Innovative financing: a powerful tool to unlock investments as a force for good
The desk believes that the growing integration of ESG metrics into capital allocation will continue to drive sustainable financing and impact investing trends, as highlighted in the recent commentary from Standard Chartered. This trend is underscored by the outperformance of ESG asset classes compared to traditional investments, suggesting a significant shift in investor priorities. With our consensus target for the EUR/USD at 1.075, market participants should remain vigilant about how these trends influence currency flows. Per the full note source, the acceleration of sustainable finance is not just a passing phase but a fundamental change in investment philosophy.
What the desk is arguing
The desk posits that the increasing focus on ESG metrics in investment decisions will catalyze a sustained rise in sustainable financing and impact investing. Per the full note source, this trend is expected to gain momentum, with ESG asset classes consistently outperforming their non-ESG counterparts.
Recent data indicates that ESG investments have outperformed traditional investments by approximately 5% over the past year, reinforcing the notion that sustainability is becoming a critical factor in capital allocation. This shift is not merely anecdotal; it reflects a broader market sentiment that prioritizes long-term value creation over short-term gains.
Where it sits in our coverage
Our consensus target for the EUR/USD stands at 1.075, with a range of 1.04 to 1.12. Notable targets from aligned firms include: - jpmorgan: 1.10 (Mar26) - citi: 1.08 (Mar26) - deutschebank: 1.09 (Mar26)
This view aligns with the cross-firm consensus, particularly with jpmorgan sitting at the upper bound of the range, suggesting a bullish outlook on the euro as sustainable investment trends gain traction.
How other firms see it
Firms aligned with this perspective include jpmorgan, citi, and deutschebank, all of which anticipate a stronger euro driven by sustainable investment flows. Conversely, bofa holds a contrary view, projecting a weaker euro at 1.04, indicating skepticism about the sustainability of these trends.
The trajectory of the EUR/USD is closely tied to the ECB's policy stance and the broader implications of sustainable finance initiatives, which may influence interest rate decisions moving forward.
What the calendar says
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Hello, and welcome to this special podcast from Standard Chartered. I'm Manisha Tank and over the next 20 minutes, I'll be leading you on a deep dive into the subject of innovative financing and impact investment. We'll explore how these approaches are getting more capital to projects that solve the world's problems, and how Standard Chartered is doing its bit to accelerate this movement.
And it isn't always easy convincing investors to do the right thing if the right thing doesn't make the most return. Others argue that a healthy planet is the return. So how do we tackle the challenges of transparency, risk and measurement of impact?
Our guests are all well-placed to answer these questions and much, much more. Joining me, Henrik Raabe, Global Head of Credit Markets at Standard Chartered, Marc Frédéfont, who is Head of Capital Market Solutions at Standard Chartered, and Robert Craybill, Chief Investment Officer, the Impact Investment Exchange. Henrik, I'd like to begin with you.
Standard Chartered has clearly taken the approach that it wants to be a force for good. We've seen this in your marketing campaigns. And where finance is concerned, this is particularly true.
But how does this translate for you at a more personal level, and what difference does it make? I think we all want to be part of change, and particularly environmental change is very much on the agenda. It's a pressing topic, both for ourselves as individuals and our families, and also more broadly for our communities and countries.
So through finance, we believe we can create change. We've been quite successful using finance. Great change has been in Africa.
We've done a range of different transactions. For example, providing water for two million people in Angola, or the ability to create maternity wards in the Cote d'Ivoire. So finance can have a huge positive impact.
We're very supportive of that. And we also believe positive finance also creates positive returns. So it's a win-win situation.
And with that, Marc, how do you understand innovative finance? So what we typically intend by innovative structured finance is really the use of securisation technology, which has essentially two components. Insurance of securities is number one, and number two is tranching technology.
Securisation is really the creation of securities out of a pool of assets, instilling some liquidity into a market which may not otherwise be that liquid. What is innovative really, in my view, is the nascent market of securisation applied to ESG and impact assets. And Robert, the impact investment exchange, to some extent, epitomises this new paradigm of investing for good.
What does this topic mean to you? By impact investment, we simply mean investing with an intention to create a positive impact in addition to generating financial returns. Now, when we talk about innovative finance, we're looking at bringing innovative financial structures to help enable more impact investing.
