Skip to main content

Making Global Progress in Responsible Investments

Responsible finance flourished when they were most necessary: shortly after the financial crisis of 2008. Its momentum has come from increasingly more conscious investors.
GEMA SACRISTÁN
JULY 19 2019

Making Global Progress in Responsible Investments

When in January 2004 Kofi Annan wrote to fifty CEOs of the world’s largest financial institutions, he could not imagine the global impact of his call. The then UN Secretary- General invited them to join the World Bank’s initiative to introduce responsible financial management and incorporate ESG (environmental, social and governance) factors in capital markets.

Nor could Annan imagine that the acronym ESG would be on everyone’s lips just a few years later, along with another, SDG, which corresponds to the Sustainable Development Goals. These 17 goals were created by the United Nations (UN) in 2015 as a roadmap toward a more sustainable world.

Today investing with ESG criteria means considering the social and/or environmental impact and not only financial profitability. These issues are too critical to be ignored. To better understand the scope, assets managed by funds incorporating a socially responsible vision amount to $30.7 trillion around the world. This is equal to twice the GDP of the United States and is ten times higher than in 2006, according to the latest data published by the Global Sustainable Investment Alliance.

If we apply a broader view and measure all the financial assets that follow the guidelines that, after that meeting with Kofi Annan, were crystalized with the creation of the Principles for Responsible Investment, the volume of those assets exceeds $86 trillion. This figure is equal to five times the GDP of the United States.

Responsible finance flourished when they were most necessary: shortly after the financial crisis of 2008. Their momentum came from increasingly more conscious and demanding investors, like Larry Fink, founder and CEO of BlackRock, who in his letter “Purpose & Profit” argues that “corporate purpose” and “profits” are now two inseparable concepts and thus –he says–it is more important than ever to develop long-term strategies that promote growth and sustainability. BlackRock is one of the world’s largest investors: it manages nearly $7 trillion. The investors are followed by regulators, supervisors, international organizations and more and more companies.

Investing with ESG criteria means combining financial analysis with sustainable impact. The reality is that, over the long term, respecting sustainable and responsible principles helps to achieve corporate economic goals. This was already indicated in 2005 in the book Who Cares Wins, another initiative of Kofi Annan, where the term ESG was first coined. Its author, Ivo Knoepfel, was one of the promoters of the Dow Jones Sustainability Index (DJSI), aspired by so many companies.

All this is what propelled the development of a sustainable financial market with actors of different stripes, from development banks to governments, as well as municipalities, and public and private companies. Europe and the United States are the markets that are leading the trend, but interesting things are happening in Latin America as well.


You may also like:


Brazil’s B3 Exchange (formerly Bovespa) was not only the first to join the Global Pact in 2004; it was also the first in an emerging country to sign the Principles for Responsible Investment and to launch a sustainability index (2005). Moreover, it was one of the five founders of the Sustainable Stock Exchanges platform in 2012, promoted by the UN to foster the adoption of practices in the area of reporting on ESG factors. Today this platform also includes the securities markets of Colombia, Argentina, Chile, Peru, Mexico, Ecuador, Costa Rica, Jamaica, and Panama.

Various countries in the region, such as Mexico, Brazil, Chile, and Argentina already have sustainability indices. Several regional companies have passed the test to be included in the Dow Jones Sustainability Index and London’s FTSE4Good. Regarding fixed income, social and sustainable bonds are taking off. In green bonds, although the region was not very active in 2018, there are already cumulative operations amounting to $84 billion, with Brazil and Mexico as the most active issuers.

Similarly, Peru, Chile, Argentina, Brazil, and Mexico have developed their own guidelines and recommendations on green bond issues. Panama’s exchange has become the first in Latin America to trade in green bonds by joining the Climate Bonds Initiative (CBI), an international organization that promotes financial solutions for climate change, with participants including Borsa Italiana (Italy), Deutsch Börse (Germany), Luxembourg Green Exchange (Luxembourg), Nasdaq Norway (Norway), Swiss Six Exchange (Switzerland), and Taipei Exchange (China). Everything is being prepared for new operations, as pointed out by the CBI itself.

No doubt, there is still much to do. The UN calculates that achieving the SDGs requires an annual investment of between $5 and $7 trillion, and for developing countries the gap has been identified at $2.5 billion. The annual financing gap in Latin America and the Caribbean is calculated at $170 billion per year, 3% of the entire region’s GDP.

We must continue to work without becoming complacent. Nonetheless, we can fairly acknowledge that, along with Kofi Annan, we could not have imagined at the time that the acronyms SDG and ESG were going to be so present in our lives or in our financial deals.

IDB Invest addressed these themes in its Sustainability Week, the most recognized sustainable businesses forum in Latin America and the Caribbean, which was held from June 24 to June 28 in Panama City.■

This column was originally published in Forbes México.

