Sustainable and impact investment
Sustainable investment is on the rise. Although the outcomes of COP 26-outcomes may disappoint, they still include a promise of 500 billion US$ of public investment up to 2025. In addition, in private-market investing in Europe alone, the demand for sustainable investments is driving a “structural reboot”, with environmental, social and governance (ESG) investment on track to account for double that amount in Euro, by that same year.
This money is looking to be invested in line with the United Nations sustainable development goals and European Union’s sustainable finance ambitions.
Many of the challenges of small Island nations, but also the protection of many of their riches, match the UN and EU sustainable and impact investing agenda’s.
The Six Surfers
Private sustainable or impact investing, however, aren’t just one thing. They are rather six categories of sustainable investment strategy, or: the six surfers of the green wave.
To catch it, follow them.
First the oldest group, the “values first” investors, applying negative, exclusionary screens to their investments. They look at the financial numbers, but don’t want activities or assets that offend their values. Although well-intending, these are not the surfers guiding us to the wave.
The second group of investors follow a “value first” strategy. That sounds the same, but they paddle differently. Rather than exclude, this fast-growing group combines financial performance criteria with non-financial criteria related to social and environmental factors. Now the picture gets interesting, as these and the following two surfers may include specific projects in their investment-portfolio on a case-by-case or ESG-project basis.
Third come the “impact investors”. These have a long history of improving the well-being of regions or groups. Their “bottom of the pyramid” approaches originally focused on things like as microfinance and social entrepreneurship. Impact investing has now become a lens for investors looking to have positive societal and environmental effects with their investments.
Fourth are “thematic investors”, typically private equity or venture capital investors. They focus on themes like social housing-, renewable energy-, water-, road- or other infrastructure. After these three ESG and project focused investors come the big-board players.
Fifth, the large investment firms and institutional investors needing to integrate more ESG in their portfolio’s. They have a hard time changing their wide financially focused portfolio’s. To integrate ESG-factors in their investment criteria, they use ESG-data from external and specialized data providers.
And last, the “minimum standards” investors. This is a diverse group applying EU, UN, OECD or ILO principles as minimum standards. Here, much is in flux as the EU Commission is pursuing its sustainable finance ambitions and the US Securities and Exchange commission is reviewing its climate and sustainability standards.
Blue ‘n Green Bonds
So at least three of the six surfers are a good match for small Island communities. But in what way and does it really happen? Examples are green and blue bonds.
Since its inception almost 15 years ago, the “green bond” market has seen a nearly 100% annual growth rate, to reach almost 1 trillion US$ last year. Riding this wave of success is the EU Commission, that recently proposed a voluntary green bond standard for bonds financing sustainable investment. Green bonds fund projects with positive environmental, social or governance benefits.
Most green bonds are based on future Island income streams or specific revenues from such ESG-projects. A newer type of green bond is the “blue bond”.
These support investments in healthy oceans and blue communities or economies. In a blue bond, earnings are generated by sustainable blue economy projects, such as coastal ecosystem and marine management restoration, wastewater management or marine renewable energy projects. In 2018, the Seychelles launched the world’s first sovereign blue bond to support sustainable and fisheries projects.
To draw attention to plastic waste pollution in oceans, the World Bank launched a blue bond in 2019. And finally, at COP 26 the Inter-American Development Bank announced the first Latin-American and Caribbean blue bond, to contribute to UN-SDG 6: “clean water and sanitation to all”.
So, it is time for small Island communities to follow Ricardo’s two-century-old lead and leverage their specific endowments with human-, social- and natural capital for the greater good of themselves and others. They can catch it by paddling with the six surfers and dropping into the wave of the green and blue bonds.