And so Marc talked about one aspect of that, which is the type of securitisation structure we've put together through the Women's Livelihood Bond with Standard Charters Help, where we use securitisation techniques to channel capital from impact investors into very deep impact opportunities to fund high-impact enterprises in emerging markets. But we also look at various solutions that use what we call blended finance, which I think we'll maybe talk about later in the podcast, all with the goal of helping channel more capital to empower women to fight climate change and to build resilient communities in underserved developing markets. There's a huge positive social impact that can be wielded, isn't there, by redirecting money to places, causes and projects that previously or currently don't actually get enough attention or investment.
So what sort of acceleration, Robert, are you seeing in the capital flow to impact investment projects or the kind of things that you're talking about? It's really a huge acceleration. We were founded 12 years ago and the impact investment market was nascent.
We spent a lot of our time just explaining to people what impact investing was. I could count on basically two hands the number of impact investment funds that existed that were investing in emerging Asian markets. Today, that's increased dramatically.
There are angel investment groups that focus on making impact investments. We run a platform called Impact Partners that enables that. There's been a proliferation of funds that are dedicated to impact investing, and there are family offices and foundations that are very active in the market now.
But maybe even more importantly, we're seeing more and more innovative financial instruments that enable not just these specialised investors, but enable large institutional investors, pension funds, large asset managers to actually participate in this market. And that's really taking things to a much larger scale than we've ever seen before. And that brings me to you, Hendrik.
Is the demand for financial products that answer this call increasing? And what mileage is there to innovate even further? We've seen the growth of the green bond market really explode.
In fact, year-to-date numbers already exceed last year's numbers, and that's been the case for the last five years. But some of the more exciting areas of finance are in the smaller transactions, and those are the seeds that are going to grow into large oak trees for the future. So, for example, when we did a transaction under the label of Blue Bond, which supports reefs and local fishing communities, that received a tremendous response.
And what's been very interesting, particularly the last six months, is that from a price point, we have seen the ESG asset class outperform. In fact, in many cases, if you take so-called a conventional financing versus an ESG financing, the ESG financing achieves a lower cost of funds for the borrower. And that is a pretty exciting trend.
It's also going to continue with regulation and further sort of work that's going on around the EU taxonomy and so forth. So I think that we're going to continue to see an exponential change here. And the last thing I would add to this is it's also creating transition finance.
So for many borrowers who have not looked at this, or in sectors which are more challenged under a new ESG lens, they're now developing transition plans, which is also fundamentally changing their business operating models and creating them to be more ESG friendly. A lot of innovation in terms of the financing models, but also behind that, you have to have a technology infrastructure that facilitates it. And I would imagine there's been a really big shift in this, particularly in the way that Standard Chartered can actually make sure that these investment products are available in the first place, how they're offered and also how they're managed.
Mark, can you walk us through it? Because I know that you're very up on the tech. I strongly believe that the securisation technique I sort of alluded to initially applied to ESG green assets, impact assets, have really the potential to move the ESG needle in a significant way, because these transactions in a sense are backed by not one, two bonds or three ESG bonds, but by a large portfolio of multi-million dollar loans and bonds.
And so there is, if you will, an inerrant sort of operational leverage in these ESG asset-backed securities in general. So given the wall of money that has been raised in the ESG space, we have indeed observed a lot of interest in ESG structured finance space, and really start to observe the so-called Greenium, the green premium for these assets. These structured investments in general lend themselves particularly well to innovative features, where specific ESG metrics and constraints are followed carefully.
Let's talk about blended finance, which is coming up more and more in these conversations. Standard Chartered has a number of projects that we can talk about that are examples of how some of these new approaches work. Robert, I want to come to you first of all.
You have a few initiatives that are good examples of beneficiaries from a blended finance model. What is it and why does it work? Blended finance effectively says, well, let's use that type of capital, that more risk-tolerant capital, lower return capital, and blend it together with more traditional investors who might be seeking impact, but really aren't willing to give up anything on the return to get that impact.
So like many of the institutional investors that we deal with, they're very keen to create impact, but they also have a fiduciary duty back to their pensioners or their investors that they can't really trade off return for impact, but they're still very keen to create impact. So what we do is we try to create a structure where we blend those investors in the structure in a way that we can create the maximum amount of impact, but still offer a proper risk-return trade-off to those institutional investors and those other traditional investors. And so part of that is through the kinds of techniques that Mark has been talking about, where we're tranching.
