The Global Impact Investing Network (GIIN), the “trade association” for impact investors, has published a new “Roadmap for the Future of Impact Investing”.
We analyse the key findings of the report briefly below, in terms of what lessons there might be for climate finance. As we have written about previously, climate finance shares many characteristics and crossovers with impact investing.
The GIIN report lists six key actions to scale up impact investing:
- Strengthen the identity of impact investing by establishing clear principles and standards for practice
- Change the paradigm that governs investment behaviour and expectations about the responsibility of finance in society, via asset owner leadership and updated finance theory
- Design tools and services that support the incorporation of impact into the routine analysis, allocation, and deal-making activities of investors
- Develop products suited to the needs and preferences of the full spectrum of investors, from retail to institutional, and of various types of investees
- Increase the supply of trained investment professionals and the pipeline of investment-ready enterprises through targeted professional education
- Introduce policies and regulation that both remove barriers and incentivize impact investments
What might these actions imply in the field of climate finance? Here are just a few thoughts under each heading.
Strengthen the identity of impact investing by establishing clear principles and standards for practice
The green bond market is growing rapidly, with new standards emerging all the time, and a small “industry” growing up around assessing them. Doubts still persist in many minds over how effective these standards are in preventing “greenwashing,” but the newly announced EU taxonomy of what constitutes sustainable finance should assist with perfecting standards. It might also help promote standards for other forms of finance such as green mortgages and loans. A recent report from Shareaction, however, showed that as things stand, most banks major don’t even have systems in place that allow them to know what’s in their portfolios, so there is a huge distance to travel.
Change the paradigm that governs investment behavior and expectations about the responsibility of finance in society, via asset owner leadership and updated finance theory
Climate finance is arguably quite well advanced in terms of addressing negative behaviour. The fossil fuels divestment movement is well financed by philanthropy and appears to be making inroads on coal financing in particular. Not that this progress is entirely universal – a report just out from several NGOs reveals that many major banks have re-upped their lending to coal and other “extreme” fossil fuels in the past year. What’s more, the divest movement doesn’t have reach into the activities of Chinese banks, which remain major financiers of such assets.
Equally, the TCFD recommendations and the new EU sustainable finance rules arguably “change the paradigm” on disclosure, though again the journey has only just started. Meantime, in terms of “an updated finance theory”, there appears to be little evidence that business schools, for example, are stepping up to deliver any such thing, whether on climate or economic sustainability.
Design tools and services that support the incorporation of impact into the routine analysis, allocation, and deal-making activities of investors
The key “impacts” in green or climate finance terms is of course climate impacts, and there is now clear momentum among, for example, rating agencies, to deliver tools that can make more routine the understanding of these impacts on company performance. Initiatives like TCFD referred to above will help to drive asset managers to look at changes in asset allocation, but whether changes in culture and mindset among, say, pension fund trustees will keep pace is less obvious.
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One piece of good news is that major global corporations seem to be awake to the dangers to their operations and supply chains. This is not public investment, but these companies bringing their balance sheets to bear on adaptation could nevertheless be a major source of finance in the developing world, as long as communities are included in projects and fairly brought along.
Develop products suited to the needs and preferences of the full spectrum of investors, from retail to institutional, and of various types of investees
Apart from green bonds, we are seeing very little sign of any scale-up in climate finance, either in money flows or diversity of instruments on offer. As we noted in a previous blog, CPI’s 2017 report indicated that we are probably falling short of the amounts we need to raise by a factor of 8.
There are two levels that we need to look at in the climate finance ‘supply chain”: the money to the get the projects built in the first place, and then the skillsets to repackage those projects into ‘bulk’ instruments that institutional investors can refinance. The first requires the DFIs, the MDBs and the public climate funds to be doing far more than they are to de-risk projects for private financiers. Current leverage levels are woefully low – again by a factor of several. The second task is the bread and butter of investment banks, and should happen naturally once the ‘raw materials’ for those instruments (the projects on the ground) start to get financed. That’s what already happening with green bonds, so the model has been established – it’s just not always clear what the underlying projects in these bonds are.
Increase the supply of trained investment professionals and the pipeline of investment-ready enterprises through targeted professional education
This raises the question of who is responsible for this kind of capacity building in the climate finance world? Where is the “GIIN for Paris”? It’s clear that UN Climate Change (what used to be the UNFCCC) either has no interest in doing this, or is being starved of resources to do so. Initiatives like this blog are one (minor) response, but we need to do far more to build a “Paris finance community” that can start to provide the kind of professional development the GIIN report calls for in its sector. The NDC Partnership might have been one place to look, but it seems for the moment stalled.
Introduce policies and regulation that both remove barriers and incentivize impact investments
At the highest levels, as noted in remarks on (2) above, there have been helpful policy moves, such as TCFD and the French Article 173, that should have a bearing on levels of transparency and change behaviours over time. At the level of government-to-finance discussions, though, even in developed countries the dialogue is very patchy and the languages used very different. Though most MDBs have programmes for this kind of capacity building, we again suffer from the lack of any co-ordination so that needs are best identified and best practices shared.