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Why investors are shifting focus to sustainable investment

Recent years have seen environmental and social concerns rapidly move up the agenda. With this shift, there is greater focus on sustainable investment; both in environmental or social terms.

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sustainable development

In the past few years, socially responsible investments have emerged that have steadily grown the relevance of green finance. Entrepreneurs and investors have laboured to promote sustainable investment but many of their eco-oriented start-ups still remain under-funded.

However, modern day innovative financing mechanisms to facilitate sustainable development are now catching the attention of the financial sector even as the world is waking up to unfathomable environmental challenges. As a result of the threats posed to the planet, more and more corporates have elected to invest in and do business with eco-centric start-ups.

The results are different investment strategies and sometimes competing portfolios that start-ups come up with during pitching. In this article I will explore this emerging phenomenon of environment-related venture capital and provide an overview of the current market for this type of investment in Kenya.

What impedes sustainable investment?

There are many smart green Venture Capitals in the world that back African start-ups in energy, waste, transport, water, and agricultural improvements to create impact as well as gain environmental, financial and strategic returns.

They can be categorised into; early stage investors who prefer investing at lower valuations and higher risk, in the Seed, Series A and Series B financing rounds of young start-ups. The young start-ups would essentially still be working on product market fit and traction.

The second category is the late stage investors who prefer shorter holding periods and time-to-exit. They look out for advanced start-ups with high revenues, experienced management teams and fast growth. However, African start-ups face several challenges in mobilising green and sustainable finance through external capital flows for investment in those areas.

The underdevelopment in financial systems in Kenya is the biggest impediment, especially when it comes to structuring major projects and providing credit and insurance to enable companies and households to make investments and manage the risks they face. It calls for the political provisions in these countries to give priority to green projects through crafting of sustainable policies to aid the growth of this sector.

The 2016 UN Environmental Program report titled Green Finance for Developing Countries”, quotes Nuru Mugambi, Director of Public Affairs at Kenya Bankers Association (KBA) who says that, “Green finance is burgeoning, it has reached a point of spontaneous combustion. But it needs to be aligned. It needs to go beyond the leadership of a few champions and it needs to be coordinated across regional trading blocks.” With Mugambi’s words in mind, African countries should look into the following to make the environment friendly for green financing and green investing;

Related: Solving a billion-person problem

Greening the banking system

African banks are still struggling with formulating policies that will guide them to do more green financing. Besides these policy failures, the banks are also grappling with lack of capacity and absence of “green” performance measurement matrices. Kenya has been working on achieving this change for financial institutions evidenced by CBK Governor Patrick Njoroge’s pledge on 15th November 2019.

He pledged support for green finance to combat climate change saying that, “now is the time to build a truly sustainable financial system that works for the banking sector as well as the environment.” “In the future, all finance must be green,” he told the press, adding that, “the financial sector has been identified as one of the sectors that can lead the country’s transition toward low-carbon development pathways.”

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In the recent past, Kenya has been experiencing extreme climate events such as droughts and floods, which hurt the country’s key sources of livelihoods. There underlies tremendous potential within the banking industry to aid the country to transition into a green economy. KBA estimates that the country needs approximately KSh.2.4 trillion (USD24 billion) to implement the Green Economy Strategy and Implementation Plan.

Greening the bond market

Green bonds are financial tools (capital) raised at the capital market to fund sustainable projects that have a positive impact on the environment. They help alleviate the risks posed by the country’s exposure to climate change, environmental degradation and associated social impacts.

They can be used to mobilise private sector capital towards sustainable and resilient infrastructure and achieve the policy goals set in a country’s long-term growth and development vision. The green bond market has grown exponentially over the past five years, reaching KSh16.9 trillion (USD167 billion) issuance in 2017.

However, the growth of green bond markets faces several challenges such as a lack of clear and comparable definitions of what amounts to green or sustainable. Some investments are likely more “green” than others. There’s no standard definition for what green or sustainable finance counts for.

Some investors will want to back only pollution-free energy while others would consider efficiency. This uncertainty undermines investor confidence in the so called “green projects”. Industry players and policy stakeholders should thus come out and give clear definition on what is considered sustainable investment thus fostering mass issuance of these bonds.

Greening institutional investment

Green investments are traditional investment vehicles such as stocks, exchange-traded funds and mutual funds in which the underlying business(es) are involved in environmental friendly operations. It ranges from companies that developed alternative energy technology to companies that have best environmental practices.

However, just like banks, these companies are grappling with challenges such as weak environmental impact assessment capacity. This inadequate risk management leads corporates to exercise excess caution during budgetary allocations to green investments. Kenya’s economy hinges on more green investments. More than 50 per cent of the country’s GDP comes from agriculture, mining, forestry and fishing.

This alone is enough reason for the government to facilitate adequate support for corporates in the country that seek sustainable investment. The Kenyan government itself should lead the efforts in investing in green projects that benefit the economy and the society. The many pure-play, leading edge green companies in the country should be facilitated and enabled to trade in the stock market. These include start-ups that are developing new methods for creating biofuels or solar solutions, and corporate heavyweights that are expanding their product lines to include environmentally friendly products.

Way forward

According to the Kenya National Climate Change Action Plan 2013-2017, extreme climatic events could cost the economy as much as USD500 million a year with the economic costs predicted to increase in future. The losses would come from lower crop and livestock yields, destructive forest fires, damage to fisheries, lower hydropower generation, lower industrial production, and reduced water supply.

Kenya would also face huge costs from environmental pollution, which are associated with adverse effects to human health raising the risk of epidemics. We should therefore create strategies for greening our financial systems as part of the broader strategy to achieve inclusive, resilient and sustainable development.

This we can achieve through increased investment in areas such as sustainable agriculture, and green resilient infrastructure for transport, water, and waste management to counter these trends. We need to make a conscious shift away from a business-as-usual approach by cutting capital flows to non-sustainable polluting industries, practices, and technologies.

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