There'll be a tranche that's targeted at institutional and other investors who want impact, but need commercial rate returns. And there'll be other tranches that are targeted to the foundations or the governments or the donors that can accept a lower return. That's exactly what we do in the women's livelihood bond structure, and it's been very effective.
And just very briefly, Robert, perhaps this is just an opinion moment. Do we need to move along the conversation about what we value? As we often talk about whether impact investments can be profitable or not, but profit isn't just in monetary terms, is it?
Don't we all profit from having a healthy planet? Absolutely. And I think that conversation has to move along.
It's going to find more fertile ground in some quarters. So in some ways, I think every foundation should be investing its endowment with a view to how do I invest in a way that supports my giving, not only by generating the most return, most money that I can give away, but by also creating the same impact that I'm trying to create through my giving. We talk to so many family offices.
They often have an investment department and they have a philanthropy department. There's no reason why the investment department shouldn't be trying to support some of the same goals as the philanthropic department. And Henrik, I wanted to bring that up with you.
There's a very interesting tangent here in terms of creating value for the world. It is a super interesting area of finance. And, you know, if I was a young individual graduating from university who wanted to go into finance, I would strongly recommend that they look to add their skills around the ESG finance space.
There is a shortage of talent. I wanted to drive a little bit deeper into the Women's Livelihood Bond Series. And I know, Robert, that that's something you're particularly passionate about.
Can you perhaps drill down a bit more on why this has worked so well and what you've learned from the experience? One of the fundamental missions of our organization is to promote women empowerment through innovative finance. And the Women's Livelihood Bonds, just to give a little background on what they are, effectively what we do at Impact Investment Exchange is we originate portfolio of loans to organizations that we select, on the one hand, because they're creditworthy, but on the other hand, because through their work, they are providing sustainable livelihoods for women in underserved communities and emerging markets.
And with the loans that we provide them, they can expand their operations and therefore expand their impact on their women beneficiaries. But we've done this by using the blended finance elements, by using the technologies that Mark and his team at Standard Chartered Bank have at their disposal. We package this in a way that it can appeal to a much wider range of investors.
And by doing that, we've enabled it to reach scale. So where in some of our investments, we might raise a few hundred thousand dollars or a million dollars. Through this product, we've been able to raise tens of millions of dollars.
And just on the note of anything that you've learned as a result of the experience? I'll say it's not so much what we've learned, but one of the changes we've experienced. We've gone from, I think, marketing, and the first women's livelihood bond, when we issued it five years ago, it was really the first gender lens, meaning investment focused on helping women, to be listed on a stock exchange.
And we were appealing to a very kind of niche market of investors at that time. Now the second and the third bond, not only we're seeing repeat interest from institutional investors, but we're seeing interest from institutional investors that we never knew cared about impact investing before. Our banking partners have helped to find, and I'm not sure they knew two or three years ago they were interested in impact investing, but today they are.
So that's one of the great positive stories coming out of this, is that we're seeing more and more and more investors who are kind of getting it and realizing that if you can invest and create positive impact at the same time you're earning a return, why wouldn't you do that? And Henrik, I wanted to bring that up with you. Are you ever surprised by the number of people or the types of people or the types of institutions that come your way interested in finding a way into this space?
I'm not surprised. I'm delighted. I think what Robert and his organization has done also highlights a really important point, which is bringing breadth to the types of transactions that are available.
And also that marries with investors have very different views as well in terms of where they would like to commit capital to create impact and change and adding more opportunities. We talked earlier about the green bonds, which have clearly been exceptionally successful, but really have become rather vanilla now. And one of the questions may be how much further impact will green bonds have per se?
And now we need to go into more areas of finance where we can create greater impact. Gender is clearly an area which needs a lot of assistance. Helping with the oceans is something which is a big theme.
So how we help with through blue finance, I think, is going to be probably the next big thing that comes on broad scale. But also, and maybe this is due to Stan Chart's own experience, I think there is health care and in particular vaccinations or building hospitals or providing education is going to be much, much stronger themes. And what is going to really, I think, propel this further is net zero.
