Micro opportunities: A capital allocation guide

In many cases, investors are implicitly taking these factors into account already, but not articulating it: the SDGs give a common language with which to shape and articulate such an investment strategy. Opportunities are available in most asset classes, for example: clean technology stocks in listed equity, private equity and venture capital; low-carbon infrastructure; green bonds; green real estate, sustainable forestry and agriculture.

The SDGs offer investors the opportunity to use a different lens through which to filter future investment decisions. There is a growing school of thought that investment strategies should focus upon investments that create a positive impact on society and/or the environment, in addition to fulfilling their future financial risk and return requirements, thereby simultaneously creating benefits for both business and society.

In 2015 researchers from ShareAction interviewed 52 institutional investors, based in every region of the world, on their attitudes and intentions in relation to the SDGs and they found that:

• 95% of respondents plan to engage with investee companies about issues covered by the SDGs;
• 84% will allocate capital to investments supporting the SDGs;
• 89% will support regulatory reforms that promote the SDGs.

PwC’s 2015 survey of business and consumers found that 78% of citizens were more likely to buy goods and services from a company that had signed up to the SDGs.

“Every challenge presented by the UN Sustainable Development Goals also presents an opportunity. Investors can therefore contribute to the attainment of these global goals. Through our sustainable development activities and the investments we make, the fund contributes in various ways towards the UN’s Sustainable Development Goals.”

Eva Halvarsson, CEO, AP2

The SDGs also bring opportunities to reach relatively untapped markets and geographies, and to develop innovative financial products.

Blended finance instruments

Several countries and financial institutions started to experiment with public-private finance long before the SDGs, but as the SDGs are becoming a language that is spoken and understood by the public and private sector alike, they offer a way to communicate and set targets using a shared impact framework. This has rekindled interest in blended solutions, as evidenced by a recent qualitative assessment and review of existing blended finance vehicles by Dutch development bank FMO and asset manager PGGM.

Signatories to the Dutch SDG Investing Agenda have identified the systematic deployment of blended finance instruments as one of the avenues that will enable private investors to increase their involvement in sectors such as energy, infrastructure, water, agriculture and food and healthcare – all sectors that constitute a largely untapped potential in higher risk markets, where private investors would not venture alone, but will invest alongside development finance institutions and sovereign wealth funds.

Financial product innovation

The SDGs can be a driving force for financial product innovation. Examples include specific SDG-related bonds – for instance, those issued by the World Bank and BNP Paribas – but also the refining and growing of existing products such as green bonds, or insurance and banking products for peripheral groups. Examples include:

• the Climate Policy Initiative, which provides lessons and innovations to spur green investment in developing countries;
• the Climate Finance Lab, which identifies, develops, and pilots transformative climate finance instruments with the aim of driving billions of dollars of private investment into climate change mitigation and adaptation in developing countries;
• the Green Infrastructure Investment Coalition, launched at COP21, which is dedicated to reducing investment barriers to green infrastructure.

A recent PwC report describes an example from Australia’s Westpac Group:

Existing research highlights the following areas as presenting some concrete opportunities for blended instruments and SDG-targeted products:

SDG 3: Good health and well-being

Healthcare and education providers in emerging markets

• Demand for quality healthcare and education is increasing in emerging markets and developing countries, as shown by the growing engagement of multilateral investors in these sectors. The IFC, CDC, FMO and Dutch Good Growth Fund (DGGF) are just some of the examples of development finance institutions that have invested in companies providing education and healthcare in developing countries. These investments are often being done via fund-of-funds structures, with funds funnelled to the companies via financial intermediaries such as local private equity funds that have built their portfolios around the notions of innovation and quality services that cater to a growing middle class. In the last two years, the ESG team at PwC (which is responsible for handling the ESG assessments of intermediaries on behalf of the Dutch Good Growth Fund) has assessed the ESG profiles of intermediaries financing education and healthcare in markets such as Ghana, Democratic Republic of the Congo and India.

SDG 6: Clean water and sanitation

Water infrastructure, treatment and management

• Investments are needed along the entire water value chain, in developed and emerging markets alike. Global water infrastructure projects alone are expected to see annual growth of 5%-8%, according to 2016 figures by Bank of America Merrill Lynch. Examples of areas where investors could play a role – including via blended instruments – include exploration, desalination and wastewater treatment plants.

SDG 7: Affordable and clean energy

Energy efficiency opportunities, from tech/software to transport/logistics

• Demand for energy efficiency has driven innovative financial products and a new range of blended solutions. Research from Bain & Company shows some concrete examples from India. India’s Bureau of Energy Efficiency develops policies and initiatives to help reduce the country’s energy intensity, including innovative financing of energy-efficiency projects. Private domestic bank ICICI was one of several to embrace the programme, introducing a loan scheme to help commercial and industrial companies, small and medium-sized enterprises and public sector organisations to finance energy-efficiency services and purchase equipment and lighting for energy-efficiency projects. A US$350 million loan from the World Bank supports these efforts, with most loans delivered over 3-5 years at 7%-9% annual rates. Energy savings from these projects range from 15%-30%.

The steps that investors have taken in these areas show the work towards engaging with the SDGs and connecting them with investment opportunities has already begun.

Produced in collaboration with PwC