UNCDF SEEDS HIGH IMPACT INVESTMENT—FERTILE GROUND FOR BIG CAPITAL

By Esther Pan Sloane, Guest Contributing Author March 17, 2021

Esther Pan Sloane, a U.S. national, joined UNCDF as the Head of the Partnerships, Policy and Communications in October 2016.

Prior to joining UNCDF, Esther was a U.S. diplomat for 10 years. As Adviser at the Permanent Mission of the United States to the United Nations in New York, she was on the U.S. team that negotiated the 2030 Agenda and the Sustainable Development Goals. She also served on the Executive Boards of UNDP, UNICEF, UNOPS, and UNFPA, pushing the agencies to become more efficient, effective, and accountable for results.

Esther previously served as a U.S. diplomat in China and the United Kingdom, as well as at the State Department Operations Center in Washington.

Prior to joining the U.S. Foreign Service, Esther worked as a journalist in print, radio, and magazines. Esther graduated from Stanford University with a BA with honors in English and International Relations and earned an MA in Theater and Performance from the University of Cape Town, which she attended on a Fulbright Fellowship.

___________________________________________________________________

Profits from Purpose is Attracting Big Capital

Recent years have brought sweeping changes to the way markets are viewed. Wall Street fund managers, global policy setters and corporate leaders have come to a new understanding of the potential of capital markets to address – or at least mitigate – societal challenges, including global inequality, racial injustice, and the threat of climate change. 

The Sustainable Development Goals (SDGs), agreed by all 193 Member States of the United Nations in September 2015, sets out a global road map for sustainable development. It puts forward a vision of people, planet and prosperity for all and, for the first time, invites business, civil society, academia and other actors to play an active role in reaching this future. 

This, and the recent dramatic growth of assets in ESG vehicles, has created an atmosphere where business and social purpose are becoming seen as inextricably linked. A new generation of impassioned consumers and investors are challenging the traditional accounting that valued financial profit from corporations above all else, while ignoring environmental and social externalities or leaving them to be addressed by philanthropy or government.  

Between 2018 and 2020, total U.S. domiciled sustainably invested assets under management, both institutional and retail, grew 42%, to $17.1 trillion, up from $12 trillion, according to the Forum for Sustainable and Responsible Investment’s 2020 trends report. This adds up to roughly 33% of the $51.4 trillion in total U.S. assets currently under professional management. For retail or high net worth investors, the demand is even greater. Money managers reported a 50% increase in the amount of sustainable assets they manage on behalf of retail or high-net-worth investors, growing to $4.6 trillion from $3.03 trillion during the same period, according to the report.

Assets in sustainable ETFs have grown 200% in the last two years, and the Global Impact Investment Network estimates that worldwide over 1,340 organizations currently manage $502 billion in impact investing assets. Just over a quarter of all impact investing assets are held by 31 development finance institutions (DFIs), national or multilateral entities that provide risk capital for economic or sustainable development projects on a non-commercial basis. 

There are clear signs that this trend is here to stay. A 2019 Morningstar report found that 72% of the U.S. population expressed at least a moderate interest in sustainable investing, while a Morgan Stanley survey found 85% of all individual investors were interested in sustainable investing, up 10 percentage points from 2017; concurrently, 95% of millennials had an interest, up 9 percentage points.

In Europe, the trend is even more dramatic: the European Fund and Asset Management Association found that as much as 45% of total assets under management in Europe at the end of 2019 were invested in some sort of ESG selection strategy. An estimated 10.7 trillion EUR worth of assets take some sort of ESG consideration into account, with strategies generally divided into exclusion of ESG risks or systematic inclusion of ESG opportunities.

As the flood of assets into sustainable investment vehicles continues, many global corporations are finding the SDGs a useful road map to integrate into their core business models. Many investors are also increasingly scanning investment opportunities in developing countries, looking for higher returns, access to growing middle-class markets and related consumers of goods and services, and the next “unicorns” from the dynamic pool of entrepreneurs in emerging markets. 

