What it takes to create a values-based marketplace
If delivering attractive risk-adjusted returns with meaningfully positive social and environmental impact is in the realms of the possible, why are investors – and voters – led to believe that one should compromise growth for impact. Empirical evidence clearly points to the contrary. An extensive body of practical experience is now available demonstrating that a skilfully engineered financial instrument can deliver significantly de-risked, high-yielding impact across sectors and regions where capital does not organically flow.
Even if only a modest proportion of the hundred trillion dollars outstanding debt market were made up of such instruments, this would still constitute a sufficiently large and highly investible universe offering attractive potential for diversification of risks. And even if only a modest portion of a traditionally diversified institutional investment portfolio were to be allocated to so-called “triple-bottom” assets – be they ESG-integrated, labelled debt or impact bonds, this would still represent meaningful demand by the trillion dollars held by asset owners (As of the end of 2023, the world's 100 largest asset owners held $26 trillion in assets) and sovereign wealth funds (As of June 2024, sovereign wealth funds (SWFs) held $12 trillion in assets) across the world.
Yet we are looking at only just over $5.7trn cumulative Green, Social, Sustainable and Sustainability-linked bond issuance since the first green bond was issued in 2007, which is not a large figure by any standard, especially in the grand scheme of what’s required to mitigate, adapt and build climate resilience. The United Nations Framework Convention on Climate Change report of November 2024 estimates that the global projected investment requirement for climate action is around $6.5 trillion per year by 2030, of which $2.7 trillion is in advanced economies, $1.4 trillion in China, and $2.4 trillion in EMDCs other than China.
The stagnation and more recent, significant rollback in commitments in the face of looming catastrophic economic and social collapse, which will only be exacerbated by the heightened frequency and intensity of environmental disaster, is leaving every corner of the sustainable finance and impact investing industry in shock and disbelief. Doubling down on efforts has, for the most part, been the response of a growing community of professionals who have chosen this path with unprecedented intentionality.
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To create a principles-based marketplace requires clarity of vision and purpose that will uplift and inspire individuals to advance the interest of the collective; A vision around how it impacts people, practically speaking, or a purpose meaningful enough to groups that are animated and moved by a desire for a better world. It takes effort, a degree of self-awareness and ethics to drive businesses and initiatives whose undebatable long-term environmental, social and economic benefits all weigh on the short-term liability side of the balance sheet.
The $1.7trn funding gap to meet the 17 UNSDGs requires we bridge the world of mainstream finance with what has historically been the territory of civil society: NGOs, charities and philanthropists solely geared to deliver impact. It requires we build a direct conduit between the two with a disciplined and transparent approach. Discipline, transparency and due process are hallmarks of the trust-inducing environment and new social contract that we desperately need.
Firstly, responsible investing demands that we identify the core values and principles we authentically wish to foster through the deployment of capital, resulting in investments matching the expression of these values into the world. Secondly, it demands that we identify the regions and sectors that most require looking at. Emerging and frontier markets are known to be disproportionately impacted by the consequences of global warming and a global south lens can enhance our ability to deliver more impactful solutions. Lastly, it demands that we select the assets, projects and activities most critical, urgent and beneficial to the collective to deploy this capital, resulting in a highly intersectional and adaptive set of solutions.
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It is complex to foster a new market in any asset class because there are circularities involved. By this, we mean that many things must be put in place simultaneously: good corporate governance; reporting disclosures; transparency in how the money is received, deposited and deployed; certification of the use of proceeds; transparency in how the proceeds are then accounted for and redistributed; verification of impact over the life, and upon maturity, of the bond.
Fostering ethical markets and a new asset class from scratch is a non-trivial task. In the best-case scenario, sufficient liquidity eventually gives the market breath and scale; this is when diversifying the sources of funds to expand the envelope of funding available to the originators and placement agents becomes critical.
Ultimately, the goal is for the risk-return and liquidity profile of the market to become commercially appealing to the institutional investor community, then to private sector investors. This is why the entire spectrum of funding is recruited: grants, concessional financing, equity, smart private and public capital blended packages, equally smart capital structures that can invite a wide variety of investor types. Recent climate resilience projects feature a range of thematics: one segment for loss and damage, one for adaptation, one for mitigation; A philanthropy tranche that may crowd in a concessional tranche, which will in turn crowd in a commercial tranche, all in the spirit of scaling the investment to size.
Assuming the broad acceptance that emerging and frontier markets are regional priorities in Project Sustainability – hope this is not too much of a leap, issuance of a bond in an internationally available foreign currency can help build the operating muscle for domestic policy-makers and operators and provide a practice ground for sovereign bonds and other types of debt instruments in the future, to access more options and eventually tap into international financial markets.
What is incredibly compelling with use of proceeds and impact bonds is their capacity to convert mainstream finance into a vector supportive of values-aligned thematics and to scale up what would otherwise remain surgically targeted finance with powerful yet limited impact. To intentionally know what impact we wish to achieve and enlarge that through a special purpose vehicle or SPV distributing microfinance loans to select borrowers, either directly to SMEs or through local lenders in a deliberate fashion can be incredibly powerful.
Finally, creating a new value-based marketplace also requires transcending boundaries to achieve Global Sustainable Development Goals. The role of international cooperation, the need to break siloes and work across bioregions demands collaboration across the Global North-South axis.