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26 Jan 22

Investing in Public Markets to Finance the SDGs

Investing in Public Markets to Finance the SDGs

BlackRock’s 2020 FactSet estimates the market value of public equities and public bonds at $93 trillion and $113 trillion, respectively. Yet, public equities represent only 0.11% of the impact capital invested in 2019. With the COVID-19 pandemic exacerbating inequality worldwide and the annual funding gap to finance the United Nations Sustainable Development Goals (SDGs) expected to grow to $4.2 trillion, it’s time to tap into this source of capital and catalyze public markets to achieve scale. The question is, how can public equities and public bonds be used strategically to deliver both environmental and social impact, as well as attractive yields?

Unlocking capital from public bonds and public equities through blended finance

One way is through blended finance – the use of catalytic capital from public and philanthropic sources to de-risk transactions and attract private investment. Kenyan property developer, Acorn Holdings Ltd (AHL), which issued Kenya’s landmark green bond in October 2019, is one example of a blended transaction. It was valued at KShs 4.3 billion (US$41 million) and was dual listed on the Nairobi Stock Exchange (NSE) and the London Stock Exchange (LSE). Priced at 12.25%, it applied a blended finance structure with credit enhancement in the form of a partial credit guarantee from GuarantCo covering 50% of the interest and principal, which earned the issuance a B2 rating from Moody’s. The Technical Assistance Facility (TAF), a Private Infrastructure Development Group (PIDG) company, provided a grant to AHL to offset some of the costs of the issuance and the green certification. The subscription book was well diversified with capital raised from institutional investors.

Fast growing companies in emerging markets can also raise capital through public markets and blended finance approaches can be utilized to de-risk and to create new products for investors. The Global Impact Investing Network (GIIN) in its 2020 Impact Investor Survey shows that suitable exit options are considered a significant challenge by almost half of respondents. Public markets can bridge this gap, enabling exits via SDG-conscious Initial Public Offerings (IPOs) and Special Purpose Acquisition Companies (SPACs), which have recently gained some prominence. Standardization across industry standards and analytical impact measurement will be critical to their long-term success.

Concessional capital providers can be catalysts for public market financing

On November 3, 2021, at COP26, the United Kingdom’s Foreign Commonwealth and Development Office (FCDO) announced the finalists of its Mobilizing Institutional Capital Through Listed Product Structures (MOBILIST) competition. MOBILIST was designed as a platform to secure new investments at scale to finance global development from both public and private markets. It drew notable asset managers such as Chapel Hill Denham, FirstRand Bank, ThomasLloyd Group, among others, in a competition to develop listed products to finance critical infrastructure projects. The role of FCDO as a donor providing upstream de-risking is expected to be catalytic in attracting private investment at scale, while leveraging public markets.

Public markets to-date have not played a significant role in the global blended finance market to finance the SDGs, however, they have the potential to be an important funding source, especially as more institutional investors prioritize environmental and social impact in their investment portfolios. Blended finance offers a way to tap into these markets and start moving this capital towards sustainable development.

By Ladé A. Araba, Managing Director Africa, Convergence (former)