Posts by Financial Institutions
Sustainable Finance: What can the financial sector do to better manage environmental and social risks?
In January 2018, Larry Fink, the CEO of BlackRock published an open letter to the CEOs of publicly traded companies. His message was clear, companies have a responsibility to deliver profit, and make “a positive contribution to society.” Failure to do the latter comes at the risk of losing its license to operate. Consumers can influence through decisions to purchase products from companies that value broader corporate goals of environmental impact, workforce diversity, and community engagement. What may come as a surprise statement from a private equity fund with $6 trillion under management is increasingly the de facto market standard.
How we incentivize social inclusion through Sustainable Infrastructure? The case of Villa 31
Recently I visited the Villa 31 in Buenos Aires, Argentina. It is a poor and informal neighborhood located at approximately 500 meters from La Recoleta, one of the most sophisticated areas of the Argentinian capital. Despite this proximity, near 45,000 residents at Villa 31 have lived in isolation, not accepted as true “porteños” by their neighbors due to the social and economic characteristic of their community. My hope is that a new development project of sustainable infrastructure in the area changes this scenario. During my visit, I met fantastic people, but I experienced a strong mix of feelings. 20 years ago, I worked on an urban rehabilitation project in Brazil, which provided new homes, electricity, water, and sanitation to hundreds of low income people. By the end of the project, high-level dignitaries from the Government and other entities visited the new homes. One of them approached a woman benefited by the project and asked: “Are you happy? Is your life better?” She looked at him and said: “No, I am much worse off today. Before the project, I lived in a shack, I had no light, no water, no job, but no bills either. Now I have been given this nice house with bills to pay, but I still do not have a job. I do not know what to do”. 20 years after, I still carry this experience with me, even though we have learned a lot about urban development and inclusion projects ever since. The number of success stories has been growing, but its nature remains rather complex and represents a significant challenge to governments, policy makers, and financiers alike. According to an Inter-American Development Bank report: “Poverty-targeted projects that did not include specific objectives to reach excluded populations often reinforced their exclusion”. We must avoid this at all cost and work on the inclusion since the beginning. From Villa 31 to Villa “Thirty and Everyone” Working on sustainable infrastructure is not only about building new houses, but to improve the entire ecosystem around them to mobilize more human and economic resources that help people to break the poverty cycle. Villa 31 is not an isolated case. In Latin American and the Caribbean cities, informal areas can concentrate up to 50% of its habitants, and according the estimates, these number will keep rising. Development processes must include habitants’ perspective. Local communities have a voice, and the fact that we are listening to them makes a huge difference in terms of long-term acceptance, appropriation and viability. During my days at the Villa, I saw the construction taking place and the physical infrastructure being implemented. The work on water, sanitation, accessible roads, energy and electrified systems at Villa 31 is allowing its inclusion into Buenos Aires. More importantly, I saw people smiling and the pride on their eyes not only for the new structures, but for having a voice and being really included. So much that the initiative has been called Treinta y Todos (“Thirty and Everyone”) by Horacio Rodríguez Larreta, Buenos Aires city Mayor. This project has renewed people’s belief that their children would have the opportunity to live a different and better life, which is an essential success factor in such complex situation. Walking the talk at the Villa The feeling when leaving Villa 31 was completely different to what I felt 20 years ago, after our conversation with that woman in Brazil. I saw a high sense of trust and hope, so high that residents are already investing their own capital on improving their homes and establishing new business, such as: restaurants or beauty shops. Complementary initiatives like these are key, considering near 70% of the urban population of Latin America and the Caribbean works in the services sector, according UN-Habitat. A new socio-economic dynamic is developing, and some important external factors are fueling the process forward. The decision to establish a major government office building from the Education Ministry at the Villa provides a strong signal. However, it is not the only one. At the Inter-American Development Bank Group (IDB Group) we firmly believe in ‘walking the talk’, and the construction of the new Argentinian representation in Villa 31 shows it. This is a bold sign of commitment to the country and, more importantly, to the people. As part of the IDB Group, IDB Invest (formerly known as Inter-American Investment Corporation) is mobilizing resources and creating financial tools to stimulate private investments on these projects. Other public and private institutions should learn about the changes at the Villa, and hopefully decide to stand up and support this process too. [gallery type="slideshow" link="file" size="full" ids="7752,7753,7755,7757,7758,7759"] Subscribe to receive more content like this! [mc4wp_form]
