Evolving Sustainable Finance

Media Release

Evolving sustainable finance: Beyond conventional and towards increased impact as sophistication grows  

This Article was first publised in Business Day on 09 June 2024  

South Africa's sustainable finance market has blossomed.  

‘Conventional’ instruments like green and social bonds - fixed-income financial instruments that raise money for projects with positive environmental or social benefits, and sustainability linked loans – linking the interest rate to environmental and social performance - have become commonplace.  

Now, the market is poised for a leap forward, embracing innovative financial products that unlock significant environmental and social impact.  

This evolution will include carbon finance, natural capital solutions, and blended finance – financial instruments with the potential to truly transform the industry and ultimately the planet. 

Carbon Finance: A market for offsets and emissions 

Imagine a market where companies can offset their carbon footprint by investing in projects that reduce emissions elsewhere.  

This is the essence of the rapidly growing field of carbon finance. Companies can purchase carbon credits, generated by projects like renewable energy or forest conservation, to compensate for their own emissions. This creates a financial incentive for sustainable practices, while directing much-needed capital towards projects with a positive societal impact. 

The global carbon market is sizeable.  

Compliance carbon markets, where companies are required to buy emission allowances, reached a value of $920 billion in 2022. Voluntary carbon markets, where companies buy offsets to reduce their footprint, are expected to reach $10 billion by 2030. This growth is driven by factors like international climate agreements and corporate net-zero commitments. 

The generation and sale of carbon credits increases the financial viability of projects, creating an additional revenue stream and enabling the development of new technologies.  

Host countries are establishing national carbon frameworks to encourage projects thereby providing businesses and investors with a more certain regulatory landscape.  

Natural Capital: Valuing nature’s treasures  

Nature provides us with invaluable services – clean air and water, fertile soil for food, and flood protection. And yet, we often take it for granted. Natural capital finance aims to value natural assets like forests and wetlands and encourages businesses to invest in their preservation. 

The World Economic Forum estimates that over half of global GDP depends on a healthy environment. Ignoring the value of nature poses a serious social risk. But nature-based solutions, not only protect biodiversity and ecosystem services, but also contribute to climate change mitigation. They also play a vital role in carbon capture which will support our transition to net zero, and help us adapt to the impacts of climate change to date.  

The scale of investment needed is significant – $500 billion annually by 2030 according to some estimates.  

Africa's protected areas alone require at least an additional $1 billion in funding. 

Fortunately, there's growing recognition of this need. Asset managers are pledging $14 trillion to support biodiversity restoration in an effort to catalyze this fledgling industry.  

Blended Finance: Collaboration for Social Impact 

Many projects with high social and environmental impact struggle to attract traditional investors for reasons including real and perceived risk, as well as poor returns for the risk relative to comparable investments.  

Blended finance bridges this gap by the crowding in of different types of investors, with different risk and return appetites to fund the same projects -thereby directing the required capital to critical hard-to-fund projects. 

It is an innovative approach to structuring financial instruments to combine public and private financing to unlock impact, with development finance institutions often playing a key role.  

There is global consensus that to meet the key goals for society articulated in the Sustainable Development Goals (SDGs) and the Paris Agreement there is a critical need to attract both private and public capital to projects which promote these goals. Blended finance is a growing necessity to close the ever-growing funding gaps in sectors such as education, health, climate resilience, water, sanitation and social housing.  

Meeting the SDGs and the global climate goals, will depend on the amount of capital available, a large part of which consists of government and developmental funding. However, with a slowing economy and declining tax revenue, it is expected that governments will have no choice but to reduce their budgets for social spending. 

Blended finance also provides mechanisms for philanthropic funders such as foundations and other social investment vehicles to increase the impact of their funding by catalysing and attracting private capital to high impact projects. 

Such an environment calls for development funders to start exploring innovative funding models, especially ones that unlock new forms of capital that go beyond traditional grantmaking. 

One such source of financing includes traditional private sector capital invested in pension funds and insurers, which represent a significant supply of capital that could fund sustainable development.  

The levels of such private sector investment flowing to development-related social enterprises and projects remains relatively low in both South Africa and emerging markets. Translating these assets into development compatible investment will be increasingly important in future. 

A Sustainable Future 

South Africa's sustainable finance market is maturing and evolving beyond the conventional.  

By embracing these innovative approaches, South Africa can position itself as a leader in sustainable finance, attracting investment and accelerating the transition towards a cleaner, more equitable future. 

By fostering a deeper understanding of these innovative financial tools, we can collectively work towards a future where finance serves not just profit, but also the well-being of our planet and its people. 

By Nigel Beck, Head of Sustainable Finance and ESG 

ENDS