While COVID-19 has in some ways been a unifying force, there is no denying the havoc it has wreaked on societies and the global economy, with the gap between ‘haves’ and ‘have nots’ dramatically widening. Even if the world economy is faring better this year than previous projections indicated, a slow roll-out of COVID-19 vaccines in many developing nations in Asia and sub-Saharan Africa is negatively impacting their economic recoveries. The pandemic is deepening global inequalities. Can innovative financing structures born out of multilateral collaboration – and which are directed towards a broad spectrum of sustainability goals – help? We think so.
Channelling capital to where its impact is greatest
Unprecedented financial liquidity provided by central banks and historically low interest rates have been the main drivers of exceptionally buoyant global credit markets over the past 12 to 18 months. But what matters most is where the volume of financing is deployed and the impact it has. In other words: credit market participants have a unique opportunity to step in and harness financial capital as a force for good.
Board member and shareholder focus on marrying commercial decisions with ESG guiding principles is only increasing, even if assessing the economic value of ESG financing structures remains challenging due to the lack of uniform ESG reporting requirements and the fact that many environmental and social impacts can be hard to measure.
Nevertheless, we have seen an exponential growth in demand for sustainability-linked bonds, with YTD 2021 ESG bond issuance already at 75% of 2020 volumes1. Sustainability-linked loan volumes have increased 15 times over the past four years2.
Yet volumes are not everything. Where capital is channelled and the impact it has is key. This is an area recently investigated by Standard Chartered, whose Sustainable Finance Impact Report revealed, for example, that a solar project in India has seven times the impact on CO2 reduction than a similar-sized project in France.
“India is the new hot spot for renewable energy, and this is not going unnoticed,” commented Henrik Raber, Global Head, Credit Markets at Standard Chartered. “We have recently structured a landmark USD1.3bn green financing deal, with massive interest and participation from international banks, which in turn has opened doors for new sponsors. We are very pleased to be playing an active role in channelling financing to where it is most impactful.”
Innovative financing: turning green into rainbow
Taking the innovation and momentum that has driven green finance and using it to support more of the UN’s Sustainable Development Goals3, more and more issuers are going beyond the pure environmental perspective when issuing sustainability-linked bonds and are channelling financings towards the wider spectrum of ESG goals. Beyond ‘green bonds’, which are devoted to financing projects with a positive environmental impact, we can expect to see an increase in: ‘social bonds’, the proceeds of which must finance positive social outcomes; ‘blue bonds’ to finance marine and ocean-based projects; and ‘orange bonds’ to unlock private capital for women’s empowerment and gender finance.
Looking at credit markets more broadly, we still have a steep road ahead of us to bridge the infrastructure investment gap in many developing nations.
“When we look at Asia and Africa, the gap in infrastructure investment needed and expected spend is currently around USD193bn. This is anticipated to widen to around USD346bn by 20404,” said Henrik Raber.
Creating innovative financing structures that have real impact on critical infrastructure in high-barrier markets in Asia, the Middle East and Africa is not an easy task as it requires multilateral collaboration between Export Credit Agencies (ECAs), Multilateral Development Banks (MDBs), Foreign Direct Investments (FDIs) and banks.
FDI flows to developing economies have shown relative resilience to the pandemic and attracted a record 72% of FDI last year. However a recent UNCTAD report also reveals a decline in international project finance deals in Africa, Asia, Latin America and the Caribbean5.
“Against this backdrop, it is remarkable that Standard Chartered has brought ECAs, MDBs, FDIs and banks together and is leading the charge in critical infrastructure developments in markets such as Angola, Ivory Coast and Ghana,” said Mr Raber. “This is something that sets our bank apart and I know our project finance team is busy working on deals that will continue to positively impact development in our footprint markets in Africa, Asia and the Middle East.”
So maybe the rainbow future of financing is not a far-off pipe dream. It’s certainly a journey and it will take resilience to navigate through less favourable and more volatile market conditions, while keeping the commitment to harnessing capital as a force for good front and centre.
This article is based on themes discussed during a panel discussion at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.
1 Bloomberg/Dealogic, April 2021
2 ‘Green Lending Review’, A Refinitiv LPC Publication, April 2021
3 ‘The 17 Goals’, United Nations, Department of Economic and Social Affairs, Sustainable Development, https://sdgs.un.org/goals
4 ‘Global Infrastructure Outlook’, June 2018, https://outlook.gihub.org/
5 ‘Investment decline in productive assets spells trouble for poorer nations’, UNCTAD, February 2021, https://unctad.org/news/investment-decline-productive-assets-spells-trouble-poorer-nations