How to attract more private capital to PPPs
As an engine of economic growth and poverty reduction, PPPs are on the rise in Latin America and the Caribbean (LAC). In the last decade, there were approximately 1,000 PPP infrastructure projects valued at $360 billion. Especially, in our current market of constrained fiscal budgets and deep social inequalities, PPPs have become more relevant than ever. Despite this historic uptick, many projects cannot mobilize sufficient private capital. PPPs crowd-in approximately one dollar of commercial finance for every dollar of public finance – a 1:1 ratio which has failed to close the infrastructure funding gap. On the supply side, institutional investors hold funds equivalent to 20 percent of the region’s GDP - a compelling figure when we seek an additional 2-2.5 percent of GDP to meet demand. Managing long-term assets like pensions and insurance is an ideal match for the long-term tenors of PPP projects. In addition, PPPs offer investors relatively predictable repayment schedules, promising financial returns and protection from inflation. In the past, private capital, namely from institutional investors, has been cautious. However the ability to mitigate certain risks is making projects more bankable and piquing investor interest. 1. Legal and regulatory risks Legal and regulatory risks span policies, regulations and institutions. Strengthening them to address market failures, incentivize risk-sharing and regulate consistently reassures investors. Countries are setting up government agencies and units with expertise to supervise PPPs. Advisory services to governments can further strengthen institutions, their regulators and supervisory mechanisms as well as long-term project programming. 2. Project preparation risk Capacity-building combined with the right incentives can mitigate project preparation risk. This can optimize project efficiency, predictability and investor-friendliness. Technical assistance can support project investment plans and share knowledge with public officials at PPP promotion agencies. Supporting investment planning can align PPP development with nationally- determined contributions. This fosters more climate-resilient, sustainable projects. Advisory also allows governments to determine optimal delivery models by conducting value for money assessments to ensure each asset brings value to government agencies, investors and end-users. 3. Foreign exchange risk Most PPPs, except for many in the energy sector, where they are often dollar-denominated, rely on local currency. For a PPP to succeed, avoiding foreign exchange risk is key. Governments are limited in the amount of dollars they can guarantee. Mobilizing local currency allows local borrowers to repay in the currency they are generating cash flow, avoiding mismatches. Currency risk can be mitigated by investors setting up local treasuries to issue debt in local currencies or by providing local currency guarantees project-by-project. 4. Construction risk Construction risk includes expropriation, geological and additional exposures to loss during the construction phase. Investors prefer to invest in PPPs only once construction is complete. However, de-risking projects through liquidity facilities, blended finance, subordinated debt and completion guarantees, which cover construction risk and up to the first 24 months of operation, can bring further comfort and incentivize early entry. Multilateral development banks are uniquely positioned to offer many of the solutions that address legal, regulatory and project preparation risks. IDB Invest (formerly known as Inter-American Investment Corporation), on behalf of the IDB Group, recently mitigated risks and attracted institutional investors in the Reventazón hydropower project in Costa Rica and Campo Palomas and Colonia Arias wind farms in Uruguay. The next phase seeks to bring institutional investors to PPPs and at construction phase. Besides, we can lend in local currency, as we are currently doing in Paraguay, Brazil, Colombia and Mexico, and we can also deploy guarantee and debt instruments to mitigate construction risk. Our in-house experts analyze infrastructure pipelines, support country planning and deploy financial and non-financial products that enhance infrastructure project risk profiles. IDB Invest, on behalf of the IDB Group, recently mitigated risks and attracted institutional investors in the Reventazón hydropower project in Costa Rica and Campo Palomas and Colonia Arias wind farms in Uruguay. The next phase seeks to bring institutional investors to PPPs and at construction phase. As the region’s PPP pipelines continue to grow, we will deploy the solutions to maximize PPP bankability and mobilize more financing. The boost we see in PPPs brings benefits for governments, private firms and the citizens of the countries we serve. [gallery type="slideshow" link="none" size="full" ids="7775,7776,7777"] Subscribe to receive more content like this! [mc4wp_form]
Three Trends in Sustainable Finance across LAC
2017 could be another record year for green investment products as the issuance of green bonds globally is forecast to rise to $206 billion, twice the volume from 2016. This shows how in the last few years, the finance sector has taken serious interest in sustainability’s potential to deliver profit, even though the benefits of environmental and social management have long been understood.