Bringing Capital to Most Needed Countries: Innovative Finance Models

UNCDF has been working on these issues for 50 years. Founded in 1966, the United Nations Capital Development Fund is a UN aid agency dedicated to making finance work for the poor in the world’s 46 least developed countries (LDCs). UNCDF offers “last mile” finance models that unlock public and private resources, especially at the domestic level, to reduce poverty and support local economic development.

UNCDF’s financing models work through three channels: (1) inclusive digital economies, which connects individuals, households, and small businesses with financial ecosystems that catalyze participation in the local economy, and provide tools to climb out of poverty and manage financial lives; (2) local development finance, which capacitates localities through fiscal decentralization, innovative municipal finance, and structured project finance to drive local economic expansion and sustainable development; and (3) investment finance, which provides catalytic financial structuring, de-risking, and capital deployment to drive SDG impact and domestic resource mobilization.

At UNCDF, we find that using our grant resources as catalytic capital can make all the difference to support small and medium enterprises, seed promising entrepreneurs, help finance local climate-resilient infrastructure, and demonstrate to local and international funding sources that these markets are viable, and indeed profitable, places to invest. 

Since 2017, UNCDF has made 25 loans and guarantees in six LDCs. Many of our loan recipients had previously been turned down by local banks. However, our intervention not only unlocked additional resources from private sector sources, it also earned over $700,000 in principal and interest payments for UNCDF – money that we can lend out again to help more small businesses that need support.   

Adding the Extra Leverage Needed by Combing Government and Private Investment 

We connect governments, regulators, fund managers, development professionals and small businesses to support innovation, share lessons learned, and revise legislation to allow for more innovation in areas like fintech and digital payments.

Governments want to see their aid funding catalyze additional investments from the private sector. Investors like to see de-risking from public sources, and entrepreneurs are just happy to get a loan to start or grow their businesses. 

It is time to take a new approach to an old problem. Blended finance vehicles like the BUILD Fund, an impact investment fund focused on small and medium enterprises in LDCs founded by UNCDF and Bamboo Capital Partners, combine government grant funding, semi-commercial funding from DFIs, and commercial finance to address the “missing middle” finance gap that plagues LDC companies that are too big for microfinance and too small for domestic banks. 

By providing targeted loans and guarantees to small businesses in the poorest countries, we can demonstrate the investment case for local banks, financial institutions and investors considering deploying capital to local entrepreneurs. Screening for SDG impact and financial viability means that the businesses we support will create positive economic and social benefits as part of their business models, with the benefits continuing as the businesses grow and thrive. 

UNCDF’s report “Blended Finance in the LDCS 2020” (https://www.uncdf.org/bfldcs/home) found that $13.4 billion of blended finance was mobilized in the LDCs between 2012 and 2018. However, that is only about 6% of the total private finance mobilized by official development assistance in that time, with the largest shares going to upper middle-income countries ($85 billion) and lower middle income countries ($68 billion). 

Yet we know how impactful a blended transaction in LDCs can be. For instance, Aptech Africa, domiciled in Uganda, generates income through project management and direct retail distribution of solar products and water pumps.  Grown from organic cash flows, this company is owned by senior managers and shareholder financing. Aptech Africa powers and empowers, allowing energy to drive regional market development. After being refused financing from every bank in Uganda, Aptech secured an initial loan of $250,000 from UNCDF. After paying this back, Aptech established its creditworthiness and was able to secure $1.2 million in follow-on finance from Ugandan banks. 

Innovation and Resilience Build Market Capacity for the Pandemic of Tomorrow

We know from our work that there are profitable, SDG-positive companies in frontier markets, and that blending resources from a mix of sources will help to scale their growth and accelerate the progress we all want to see. 

The many challenges facing us— the COVID-19 pandemic, climate change, racial injustice, and growing inequality— are universal, cross-cutting, and too big to ignore. It’s become increasingly evident to retail and institutional investors alike that they can use their resources to demand more and better investment options, move their capital to the most impactful vehicles, and accelerate the move to a more equitable and environmentally sustainable world. 

Together, we can use finance to drive positive change around the world, especially for the poorest countries and citizens. 

For more information contact, Esther Pan Sloane, esther.pan.sloane@uncdf.org