By Chinwendu Obienyi
Development of innovative finance tools and instruments to address social and environmental problems is nothing new.
Historically, such finance has focused on concessionary finance, including grants, and mutual finance to support the “social economy” or “social and solidarity economy”. In many countries, the social economy has long played an important role in the provision of non-market goods and services outside of government or mainstream markets.
Despite the long history – and continued growth -of the social economy globally, it is only relatively recently that a market of finance specifically aimed at creating social and environmental impact, as well as a financial return, has emerged. However, today, this market remains somewhat under-institutionalized – lacking a consistent terminology, consolidated financial or impact performance data sets despite a plethora of competing reporting standards and principles (for example, the UN Principles for Responsible Investment [PRI], the Global Reporting Initiative [GRI] and the Social Accounting Standards Board [SASB] and limited regulation around disclosure.
Variously, the finance that is deployed for social and environmental impacts has been categorized as grants (philanthropic finance);venture philanthropy (long-term start-up grants plus other pro bono support); mission and program-related finance (charitable asset finance); development finance (from transnational development finance institutions [DFIs]); ethical finance (that is based upon moral judgements of performance, often linked to faith systems); social (impact) finance (that supports the social economy more widely, particularly in Europe); green finance (that is focused on the climate crisis and associated issues of pollution);and impact finance (that is focused specifically on measurable impact).
Furthermore, some consistency of terminology has coalesced around the construct of “sustainable finance” in terms of a range of environmental, social, and governance (ESG) variables that are material in terms of investor decision-making around asset allocation strategies.
What is sustainable finance?
Sustainable finance generally refers to the process of taking due account of environmental, social, and governance (ESG) considerations when making investment decisions in the financial sector, leading to increased longer-term investments into sustainable economic activities and projects.
It is safe to state that a key driver behind the emergence of sustainable finance has been changing investor preferences, notably from the millennials. To meet the SDGs, ESGs especially in developing economies, financial institutions, particularly banks, have a role to play in financing these two profitably. For instance, in Africa for example, the banking sector has a responsibility to drive sustainable banking practices that will create both sustainable wealth for the sector and sustainable economic opportunities for the continent. This win-win situation is at the heart of sustainable banking.
However, the question is how microfinance banks, especially in Nigeria, look at sustainable financing? Are they ready to compete with commercial banks in that space?
It is with this in mind that the leading network of all major stakeholders of the Nigerian Microfinance sub-sector, Nigerian Microfinance Platform (NMP), hosted the 8th annual symposium in Lagos recently. The symposium was themed; Sustainable Finance: brought other related government agencies, MFBs, MFIs, MF-Association (NAMB), Credit Bureaus among others.
Experts’ react
In his opening remark, the NMP Secretariat, Adetunji Afolabi, said that the theme of the symposium is particularly timely and puts microfinance banks at the forefront of transitioning to a more sustainable economy as sustainable finance is a new approach to investing and considered a viable environmental investment.
He noted that this could be a powerful tool for microfinance institutions as it can help them to raise more capital and improve their impact on the economy. Whilst stating that there are challenges facing the microfinance industry, Afolabi called for more collaboration among key stakeholders to provide solutions to sustainable finance within the microfinance space.
“There remains untapped opportunities in that space for the purpose of sustainability and achieving the SDGs including the Paris agreement,” he said.