By Stefan Rolf, Global Head of Securitisation and Private Debt at IQ-EQ, and Ilko Thun, Co-Founder and Executive Board Member at LOOM Impact AG
Environmental, social and governance (ESG) investing has been a focal point of the finance industry in recent years, with the bulk of ESG-focused investment capital and discourse centred firmly around the ‘E’: environmental concerns. The reasons behind this focus are good ones; rising energy costs and Net Zero targets loom large, and climate change is a globally mobilising issue. But there is more to ESG than the ‘E’ alone.
That’s where impact investing comes in. While ESG investments generally seek to do no harm, impact investments are dedicated to doing active good, intentionally contributing to measurable social and environmental solutions. These investments seek a financial return on capital that is put to socially responsible use and range across all asset classes, making them an extraordinarily diverse investment option.
Impact securitisation, in particular, is a targeted and important way to direct the forces of capital toward meaningful change. In this article, we delve into why social impact is crucial for impact securitisations, highlighting the broader implications and discussing the outlook for this evolving field as investors seek responsible ways to generate financial returns.
Beyond environmental impact
Reducing carbon and plastic outputs are clear goals that are easily measured, but how can investors leverage the power of capital to advance less tangible social targets, such as education, infrastructure, healthcare, affordable housing, gender equality and poverty alleviation?
Impact securitisation can significantly advance social goals by providing new avenues for funding projects that directly or indirectly benefit society. They allow organisations to raise capital for projects that may not offer immediate financial returns but have the potential for substantial social impact and profit over the long term.
The outlook for social impact securitisations is promising. Investor preferences are evolving, with rising demand for investment opportunities that align with all ESG principles. Impact investments aimed at social objectives accelerated during and after the global pandemic, increasing seven-fold in just one year to reach US$147.7 billion in 2020.
Governments and regulatory bodies are introducing frameworks to promote responsible, transparent investing, creating an enabling environment in which social impact securitisation can thrive. Technological advancements like blockchain and secure digital platforms have facilitated transparency and accountability, making it easier to track and measure the degree of impact. Collaborative partnerships among financial institutions, governments, non-profits and tech providers have driven long-term scalability in addressing social challenges.
Driving social impact through securitisation
Against this backdrop, social impact investments have made especially notable headway in securitisation. Traditionally, securitisation has been linked to assets such as mortgages, credit card debt and auto loans, but an increasing number of companies are now exploring securitisation as a means of generating positive social impact.
Social impact securitisations are attractive due to their flexible structure, accommodating different asset classes and enabling easy adaptation to socially relevant projects. Securitisation also allows for diversified funding sources, promoting a sustainable strategy while meeting investor demand. This flexibility offers attractive collaboration opportunities to engage public support, including development finance institutions (DFIs), foundations and supranational organisations such as the International Finance Corporation (IFC) or African Development Bank.
Environmental impact investments provide a valuable model for how social impact can also be measured and securitised. For example, the current practice of selling tradeable carbon certificates to offset a ‘brown’ balance sheet is transferable to social aims as well. Tradeable non-fungible tokens (NFTs) can be used to trade impact credits and monetise measurable social impact. NFTs are unique digital assets that can’t be directly replaced, making them well-suited for representing ownership. NFTs can function much like carbon credits, representing a pathway for firms to improve their impact by funding educational programmes or community development initiatives.
Social impact securitisation in action
In recent years, there are numerous examples of social impact securitisations that have been gaining momentum. Take, for instance, a hardware/software platform designed to provide interactive, engaging and personalised educational content for children in underserved populations across Africa. Traditional funding mechanisms alone are often an insufficient resource for the ambitious goals of impact-oriented organisations like these, since some bodies (such as governments) prefer to run these payment schemes rather than face high upfront payments. In this example, securitising the running contracts could bridge the related financing gap, thus providing a novel way to generate capital while working toward a resonant social goal.
The green transformation of NGOs presents another example. NGO camps suffering from shut-downs and high energy prices can benefit from financing SPVs, enabling increased impact of proceeds toward the organisation’s purpose, an increased stakeholder base, and minimised operational effort and savings.
By securitising their receivables, organisations can tap into the socially conscious investor market and raise funds dedicated to expanding their reach, improving social outcomes and creating a more equitable landscape. Results-driven social impact securitisations like these offer measurable outcomes for impact-related return profiles, benefiting both investors and the goals they advance.
All in all, impact securitisation is an exciting new pathway for investors to realise profits while making meaningful progress toward all of the UN’s Sustainable Development Goals (SDGs)—not just the environmental ones.
