Recent blended finance announcements, such as Luxembourg’s new climate finance vehicle or the European Investment Bank’s €27.6 billion green investments in 2021, both discussed at the conference, require that private investors already engaged remain engaged and hold the management of the underlying assets to account.
“It’s a drop in the bucket in terms of size and scope,” said David Berners, director of product strategy and investor relations at social investment fund Yunus Social Business. He was referring to the additional $2.5 trillion in private and public financing needed globally annually to meet the UN’s sustainable financing targets.
Gaëlle Haag, who co-founded StarTalers, a fintech specializing in education and financial inclusion that supports women who want to invest sustainably, said of private investors: “It is easy to invest when the markets are up, but the same investors turn their backs when the markets go down. There are significant outflows of ESG funds under current market conditions.”
“Investing for impact and investing with impact”
Blended finance makes investing less risky for private capital by strategically taking first-loss positions with public, development or philanthropic funds. In this way, larger volumes of private capital can flow into less popular investment universes with a lower risk of loss than might otherwise arise.
Eventually, private investment blossoms to the point that public participation can be withdrawn. But whether private money remains depends on the private investor, experts said.
“There is a difference between investing for impact and investing with impact,” said David Berners. “If you invest for impact, then your primary need is impact and you don’t withdraw your assets when the market goes down. Investing with impact, on the other hand, is another story.” Gaelle Haag explains, “In its most passive form, ESG investing is the effort of financial investors to avoid distressed assets in the future portfolio.”
The Luxembourg State and the EIB, headquartered in Luxembourg, have recently announced ambitious investments in the field of climate finance. Luxembourg has partnered with global investment manager Schroders and impact investment specialist BlueOrchard to create and manage, by the end of 2022, a climate finance vehicle that will focus on transition-enhancing investments towards carbon-neutral and resilient economies.
The EIB for its part allocated 26.7 billion euros in 2021 to green investments, including 9.1 billion euros for low-carbon transport, 5.7 billion euros for renewable energies, 4 .7 billion euros for energy efficiency, 4.1 billion euros for other climate change mitigation measures, 1.6 billion euros for research, development and innovation, 1, €3 billion for adaptation to climate change and €1.1 billion for other funding for environmental sustainability.
The bank, which notably uses blended finance to achieve its political objectives, also plans to increase its investments in climate change adaptation to 15% of its total climate finance by 2025, three times more than for the period. 2015-2020.
Transparency and measures
Céline Bruhe, head of climate at the EIB, also underlined the importance of transparency in a presentation made during the Momentum conference.
Some delegates, however, pointed out that transparency alone cannot improve private investment decisions. “I don’t believe in an approach based entirely on transparency,” said David Berners. “The truth is that we are a long way from showing data to the investor and trusting them to make the right choice. The challenge is for asset managers to convince investors.”
Gaelle Haag confirms. “Labels don’t tell the right story or they confuse it. Risk-based measures are sold as a label for impact or ethics. But socially responsible investing and fossil fuels are not mutually exclusive. Rather than boxes with labels, we need to educate investors on how to go beyond raw data and decide for themselves a sustainable portfolio aligned with their own values and goals.”
For Adriana Balducci, associate director at sustainable investment adviser Innpact, the complex EU framework has significant downsides when it comes to investing in illiquid emerging market products. “The EU taxonomy cannot be easily applied to emerging market managers. A small business or a microfinance fund in Latin America cannot report its global emissions offsets in the absence of data. Even surrogate data is often based on exchange-listed products, so it cannot be applied.”
What’s important, she says, is to look beyond the key performance indicators and into the investment portfolio. “As Plato said, we must not confuse law and ethics.”
Experts agreed that impact investors actively invest to make a difference. However, the percentage of impact investing relative to global assets under management is too low – 2%, or $2.3 trillion in 2020, according to the International Finance Corporation.
Improving liquidity and reducing the size of entry tickets are key to opening up trillions of dollars of impact investment assets to retail investors. “We need to look at liquidity solutions for retail investors,” said Adriana Balducci, explaining that retail investors and even many institutional investors are reluctant to tie up their capital for 10-15 years in sustainable private equity and even longer. in sustainable forestry – 15 to 20 years.
The opposite problem, that large institutional investors such as pension funds have too large tickets for certain impact investment projects, also needs to be addressed, Adriana Balducci continued.
For mixed financial investments such as that of Luxembourg and the EIB, the experts are less interested in the financial investment than in the impact. “We always talk about the language of financial numbers, but what I really want to know is the impact ratio of these types of investments,” said Adriana Balducci.
Otherwise, “the house is burning but we continue to fuel the fire,” said Gaëlle Haag.
This article was written for Delano, translated and edited for Paperjam.