How capital markets can help sustainable financing agenda

An estimated $4 trillion in annual investment is required for developing countries to achieve Sustainable Development Goals (SDGs) by 2030 according to the World Bank. Most green investments are financed through pure equity and bank credit.

There is need for the capital markets to step up and mobilise the much-needed support to scale up financing of green investments.

Indeed, the creativity, entrepreneurship and innovation funded by capital markets should be the driving force behind a globally green and sustainable economy.

Fortunately, sustainable development issues do not arise from a lack of financial capital. The problem comes from the lack of pricing or mispricing of sustainability issues in the overall performance of companies and the ensuing misallocation of capital.

Notably, the capital markets regulators and policy makers have laid more focus on the short-term financial performance of businesses and are yet to properly internalise environmental and social costs into companies’ profit and loss statements. As a consequence, the corporate cost of capital does not necessarily reflect the sustainability of the company.

By taking the measures below proactively, capital markets can help scale up uptake of sustainable financing. The capital markets watchdog and policy makers should promote regulation and standards that integrate sustainable development factors in listing rules and reporting requirements.

While regulation may not be an effective way to inspire or lead the most ambitious companies, it does help create a basic level of competency within a market.

Notably, the Nairobi Securities Exchange is developing Environmental, Social, and Governance (ESG) disclosures guidelines for listed companies that are intended to guide them on how to identify and measure material topics; integrate them into strategy and report on performance using an approach that meets international standards on sustainability reporting.

Over time, and with improved maturity on disclosures, stakeholders will be able to correlate financial performance with specific indicators as well as compare the profiles of companies reporting within the same sector.

The inevitable evolution of this trend will be full integration of sustainability performance and sustainability will cease to be a niche investment strategy and become a standardised performance metric in the same way as financial performance.

Globally, capital markets are rapidly embracing sustainability through issuance of products dedicated to sustainability themes. For example, in Kenya, we have seen the issuance of green bonds.

In 2020 alone, global sustainable funds surged and Covid-19 pandemic boosted issuance of social bonds. Supranational entities led the development of the virus response bonds to address impacts of the scourge.

Building on existing market-driven initiatives, stock exchanges can facilitate change by innovating and creating new sustainable finance investment products and indices for all asset classes.

Bourses in partnership with other capital market players should seek to improve the level of capacity for issuers and investors on sustainable finance opportunities. It’s also important that the government integrates sustainable finance into school curricula.

Capital market players should embrace the opportunity and responsibility, to educate listed companies on environmental, social, and governance risk management and reporting in order to attract impact capital.

Additionally, available financing options for sustainable ventures should be promoted. Capital markets players are in a unique position to guide investors by explaining ESG metrics, and encourage issuers to make reports and performance data available and accessible for progress tracking.

Capital markets should advocate for and extend incentives to listed companies that are fully aligned with long-term sustainable performance.

This could involve, among others, rebates on listing fees, tax credits to investors in sustainable-themed products, lower carbon taxes, and subsidies in net interest payments for issuers. Incentives could also be provided for the development of and investment in sustainability-aligned indices and funds.

Trading in green ventures should also be made attractive. This can be done by developing competitive trading fee schedules and better redemption levels and expense ratios for issuers.

Capital market regulators and stock exchanges should encourage proactive and transparent ESG reporting and availability of data. This would help companies to attract the right investors and raise capital to finance ventures targeted at green investments.

Loise Wangui is chief officer, regulatory affairs Nairobi Securities Exchange