to incorporate responsible environmental, social, and governance initiatives into their business models as a condition to continued support in public capital markets. Other companies seeking to demonstrate to impact investors their commitment to environmental and social responsibility have opted for emerging forms of legal entities, so-called social enterprises, which explicitly incorporate sustainability and multi-stakeholder interests into their governance and reporting frameworks.
This book provides readers with a basic understanding of sustainable finance and impact investing including history, definitions of impact, current trends and drivers, future challenges, and an overview of the key players in the global impact ecosystem. The book also describes impact investment structures and instruments, social enterprises, and impact measurement and reporting.
Keywords
impact investment; impact; environmental performance; social performance; sustainable development; integrated reporting; venture capital; private equity
Contents
Chapter 1 Sustainable Finance
Chapter 2 What Is Impact Investing?
Chapter 3 Impact Investment Tools, Structures, and Instruments
Chapter 4 Organizing for Impact Investment
Chapter 5 Doing the Deal
Chapter 6 Impact Measurement and Reporting
About the Author
Index
CHAPTER 1
Sustainable Finance
In recent years governments have debated and established ambitious public policy initiatives such as the 2030 Agenda for Sustainable Development and its broad range of Sustainable Development Goals (SDGs) including reducing poverty worldwide and promoting sustainable economic growth and the Paris climate agreement of 2015. Funding these initiatives would require the deployment of massive amounts of external financing, much of which would need to come from governments in the form of “official development assistance,” which has been defined as government aid that promotes and specifically targets the economic development and welfare of developing countries. Multilateral development banks (MDBs), which are created by governments including the World Bank and International Monetary Fund, also play a significant role in stimulating and channeling aid into developed, low-income and emerging companies. Other significant forms of external financing assistance in the development sector include philanthropic assistance through foundations, international sovereign bond issuance across various multilateral institutions including MDBs, development institutions and supranational organizations, and climate finance through public–private partnerships. Capital for development projects is also being provided by financial institutions, insurance funds, pension funds, and impact investors, and organizations active in the startup community are ramping up their support for sustainable entrepreneurship. More and more companies are issuing financing instruments based on specific promises of use of the funds for environmental and/or social projects and stock exchanges are facilitating these offerings by mandating more robust environmental, social, and governance disclosures. The actions of all of these actors are influenced by the priorities identified by nonprofit think tanks, philanthropists, social change activists, and enablers and civil society. 1
Sustainable finance has been explained to be a long-term approach to finance and investing, emphasizing long-term thinking, decision-making and value creation, and has also been described as the interrelationships that exist between environmental, social, and governance (ESG) issues on the one hand, and financing, lending, and investment decisions, on the other and long-term-oriented financial decision-making that integrates ESG considerations. 2 On its webpage describing “sustainable finance,” the European Commission (EC) explained that the term generally referred to the process of taking due account of environmental and social considerations when making investment decisions, leading to increased investment in longer-term and sustainable activities. Examples of environmental considerations offered by the EC included climate change mitigation and adaptation, as well as the environment more broadly and the related risks (e.g., natural disasters), while social considerations refer to issues such as inequality, inclusiveness, labor relations, investment in human capital, and communities. The EC also noted that the governance of public and private institutions, including their management structures, employee relations, and executive remuneration practices, played a fundamental role in ensuring the inclusion of social and environmental considerations in the decision-making process. The EC’s view was that all of the components of ESG were integral parts of sustainable economic development and finance, and that sustainable finance should be understood as financing that can support economic growth and the reduction of pressures on the environment while simultaneously taking into account social and governance aspects. 3
Sustainable finance has emerged in parallel to policy initiatives mentioned above as it has become clear that they cannot be realistically undertaken and completed without innovative private sector financing models that allow a wide range of potential investors to participate in high-growth, albeit risky and uncertain, opportunities. According to BNP Paribas, capital for sustainable finance is available from investors who want to take part in financing enterprises involved in projects with high environmental or social value, including projects that will have an impact that the investors may experience directly; socially responsible investment funds capitalized by institutional and private investors; pension funds and private banking and wealth management sources expected to grow significantly in the coming decades due to wealth transfers from Baby Boomers and Generation X to Millennials who surveys indicate have a strong commitment to incorporate social change into their investment decisions. 4 Sustainable finance is just not about “doing good,” in fact consultants such as McKinsey have argued that companies with a robust ESG framework are more likely to add value as compared to companies that have not developed sustainable practices and that ESG creates value in several different ways including top-line growth, cost reductions, reduced regulatory and legal interventions, employee productivity uplift, and investment and asset optimization as key enablers in generating a long-term advantage. 5
The interest of the EC in sustainable finance has been driven by the European Green Deal, which is a growth strategy announced in December 2019 that seeks to make Europe the first climate-neutral continent by 2050. The EC has acknowledged that the scale of the investments necessary to achieve the desired transition to a climate-neutral, green, competitive and inclusive economy is beyond the capacity of the public sector alone (e.g., in January 2020, the EC presented its European Green Deal Investment Plan that called for the mobilization of at least €1 trillion of sustainable investments through the period ending in 2030) and has committed to an action plan on sustainable finance in which the financial sector (e.g., asset managers, insurance companies, and investment or insurance advisors) supports the European Green Deal by reorienting investments toward more sustainable technologies and businesses; financing growth in a sustainable manner over the long term; and contributing to the creation of a low-carbon, climate resilient, and circular economy. 6
The financial services industry has taken notice of importance of sustainable finance and the market for sustainable investment opportunities has been growing steadily as more and more industry participants are recognizing the long-term benefits of a more sustainable economy and incorporating sustainability considerations into their strategies and operations. According to data from the Global Sustainable Investmen