By Mohammad Raafi Hossain, CEO & Co-Founder of Fasset
Over a year since the world began battling COVID-19, recovery has been uneven across countries and continents. As the US reopens and parts of Europe begin relaxing restrictions, Asia combats a new wave of infections, disrupting the region’s return to normality and challenging the favorable economic outlook of the region. Amidst the unpredictable pandemic-stricken global market, investors have increasingly turned to sustainable investments, raising total ESG investment funds flowing into the US alone to US$51.1 billion in 2020, more than double 2019’s figures. 2020 also saw the ESG sector outperforming the broader market.
Even with ESG’s ascendency, impact investing practices are globally fragmented, with developed markets serving as a focal point of activity. Currently, 64 percent of sustainable assets have been invested in Europe and North America—much greater than the 22 percent invested in Asia, and just 10 percent across Africa, the Middle East and South America combined. Yet, with a global annual financing gap of US$2.5 trillion to bridge in order to reach the United Nations’ Sustainable Development Goals (SDGs), much is left to achieve in the race to sustainability. As we continue to witness the economic benefits of ESG investments, how can innovators accelerate investments in green initiatives and support sustainability in regions most in need?
Changing Investor Portfolios
Prior to the pandemic, perceptions of ESG investments were often laden with similar connotations to charity. However, today, younger investors are recognizing the necessity of prioritizing ethical investments and supporting decisions that will positively impact future generations. More than 80 percent of millennials have expressed interest in sustainable and responsible investing (SRI), making it even more important for fund managers to acknowledge changing investor perspectives. Further compounding this trend, the rise of Gen Zs, dubbed the sustainability generation, is also set to fuel the push for more environmentally and socially conscious decision making across business and finance.
These changing investor preferences have become even more pronounced since COVID—with investors turning to corporations with strong reputations for corporate responsibility, including those upholding green initiatives and ensuring the ethical treatment of their employees and customers. With the uncertainty resulting from the pandemic, companies have been forced to consider long-term implications instead of just immediate capital gains—a trend that has rewarded corporations championing ethical business.
With today’s conscious investors, sustainability-focused funds are quickly nearing US$2 trillion globally, a rapid jump since sustainable investment funds topped US$1 trillion for the first time on record last year. Following the sharp rise of impact investing and the obvious longevity of the pandemic, this fundamental shift in investing will likely remain as more millennials and Gen Zs take a more central role in business and governance.
ESG’s Fragmented Landscape
Despite the massive inflow to ESG funds, much of it remains concentrated in developed countries and is ill-distributed across regions that most need this funding to achieve the SDGs. Two in three investors view emerging markets as a risky choice, citing market constraints, low quality of governance, risk of corruption or lack of liquidity as reasons to explain this disproportionality.
Furthermore, COVID has disproportionately impacted the most vulnerable societies and regions across the world, throwing as many as 150 million people into extreme poverty. Adding to that, the pandemic erased nearly 255 million jobs in 2020, mostly in Latin America, the Caribbean, and Southern Asia. With developing countries at the brunt of the pandemic’s impact, governments are forced to prioritize saving lives, managing the outbreak, and job creation above green initiatives—which are often viewed as a novelty rather than an urgent necessity. Consequently, COVID’s impact on developing regions has reversed decades of progress on poverty, healthcare and education, making reaching the SDGs an even greater uphill battle.
How then, can the world continue its path towards sustainable development while battling COVID’s challenges?
Lowering Funding Barriers
With the widening funding gap of ESG initiatives between developed and emerging markets, the private sector can do more in funneling investments into developing regions to make sustainable funding more equitable across the globe. Considering the obvious growing investor interest in sustainability, it is not just a matter of raising education and changing perspectives on ESG, but rather finding ways to redistribute funding so emerging economies can benefit too.
As investors seek to expand the proportion of ESG investments in their portfolios, there remain significant barriers to entering the market, including low liquidity, large ticket sizes, lack of optionality, and high costs and fees. It is these market characteristics that drastically limit the accessibility and appeal of sustainable infrastructure assets for many.
To encourage greater inflows of capital into sustainable infrastructure, it is necessary to lower the barriers to entry, which is especially necessary for emerging markets. This can be made possible by leveraging emerging technologies such as blockchain and tokenization technology. By digitizing and fractionalizing equity, large sustainable infrastructure such as solar panels or wind turbines—often seen to be exclusive and inaccessible—can be made more liquid, accessible, and tradable with the creation of digital “tokens” representing a share of the underlying asset. With the enhanced liquidity, asset owners can now secure capital from a substantially larger base of potential investors—a benefit especially important for sustainable asset owners from emerging markets—reshaping the sustainable infrastructure sector to benefit developing and emerging markets alike.
As environmental degradation is expected to be exacerbated by COVID, the barriers to reaching the SDGs are a truly global issue and not dichotomous between developed and developing markets. While ESG moves from the niche to the mainstream, it is no longer a fad but a fundamental shift in investor priorities as we near the 2030 target for the SDGs. Staying on the path to sustainability despite the added challenges from the pandemic is a global effort needed to eradicate climate change that threatens tomorrow’s generations.
Blockchain, and the power of tokenization technologies, may be the answer to keeping us on the right path.
About Mohammad Raafi Hossain
Mohammad Raafi Hossain is the Co-Founder and CEO of Fasset, a rapidly expanding multi-country digital asset gateway that aims to enable the next billion digital asset users to buy, sell, send, and store digital assets such as bitcoin and real world asset tokens.
Prior to co-founding Fasset, Raafi was an Advisor to the UAE Prime Minister’s Office where he seeded and facilitated several innovative initiatives aimed at strengthening connections between governments and the adoption of emerging technologies across several sectors. As an entrepreneur, Raafi is also the Founder of Finocracy, a boutique think-and-do-tank partnering with the United Nations, the Global Fund, and the Islamic Development Bank to democratise access to financial opportunities for the next billion. Previously, Raafi worked for the UN across several countries in the MENA region, primarily focusing on agriculture, climate change, and sustainable development.
With an academic background in Environmental Economics and Sustainable Development, Raafi is an alumnus of the University of California—Berkeley and Harvard University. He has an illustrious career across multiple fields from emerging technologies, economic development, climate change, renewable energy, healthcare, agriculture and education sectors formulating and executing strategies for governments, multinationals and corporations alike.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.