Opportunities For Participation Finance In The Impact Investment Market

Impact investing is an innovative model to enhance the role of the private sector in solving social and environmental problems.

The impacts of globalisation on the financial world and markets have long been a debated issue, sometimes regarded as an opportunity and other times, as a risk that needs attention. The past year has showed us all that the biggest impacts of globalisation were not only felt on the markets but also on the most fundamental components of life such as public health, ecological sustainability, and biodiversity. Despite all the progress made in increasing global prosperity, there are still important obstacles to inclusive and sustainable development.

The traumatic effects of the novel coronavirus (COVID-19) destroyed lots of gains that we achieved after long efforts in many fields. Only less than half of the world's population can benefit from basic health services. There are at least 500 million students who cannot have access to distance learning opportunities. Today, the Sustainable Development Goals are a global guide, just as they were before the pandemic,to prevent problems and minimize social and environmental injustice with its comprehensive road map.

Achieving the Sustainable Development Goals require $5 to 7 trillion of annual investments. When we take the official development aids out, we are faced with a $2.5 trillion financing deficit. Cooperation between public and non-governmental organisations alone is not enough to fill this gap. We need a radical change and stronger cooperation in the financing of sustainable development. The private sector, which accounts for 90% of employment and 60% of the gross domestic product (GDP) in an average country, plays an important role in mobilizing resources and establishing partnerships for such large investments.

The momentum gained in recent years through concepts such as "responsible investment" or "sustainable finance" can be regarded as indications of the private sector's willingness to participate in this cooperation. An example of this effort was when 214 banks, with an asset size of $47 trillion, signed the Principles for Responsible Banking, which covers the responsibilities of the banking sector in creating a sustainable future within the scope of the United Nations Environment Program Finance Initiative. Joining the agreement as a founding signatory, six banks from Turkey demonstrated how sensitive the Turkish financial market is in the area of sustainability. Although concepts such as "environmental, social and governance" (ESG) and "socially responsible investment" (SRI) are on the rise, reflecting this awareness in the world of finance and investment, the private sector needs to take more concrete actions, especially considering the destructive effects of the pandemic. The private sector should now leave the principle of “avoiding negative impact” behind and start “creating a positive impact”, applying solutions for the development problems in business lines and value chains.

Impact investing is an innovative model to enhance the role of the private sector in solving social and environmental problems. Impact investing means that financial resources are used not only for profit but also for social and environmental impact reasons. Thus, the expected return includes both financial and the positive environmental and social impact generated with the investment. This impact is promised before investment as in the financial return, and it is measured and reported transparently during and after the investment.

As the United Nations Development Program Istanbul International Centre for Private Sector in Development (UNDP IICPSD), we carried out an Impact Investing Ecosystem study in Turkey in 2019 and saw that Turkey has the potential to attract impact investing in areas such as refugees, women empowerment, healthcare, renewable energy, and financial inclusion. Our studies show that although the impact investment market continues its rapid growth, the limited awareness and capacity for impact investing by investors and the inability of investors to access projects that comply with their risk-return expectations cause the impact investment resources to be channelled to the already developed countries. Many regions where development needs are much more of a priority still cannot adequately benefit from impact investing resources. The close overlap in its fundamental principles is leading the growing impact investment market to offer innovative partnerships for participation finance instruments as well. In regions where participation finance has a strong presence with high development needs, synergies arising from participation finance and impact investment markets are expected to play a significant role in funding market-based solutions for these needs.

Considering this potential, as the UNDP IICPSD, we established the Global Islamic Finance and Impact Investing Platform (GIFIIP) in 2016 in cooperation with the Islamic Development Bank (IsDB). GIFIIP aims to increase the role of the private sector in development to achieve the Sustainable Development Goals through participation finance and impact investing.. The platform is actively working to develop market-based solutions for sustain- able development by bringing together the public and private sector stakeholders, who are working in the fields of participation finance and impact investing.

As Generation Y begins to play a more active role in the business world and acquire wealth, a quite different investor base is emerging. This generation will be the heir of $68 trillion worth of assets in the United States alone by 2030. This generation is not only motivated by financial returns; the social and environmental impact created is as important as financial returns in business and investment choices. We see a similar situation in the participation finance sector in the world. For the new generation, the participation financial institutions should not only comply with Islamic finance principles; young consumers expect these organisations to consider the environmental, social, and ethical criteria in their investments. According to GIFIIP's studies, issues such as renewable energy, women empowerment, integration of refugees into the society, which stand out especially in countries where the Islamic finance sector is strong, are of great importance for institutional and individual impact investors. Considering all these trends, in a period when the participation finance system is developing rapidly, the integration of impact investing into participation financial institutions will multiply the potentials of these two markets and take them one step further as leading players in this evolving world.

UNDP Istanbul International Centre for Private Sector in Development (IICPSD) Müdür Yardımcısı Gülçin Salıngan