How Fintech Can Help Nanks Tackle Deforestation
Big data and geospatial technology are making it easier for banks to decrease risk when financing projects with potential environmental impacts. How? Our guest author, Luiz Amaral, Global Manager of WRI’s Global Forest Watch Commodities has the answer.
Empower women and investors will follow
Gender equality is no longer a choice for companies. It is not only about fairness, but about business success. For investors, this has become so clear that one of the world’s largest asset managers has just placed a statue of a defiant girl in front of Wall Street’s iconic bull in New York City to remind businesses that the time to fight for gender equality is now. Why? Because investors have realized that companies that foster diversity yield higher returns. More diversity improves decision-making, reputation, productivity, and employee retention and satisfaction, whTry ich in turn leads to higher returns. Companies with more diverse workforces are also better equipped to innovate in product development, tapping into new business opportunities, such as the women’s market. Investors are looking for results on gender equality But how can companies take concrete actions in line with what investors expect? The answer is not easy, as it requires looking at your company through a completely different lens. Statements and mere commitments to gender equality are not enough. In today’s data-driven world, investors are looking for information to evaluate companies’ performance and their environmental and social footprint. In the past few years, several gender equality indexes have emerged to help investors make informed decisions. Examples include the Barclays Women in Leadership Total Return Index, Pax Ellevate Global Women’s Leadership Index and the Bloomberg’s Financial Services Gender-Equality Index, among others. These benchmarks are tracking gender outcomes, including equal compensation and the number of women in leadership positions, employee policies, ability to create products and services for women, and community engagement. Some of these indexes have investment products to capture the benefits of gender diversity. Since 2014, both Barclays’ Women in Leadership Exchange Trade Notes and Pax Ellevate’s Global Women’s Index Fund enable investors to allocate capital in companies with strong female leadership. As investors’ appetite grow, similar initiatives are under way. Last year SSGA and California State Teachers Retirement System, the second-largest public pension fund in the US, launched the SPDR SSGA Gender Diversity Index ETF (SHE) to invest in companies with high levels of diversity on their boards. With over $280 million in assets, Berkshire Hathaway Inc and Oracle Corp. are among its top investors. A free tool to evaluate gender equality For those willing to roll up their sleeves and move beyond good intentions, the first step is knowing where you are and what you are doing. With this goal in mind, IDB Invest (formerly known as Inter-American Investment Corporation) and the Multilateral Investment Fund, along with UN Global Compact, UN Women and other public and private partners, have created a tool to help companies assess their gender equality performance. The tool follows the UN Women’s Empowerment Principles (WEPs) to unleash the potential of women in the workplace, marketplace and the community. The assessment is free and confidential and can be done by any company from any sector in any country. It looks at corporate policies in place and evaluates the extent to which firms provide equal opportunities, adequate work life balance, support to gender equality in the supply chain and respect to women’s rights in local communities. The tool has far-reaching potential for companies. Designed with the feedback of nearly 200 companies worldwide, the tool has proven to be eye opening for the firms that participated in the pilot phase. Some found that the assessment made them rethink their approach to gender equality in procurement and marketing, while others said it compelled senior management to improve processes. Others highlighted that the tool provided a road map to better integrate gender initiatives into the broader company’s strategy. So, if you are ready to face the bull and reap the benefits, complete the assessment and take action. Investors are waiting. This article was originally published on The Huffington Post Subscribe to receive more content like this! [mc4wp_form]