AUTHORS

Energy

Related Posts

  • Building resilience to health risks in the private sector

    A Six-Step Roadmap to Enhance Private Sector Resilience to Health Risks

    An IDB Invest poll shows nearly 60% of projects have temporarily ceased work or faced major project delays because of COVID-19. Early lessons coupled with existing best practices in public health and safety principles provide a six-step action road map to build resilience against such risks.

    Read more
  • Can 'flotovoltaics' be a future partner for hydropower systems?

    Can 'flotovoltaics' be a future partner for hydropower systems?

    To address changing paradigms, a new technology has been proposed: hydropower plants that enable solar generation or hybrid hydro-solar systems.

    Read more
  • Solar energy: The revolution spurring development in Honduras

    Solar energy: The revolution spurring development in Honduras

    When Invema plant, the main plastic recycler in Honduras starts operating, a success formula resonates. It is one of the commercial companies that took advantage of the photovoltaic energy boom in the country. Its case demonstrates how the private sector’s investment in solar energy can facilitate greater economic and sustainable development for the country. Six years ago, the executives of the firm decided to install solar panels in the company, so it could generate its own power. This initiative promised a 20% reduction in energy consumption as well as a significant reduction in greenhouse gases emissions of polluting gases. And so it was. Today, Invema obtains energy savings up to 30% in electricity and reinvests in the focus of its business, recycling, so much so that it is now manufacturing the bottles that Coca-Cola uses in Central America. “We are very proud, because thanks to the solar panels, IDB Invest’s doors/channels opened up and allowed us to make the investments we dreamed,” says George Gatlin, the manager of Invema, which is located in the northern city of San Pedro Sula. Invema is part of many companies and private consortia that have opted for photovoltaic energy since Honduras decided to reform its electricity subsector to revert its electricity matrix from thermal to renewable. The reforms began in 2012, when generation using fossil fuels accounted for 70% compared to 30% for renewables. This thermal hegemony was reflected in increasing oil billing, carbon dioxide emissions, high tariffs up to US$0.30 per kilowatt (KW) produced, and frequent rationing. Following the reforms, led by the government with the advisory services of the Inter-American Development Bank (IDB), there was an upsurge in renewable energy until the energy matrix was completely reversed compared to 2012. The latest report from the Central Bank of Honduras (BCH) in 2018 records a 75% electricity generation based on renewable sources, and an 11% share of photovoltaic energy. This percentage translated into 433 megawatts (MW) of installed capacity at the end of 2016, placing Honduras in the lead of solar generation in Central America and third in Latin America, after Chile and Mexico. “We are witnessing a revolution in the electricity sector, not just in Honduras, but worldwide, because energy storage is changing the concept, points out Carlos Jácome, IDB energy specialist who has participated in the reforms process in Honduras. “The Bank support comprises studies and soft financing. Later, the savings make it possible to improve the productivity of these companies because they can use what they no longer pay in energy to expand their businesses,” comments Jácome. Since 2012, the IDB and IDB Invest have provided technical assistance to Honduran commercial, industrial, and institutional sectors to investigate the technical and financial feasibility of photovoltaic projects. To date, 22 studies have been completed for projects ranging from 40 kilowatts (kW) to nearly 3 MW of installed capacity. Official reports indicate that interest in photovoltaic projects have increased due to a reduction in about 40% of the installation costs over the last five years. Behind this innovation there are three combined components that have resulted in a successful formula: i) the impetus of government that created favorable conditions for investment; ii) the decisions made by entrepreneurial companies; and iii) the IDB’s ability to evaluate and finance the projects. The initial investments in photovoltaic development in Honduras involved a shared risk for IDB Invest and its clients. Nonetheless, what made the difference is the technical capabilities of the Bank for evaluating and support for this type of investments. The Honduran experience encourages entrepreneurship and new markets while demonstrating that IDB Invest is the partner of choice for innovative markets. Experiences of this kind should be replicated in the region. The first photovoltaic investments began in 2015, when 388 MW were installed, followed by 45 MV more in 2016, according to reports from the National Electrical Energy Company (ENEE). According to the ENEE, the Honduran commercial and industrial solar energy market is quite different from what it was in 2012, starting with changes in electricity billing (between 11 and 18 cents per kW per hour), installation costs for panels, legal regulations, and the availability of photovoltaic manpower in the region. In addition to this, national capacities have developed with the installation and administration of photovoltaic projects. “Before, if a Canadian, Spaniard or a Costa Rican person did not show up to supervise the project it didn’t move forward. Now the Hondurans themselves have been strengthening all these positions. There is a friendly environment for investment,” notes Elsia Paz, President of the Honduran Renewable Energy Association (EHER), one of the entities that emerged in the context of these reforms. Download the full story here: “Solar Energy: The Revolution Spurring Development in Honduras” Subscribe to receive more content like this! [mc4wp_form]

    Read more