Asia's ESG investors must 're-imagine role of capital’
A version of this story was first published by sister title, AsianInvestor.
Infrastructure investors in Asia can promote a new, more ambitious role for capital in funding social and environmental development, according to Nikhil Chulani, investment director covering the industries, technology and services sectors at British International Investment.
“On the markets that we at BII focus on in Africa and South Asia, there are huge opportunities for growth and achieving greater scale," he told an audience at the Sovereign Wealth Fund Institute conference in London in June.
"To accelerate progress in realising the potential of these opportunities, one key aspect is vision and ambition, and tapping into creative solutions via financial services sector to re-imagine the role of capital.”
The UK development finance institution currently invests between $1.5 and $2 billion per year in Asia, Africa and the Caribbean.
He noted that, as ESG investing broadens from a focus on people to include the environment, the scope of allocations, and the range of problems they address, is widening. He said developing bottom-up strategies is more important than ever.
Being able to clearly identify and articulate which problems investors are aiming to address with their allocation is crucial, he added, emphasising the need to integrate impact and financial return within an investment model.
“Having an impact doesn’t exist separately from investing, it is a core part of investing,” Chulani said, adding that, while many investors still saw the ESG potential of their investment as distinct from its investment potential, attitudes were changing.
Size matters
Michael Anderson, who was director general between 2010 and 2013 of the UK’s Department for International Development, a government department that was responsible for more than $6 billion in annual aid programmes, said that a pressing question for enterprises and projects with a social or environmental dimension was achieving the scale necessary to unlock large investments.
“It’s not that we need to do more to attract major investors, but when they are attracted they need to have the deal flow to enable large ticket sizes,” he said.
“Big investors with multibillion dollar funds can’t go after small deals," he added. "The key challenge is thinking at a bigger scale, especially in areas beyond infrastructure."
“There has been some good investment in green infrastructure, but not enough in other areas,” he noted, pointing to social services, social infrastructure, and businesses designed to have a positive social impact.
Anderson, who is founder and CEO of MedAccess, a social enterprise improving access to medical innovations wholly owned by the British International Investment, gave the example of essential medicines.
“The critical reason that these drugs are not getting into markets where they are needed is that the companies who manufacture them don’t find it commercially viable to sell into those markets,” he said.
Investors were essential in providing the “catalytic finance” to de-risk distribution into less profitable markets, he added.
Anderson gave the example of a recent TB drug project mediated by MedAccess, where the finance provided reduced the per dose cost from $40 to $15. MedAccess also facilitated increased production by the drug company and worked with companies to secure distribution.
“Sometimes this means lower margins [for manufacturers],” he noted.
Local opportunities
However, Ana Nacvalovaite, research fellow at the Centre for Mutual and Co-owned Business to Kellogg College, University of Oxford, speaking at the same session, said small-scale, local projects offered considerable opportunities for ESG investors, given their strong social and environmental credentials in many cases.
Such projects that are aimed at securing specific social or environmental outcomes often involve joint investment by development banks alongside sovereign and other institutional investors such as pension funds.
But those institutions best placed to provide such “blended finance” are not necessarily the biggest, Nacvalovaite observed, pointing to the example of funding for rural farm co-operatives in Rwanda.
“The [Government Pension Fund of Norway] has its hands tied, since approval is required by the ministry of finance. But Rwanda’s fund [the Agaciro Development Fund, launched in 2012] could trial this. It is the right size and Rwanda has lots of co-operatives, so they are looking at these blended finance opportunities,” she said.
Nacvalovaite said that while single project investments with a finite lifecycle might produce tangible environmental or social benefits during their lifetime, they also created challenges when they complete.
“The community that has been built up around it has to pack up and move on,” she said.
By contrast, financing co-operatives and employee-owned businesses provided longer lasting social outcomes. “We are talking about people creating their own infrastructures,” she said.