World leaders, finance ministers, business leaders and investors gathered this week in Ethiopia for the United Nation’s International Financing for Development Conference to discuss channeling resources to the UN’s new sustainable development agenda, impacting trillions in spending and billions of lives by 2030. The resource needs are great.
The need for investments in industries, such as health, education, agriculture and renewable energy is going to rapidly accelerate as the population grows by more than 30% in the next 35 years, according to the UN Department of Economic and Social Affairs’ “World Population Prospects: The 2012 Revision.” That rapid growth will place constraints on resources like water and food, and will create new global health challenges and threats to social stability. Although governments and philanthropy will continue to be large supporters of sustainable development, the private sector and investors hold the answer to closing the investment gap in developing countries.
Investors can support sustainable development and protect and grow their financial assets in the face of a shifting global landscape through social finance. Social finance is socially responsible investing that filters investments based on social criteria and impact investing that looks to repay investors based on social results, as well as environmental finance and economic development finance, such as green and infrastructure bonds, microfinance and investments in larger job creating businesses.
Social finance strategies are connected by a common purpose to generate financial returns and social and environmental impact. It isn’t new. Our estimates show that social finance activity today includes $22 trillion in investments, with some strategies achieving double-digit growth. With environmental, social and governance trends creating outsized opportunities in developing and emerging markets, imagine how that pool might grow if barriers to broad participation were removed.
We need to make the range of investment opportunities with different levels of social impact clearer for investors. We need to address the issues, such as a lack of products that meet investor risk and return requirements, limited track records and short-term incentives that make investors who invest primarily for financial performance turn away. We need to remove the barriers, and we can.
Translating growing investor interest in social finance into meaningful capital allocation will require fundamental changes to the current system and a collective effort by the financial services community. Can we as an industry take actions that will allow mainstream investors and intermediaries to work together to bring social finance to scale? Our research suggests that we can if we focus on five key categories of challenges.
Four of the categories address barriers that prevent capital from being allocated to social finance: accessibility, measurement, transparency, and systemic change. Products need to be improved to meet investor goals and performance, and the enabling environment needs to be strengthened, including the infrastructure, skills, and incentives that shape business decisions. The fifth category – collaboration – will allow the industry to pursue innovation and risk mitigation by leveraging expertise through appropriate partnerships.
Work is already under way to address some of these challenges, and we have seen progress on the transparency and measurement fronts. When the Carbon Disclosure Project sent out its first carbon data request to companies in 2003, only 235 companies responded. In 2014, more than 4,500 companies globally reported to CDP. This growth is partly due to the increasing interest of institutional investors in understanding how climate change positively or negatively affects their investments. In impact investing, B Lab’s development of the Global Impact Investing Rating System (GIIRS), which assesses the social and environmental impact of companies and funds, has significantly advanced measurement.
One area we are focused on relative to systemic change is Rule of Law. Making investing in developing and emerging markets safer and more attractive to mainstream investors is an area with significant potential. Increasing capital flow to developing and emerging markets requires strong rule of law, which is often lacking. We are working to build a coalition of support from the private and public sectors that will seek the inclusion of substantive and comprehensive rule of law in the UN’s Sustainable Development Goals.
Our goal is to enable investor capital to advance social finance. In collaboration with policymakers, intermediaries and issuers, let’s remove the barriers to mainstream investor participation in social finance and chart the path forward. Together, the financial community can find and implement innovative solutions that greatly increase the likelihood of achieving key global development goals, while unlocking opportunities for investors. The time to act is now.
Karen Peetz is president of The Bank of New York Mellon.
