Ten Trends from 2013: The Financial Engineering We Need
For over 25 years, companies have valued our ability to serve as their early warning system—to interpret emerging issues and trends in the sustainable development agenda and help them anticipate, understand and respond to shifts in the business landscape. In 2013, SustainAbility re-launched a dedicated function to regularly track and interpret “what’s next”—our Ten Trends of 2013 series is the distillation and public output of our thinking over the year.
In the wake of the 2007/8 financial crisis, the phrase “financial engineering” has come to have a negative connotation, conjuring images of math wizards creating esoteric financial products that brought our global financial system to its knees. While such engineering is showing signs of a gradual rebirth, we see a new form of financial engineering happening–one that promises beneficial social and environmental outcomes.
In 2013, we observed a variety of new and/or improved financial concepts and structures that could help companies, governments and other entities address big environmental and social challenges. For example:
- According to the Climate Bonds Initiative, currently a total of $346B in green bonds are outstanding, and this figure is set to grow rapidly with growing mainstream interest from the likes of Zurich Insurance Group and State Street Global Advisors. A recent $1B green bond from the IFC was snapped up by investors including Ford and Microsoft, who presumably see the opportunity for yield and supporting green projects.
- Banks are creating new mechanisms to invest for impact. Examples include Goldman Sachs’ new Social Impact Fund (target size of $250M for double bottom line investments) and the Institute for Sustainable Investing that Morgan Stanley established to channel $10B of client funds over five years to investments with environmental or social benefits.
- After the issuance of the first social impact bond (SIB) in the UK in 2010, SIBs are proliferating globally. For example SIBs are either live or under consideration in roughly a dozen US states, with considerable activity in the UK and elsewhere.
- We continue to see experimentation in corporate venture units that invest in sustainability opportunities. Patagonia’s $20 Million & Change Initiative comes on the heels of funds from fellow apparel companies adidas (greenENERGYFund) and Nike (Sustainable Business and Innovation Lab).
- Crowd-sourced models such as Solar Mosaic enable individuals to invest directly in solar projects, and a novel partnership between Solar City and Centrica Plc’s Direct Energy will finance solar projects.
2014 will no doubt bring more innovation in this space as investors seek returns with positive environmental and social impact and corporations seek new ways to finance solutions to complex, systems-wide challenges. We’ll need this innovation at scale and soon—the IEA estimates that $5 trillion of investment in clean technology is needed by 2020 to stay within 2 degrees Celsius.
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