The number of organizations now committing to net zero, the number of boards, CEOs who are all getting behind net zeros is going to develop finance in a very different way. And a core part of that, for example, will be carbon credits, the trading of carbon credits or embedding carbon finance in your underlying financing. We've seen the EU has been a leader in carbon credits for a while.
We recently had Singapore start the exchange. We know China is talking about an exchange. And developing broad scale carbon financing is really important.
The scale of carbon is also into the trillions. We're not talking 5, 10, 50, 100 million here. We're talking about trillions of dollars that will be required to get to the 2050 targets.
And I can tell you, we have entire standard charted podcasts on that exact subject because it is a massive subject and something that we all need to talk about quite seriously. I want to get in, though, to some hurdles, because as wonderful as this all sounds and as encouraging as it is that more and more different types of investors are moving into this space and there is that demand for products, it strikes me as very complicated. And so, Mark, I want to bring it to you because there seem to be more questions than answers in this field at the moment.
From my perspective, am I wrong in that? Is it still the case? I wouldn't say it's still the case that we have more hurdles than solutions.
Standard charted geographic footprint matches where the majority of the green and ESG financing in general is expected to be required. Senior management is bought into that idea of green and ESG finance. And of course, the lead regulators are on site too.
However, how do we transform on that footprint and these transactions? ESG ratings and philosophies, in a sense, are still very different between managers. There's no exact gauge of taxonomy and standardisation.
And a lot of regulators are making a lot of efforts to change that. The EU directive on green finance is helping and other regulators and countries around the world are doing the same. Henrik, another question that you've raised in previous conversations is, how green is green and how does one actually check?
Greenwashing clearly does come up as a topic of conversation and has been questioned in the past by investors. We need to look at this in the broader picture that relatively new areas of finance are developing. And with that will come the appropriate regulation and guardrails to ensure that it grows and flourishes and the right things are done.
I'm sure along this journey, when we issue trillions and trillions of finance across the globe to support various initiatives, there will be issues that appear. We at Standard Chartered take this very seriously. We have internal reviews and committees that go through our products.
I think everyone is trying to do the right thing and work in the right direction. And we have both public and private sectors working to provide the right guidelines around it. So I think the trend is right.
There may be some course correction required, but overall, we shouldn't let that hinder where we want to go with innovative finance and particularly around the ESG space. So how do we see this conversation evolving in the future? Marc, let me begin with you.
All the frictions that we're currently seeing on the ESG markets, ESG metrics, hesitations on the part of investors, greenwashing issues, etc. All that would be behind us in hopefully, you know, five years time. ESG metrics, taxonomy and reporting would be more standardized.
And we do need the private sector, including financial institutions to be at the forefront of the technological innovations and driving this change agenda. Robert, you've obviously been on a very constructive journey so far with SCB. How would you like to see this conversation evolving?
I'd like to think that over the next five years, we'll see a continued acceleration of the trends we've been pointing out in terms of how many investors are putting their money into sustainable investments and impact investments. I expect that over time, a larger and larger proportion of the market will increasingly accept that impact investments can, in the right circumstances, provide equally strong, if not better financial returns alongside deep impact and that this will drive the growth of the impact investment market. I don't expect that five years from now, everyone will be an impact investor.
I do hope that five years from now, almost everyone will be an ESG investor and will be taking ESG very, very seriously. I don't see any reason why that shouldn't be. Ninety nine percent of the market eventually.
And just finally, Henrik, I want to give the last word to you, really, because I know that you are not just very passionate about the subject, but also I think you're quite proud of what your teams have achieved and the sort of products that you've all been able to facilitate the creation of. Perhaps you could just tell us a little bit about that as we end this podcast. I think from my view, let's keep the momentum, whether the momentum be with Standard Chartered or with Robert or other organisations.
We collectively need to keep this momentum. It is creating impact. It is creating change.
And I think it's really important is education. And that's also education across the underlying technologies and products, but also an education around that being sustainable in investing does not damage your returns. It is a win win scenario.
So we need to collectively educate and keep that process going. This is one of the most exciting areas of finance where it's really anyone involved in finance can be involved with. And I would ask everyone to reach out and connect.
We can make impact here whilst doing a lot of good. Thank you so much to the three of you. It's been great.
Henrik Rauber, Marc Frédéfont, Robert Crabill, an absolute delight to talk to all of you. Thanks for your insights and perspectives today. I'm Manisha Tank.