This category is cross cutting and can apply to all of the above categories that are essentially financial products. “Sustainable, Responsible and Impact Investing” or “SRI” (USSIF, Accessed January 10th, 2020) is a long-term oriented investment approach which integrates ESG (environmental, social and governance) factors in the research, analysis and selection process of securities within an investment portfolio. It combines fundamental analysis and engagement with an evaluation of ESG factors in order to better capture long term returns for investors, and to benefit society by influencing the behaviour of companies.” – (Eurosif, 2018). For publicly traded instruments, it is based on different rating and screening approaches that either target investments in companies seeking to produce positive outcomes or exclude companies that are not showing commitment to environmental, social or governance issues (ESG) by their management. According to the Global Sustainable Investment Alliance, global assets under management with some SRI focus are estimated at well over 30 trillion USD (Global Sustainable Investment Alliance, 2018).
Impact Investing is a growing segment of private investing that is defined as, “investments made with the intention to generate positive, measurable. social and environmental impact alongside a financial return” (www.thegiin.org).
Another form of sustainable investment strategy in capital markets is through shareholder activism where the owners of the companies’ shares seek to positively influence corporate behavior through shareholder resolutions and other forms of communication possible under the rules and regulations of publicly traded companies.
The following strategies are included as means to achieve SRI in debt and equity capital markets as cited by the Global Sustainable Investment Alliance:
1. Negative screening excludes certain companies from an investment e.g. building a deforestation-free or palm-oil-free portfolio
2. Best-in-class (or positive) screening selects companies based on their performance, highlighting positive examples of biodiversity friendly products and socially responsible practices
3. Norms-based screening excludes companies from an investment if they fail to meet internationally accepted norms such as the UN Declaration of Human Rights
4. Environmental, Social and Governance (ESG) integration focuses on the assessment of the structural integration of ESG factors into investment decision making
5. Sustainability themed investing has a broad meaning and includes financial products such as green and blue bonds and sukuk[1] and more recently sustainability bonds
6. Impact investing includes an explicit intention to produce a positive impact, that requires impacts to be measured and reported against the intended targets
7. Corporate engagement and shareholder action aims to push corporations to address environmental and social issues by exercising shareholder rights.
Some examples of financial institutions that provide investors with the means to make sustainable or impactful investments is Green Century Funds or Calvert Investments, which also offer investment products such as environmentally focused mutual funds.
Islamic Finance
Islamic finance is a unique form of socially responsible investment that abides with the Shari’ah Islamic law, principles and rules. Shari’ah does not permit receipt and payment of "riba" (interest), "gharar" (excessive uncertainty), "maysir" (gambling), short sales or financing activities that it considers harmful to society. Instead, the parties must share the risks and rewards of a business transaction. Islamic finance and particularly green Sukuk are emerging as alternative green finance products.
A finance mechanism that has emerged from the concept of Islamic Finance is the Green Sukuk. The Green Sukuk is a unique example of a Shari’ah compliant impact investing instrument with strong growth prospects to fund environment-friendly endeavors. One of the many examples of Green Sukuks in the Islamic world is the 64$ million Green Sukuk issued by Tadau Energy in Malaysia to finance a 50 MW solar project. To explore other case studies of Green Sukuks, visit here.
Impact Investing
Investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. Impact investors invest in innovative but commercially viable business in sectors like sustainable agriculture, affordable housing, affordable and accessible healthcare, clean technology, and financial services for the poor. Along with health and inclusive finance, the protection of the environment is a core area of impact investment.
The eco.business Fund aims to promote business and consumption practices that contribute to biodiversity conservation, to the sustainable use of natural resources and to mitigate climate change and adapt to its impacts in Latin America, the Caribbean, and sub-Saharan Africa. To learn more about the eco.business Fund, visit their website here.
Lower cost of capital for conservation investments
Identify and model policy interventions that can lower the barriers that hold back private investment in biodiversity-friendly sectors. The aim is to lower the capital costs of investment and achieve a better risk-return profile for investors and for companies receiving financing. The analytical framework and model developed for renewable energy may be adapted to conservation investments.
Sustainability Standards: Finance Sector
Voluntary, usually third party-assessed, norms and standards relating to environmental, social, ethical issues, adopted by financial companies and institutions to demonstrate their performance or the sustainability of their products .
The International Finance Corporation (IFC) works with financial institutions to introduce environmental, social, and governance standards, as well as risk management to their lending practices. The ICF also works to promote stability of financial systems in developing countries, and channel finance to responsible companies. Learn more about the work of the IFC to promote sustainability standards here.
Sovereign Wealth Funds
State owned investment funds capitalized from balance of payments surpluses, foreign currency operations, royalties on extractive industries and other transfers and economic rent. Available resources are generally invested in capital and equity markets often through intermediaries to achieve returns. These returns are either re-invested or distributed to the Government or other recipient entities. Their investment policies can be oriented towards sustainable standards and practices-for example by investing a percentage of the capital in green bonds or impact investing. Similarly, the distribution of annual transfers may be earmarked to the environmental-particularly if the sovereign fund is capitalized from natural resource royalties.
Sovereign wealth funds (SWFs) are slow to embrace sustainable investments – as of 2018, the total value of green investments by SWFs has risen to USD11 billion, approximately 0.15% of the total assets of the SWF industry (source). However, Norway’s $1tn SWF, as of March 2019, has begun the process of divesting from oil and gas companies in an effort to reduce the dependence of Norway on an industry that is facing growing questions about its long-term future. Read more about the divestment out of oil and gas by the Norway SWF here.
Sovereign Wealth Funds-Oil and Gas Funds
State owned investment funds capitalized from royalties on oil and gas. Available resources are invested in capital and equity markets to achieve returns. These returns are either re-invested or distributed to the Government or other recipient entities. Their investment policies can be oriented towards sustainable standards and practices-for example by investing a percentage of the capital in green bonds or impact investing. Similarly, the distribution of annual transfers may be earmarked to the environment and climate change-particularly due to the fact of the negative impact of oil and gas on the environment and climate.