An estimated $4 trillion in annual investment is required for developing countries to achieve Sustainable Development Goals (SDGs) by 2030 according to the World Bank. Most green investments are financed through pure equity and bank credit.
There is need for the capital markets to step up and mobilise the much-needed support to scale up financing of green investments.
Indeed, the creativity, entrepreneurship and innovation funded by capital markets should be the driving force behind a globally green and sustainable economy.
Fortunately, sustainable development issues do not arise from a lack of financial capital. The problem comes from the lack of pricing or mispricing of sustainability issues in the overall performance of companies and the ensuing misallocation of capital.
Notably, the capital markets regulators and policy makers have laid more focus on the short-term financial performance of businesses and are yet to properly internalise environmental and social costs into companies’ profit and loss statements. As a consequence, the corporate cost of capital does not necessarily reflect the sustainability of the company.
By taking the measures below proactively, capital markets can help scale up uptake of sustainable financing. The capital markets watchdog and policy makers should promote regulation and standards that integrate sustainable development factors in listing rules and reporting requirements.
While regulation may not be an effective way to inspire or lead the most ambitious companies, it does help create a basic level of competency within a market.
Notably, the Nairobi Securities Exchange is developing Environmental, Social, and Governance (ESG) disclosures guidelines for listed companies that are intended to guide them on how to identify and measure material topics; integrate them into strategy and report on performance using an approach that meets international standards on sustainability reporting.
Over time, and with improved maturity on disclosures, stakeholders will be able to correlate financial performance with specific indicators as well as compare the profiles of companies reporting within the same sector.
The inevitable evolution of this trend will be full integration of sustainability performance and sustainability will cease to be a niche investment strategy and become a standardised performance metric in the same way as financial performance.
Globally, capital markets are rapidly embracing sustainability through issuance of products dedicated to sustainability themes. For example, in Kenya, we have seen the issuance of green bonds.In 2020 alone, global sustainable funds surged and Covid-19 pandemic boosted issuance of social bonds. Supranational entities led the development of the virus response bonds to address impacts of […]