Reorienting capital flows towards a more sustainable economy

Movements in the market indicate that a new wave of innovation is coming: the 6th Industrial Revolution, driven by the depletion of the current model of capitalism and the need for re-configuration around present environmental and social needs. Inequalities are being brought to the forefront leading to questions around current needs and expectations of the future. It is within this context that the discussion of sustainability is gaining momentum, with companies incorporating these principles as a pre-requisite in their products, services, and processes.

The 6th wave of innovation. Are we ready?

This has led to the growth of impact investing, or investing with the intention of creating a financial, as well as environmental and social returns. The Association of the Luxembourg Fund Industry, which represents the country’s investment fund community, saw demand for sustainable finance surge as a result of the UN’s Sustainable Development Goals (SDGs) in 2015 and the Paris Agreement a year later, which aims to limit global temperature rises to 1.5°C. Investors are seeing the pandemic as a chance to make the financial industry more sustainable by taking the opportunity to invest in the “6th Industrial Revolution” and  benefit from the economic tailwinds associated with companies that are creating better social and environmental outcomes.

Making an impact

The SDGs were accompanied by a Financing for Development strategy to mobilize private capital to support the achievement of these goals.  As of May 2021, IFC estimates that up to $2 trillion has been invested with a mandate to achieve positive impact. Furthermore, it states that the appetite of investors for this approach to investing is much larger — up to $25 trillion, or about 10% of the global capital market. This represents an exciting opportunity. Investments of that scale could make a huge contribution to achieving the SDGs, which require about $2.6 billion a year of additional private financing. With these developments, investors have more opportunities to find investments which have a credible approach to delivering measurable impact.

The EU Taxonomy

In order to meet the EU’s climate and energy targets for 2030 and reach the objectives of the European Green Deal, it is fundamental to direct investments towards sustainable projects and activities. To achieve this, a clear definition of sustainability is needed. This is why the action plan on financing sustainable growth called for the creation of a common classification system for sustainable economic activities, or an “EU taxonomy”.

The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities. It is an important enabler to scale up sustainable investment and to implement the European Green Deal. Notably, by providing appropriate definitions on which economic activities can be considered environmentally sustainable, it is expected to create security, protect private investors from greenwashing, help companies to plan the transition, mitigate market fragmentation and eventually help shift investments where they are most needed.

What would be required to bring impact investing to the forefront of the emerging market developmental agenda? For one thing, measuring and monitoring the impact of these investments — jobs created, lives changed, people lifted out of poverty — is key. Collaboration — speaking about and sharing information with global partners — is also important to ensure a stronger, more unified voice to attract and retain capital.

The pandemic has forced a creative rethink around impact investments, especially as the ingenuity of start-ups have demonstrated the value of their approaches to various challenges. Across the globe, examples of agility and innovation in impact investments are flourishing. The steady growth in this asset class, however, belies a fragmented playing field. To bring impact investing to the centre stage, knowledge sharing, conducive regulatory frameworks and global advocacy are key.

At Satgana, we have embedded sustainability principles into the heart of our organization. We are firm believers that finance has a key role to play to solve complex problems and drive change for a better world. By applying to build your venture with us, you bridge business with impact through a dynamic and collaborative culture of ingenuity, ready to make an impact against the world’s most pressing challenges.