Sustainable finance helps turn the tide on critical social and environmental issues

This article was co-authored by Harvey Koh, Managing Director at FSG

Around the globe, a wave of innovative financial products and instruments seeking social and environmental benefits is shaping the exciting field of sustainable finance. These innovations are increasingly attracting interest from mainstream financial services providers, including BlackRock, DBS, and BNP Paribas, and mobilising capital at scale. One area of sustainable finance that has posted dramatic expansion in recent years is investing in publicly listed corporations based on environmental, social, and governance (ESG) factors. ESG investing in the US has grown almost four-fold in eight years and now represents $1 out of every $4 invested with professional asset managers.

All this raises one question: Why are investors increasingly buying into sustainable finance?

One simple answer is that financial services providers are responding to external pressure to pay greater heed to sustainability issues in their activities. A growing number of their clients and employees are demanding sustainable finance products while Government agencies are increasingly encouraging the move toward sustainable finance.

At the same time, financial services providers increasingly recognise the business case of sustainable finance. It has been shown to produce strong returns and offer portfolio diversification opportunities. Moreover, financial services providers are also looking to sustainable finance to address risks such as those associated with climate change, that have emerged from decades of resource-intensive economic growth. It is becoming increasingly clear to these players that a change in their approach is imperative as financial returns ultimately cannot outrun the consequences of global social and environmental crises.

Growing Interest and Momentum in Asia

We believe that Asia could be at the center of the next wave of innovation in sustainable finance, as it is already starting to pick up momentum in a number of countries across the region.

Asia’s economies also urgently need to find alternatives to their historical growth model: the region is home to eight of the world’s ten most-polluted cities, and there are growing threats in areas such as food and water insecurity, and inequality and poverty.

The current wave of innovation in sustainable finance in Asia shows the region’s potential to lead transformation in the space. From bonds issued to fund climate and environmental improvements, to funds investing in forest conservation; from parametric insurance products improving the disaster resilience of countries, to companies unlocking housing loans to consumers with irregular and undocumented earnings, innovative financial mechanism are helping address an increasingly diversified array of issues in Asia.

Significant innovation is also happening around financing micro, small and medium-sized enterprises (MSME) and impact ventures. In China, FinTech platforms, such as Alipay and WeChat are leveraging mobile phones to enable lending to MSMEs, a segment which has been underserved by institutional lenders. These platforms leverage technology to provide access to a variety of financial services almost instantaneously. This is illustrated by the “310” model of Ant Financial (owned by Alibaba and parent company to Alipay): “3 minutes to apply for credit,” “1 second to approve,” and “0 people involved in the decision.” This has enabled Ant Financial to offer services at scale, having disbursed over $100 billion in loans to 4 million micro and small businesses over five years.

In India, there is growing interest around finding alternatives to the commonly used closed-end fund model to better address impact venture’s needs for more patient capital. We see momentum building around open-end funds and holding companies, which have an indefinite lifespan and no fixed timelines for fundraising and exits. This allows portfolio enterprises more time to develop and grow, and is better suited with the capital needs of impact ventures.

Meanwhile, the National Advisory Boards in South Korea and Japan are working to establish impact investment wholesalers, which could play a key role in building their impact venture investing markets. The wholesalers will be based on Big Society Capital’s model in the UK: they will draw capital from dormant bank accounts and deploy funds in early-stage impact investing intermediaries, who typically face challenges in raising capital from traditional limited partners or investors.

Unleashing the next wave of innovation

While this range of innovation is inspiring, we need to see even greater levels of innovation in Asia, to truly exploit the full potential of sustainable finance. Importantly, there are needs not only for the creation of new mechanisms and vehicles, but also in making these vehicles investment-ready for mainstream investors, and then in drawing in the quantities of capital needed to transform the entire market. In our report, Financing the Future of Asia we further explore some of these inspiring innovations and developments, and lay out some initial examples of interventions for how a range of actors could engage in the field. Our hope is that many more will seize the opportunity to shape this emerging sector and move toward a future in which all of finance is turned toward building a better world.