Improved data disclosure could mobilise US$200bn of financing to help achieve the United Nations’ Sustainable Development Goals by improving access to capital for issuers in emerging and developing markets, according to Arsalan Mahtafar, head of JP Morgan’s Development Finance Institute.
Mahtafar is co-chair of the Impact Disclosure Taskforce, a private sector initiative consulting on draft guidance to develop data disclosure that demonstrates efforts to achieve the UN targets to reach a wider group of investors with deeper pools of sustainable capital.
"We think that the adoption of this guidance could bring an additional US$200bn of sustainable investment opportunities in emerging markets to the capital markets each year," Mahtafar said.
"What could turbocharge this is if more and more banks read through the guidance, learn the practice and support their clients to produce disclosures. The guidance will be finalised in October, but banks might want to start [working] with their clients to support the production of these frameworks even earlier."
The voluntary guidance is in a four-month public consultation period that ends on September 1 and the 60 financial institutions that make up the taskforce are seeking industry feedback. Members include Citigroup, Deutsche Bank, Societe Generale, Standard Chartered, Amundi, Goldman Sachs Asset Management and CDPQ.
Closing the gap
Those involved hope that using mainstream financing channels to close the SDG funding gap will help address the problem that most sustainable capital is currently flowing to developed markets, where issuers have larger portfolios of projects that can be backed by use-of-proceeds bonds and higher ESG scores that reflect more mature baselines and reporting capabilities.
Closing the SDG financing gap remains an urgent global challenge. The UN Conference on Trade and Development (rebranded in April to UN Trade and Development), said in July that some US$30trn must be found if the 17 SDG goals are to be met by 2030. This financing shortfall equates to around US$4trn per year, some US$2.2trn of which is for energy transition.
Members of the taskforce are asking sovereign and corporate issuers to make sustainable development impact disclosures, which could make their whole balance sheets suitable for sustainable capital allocation.
An SDID would help sovereigns and corporates to measure and disclose the impacts of their national development plans and business strategies and their efforts to reduce major gaps to achieving the SDGs.
If issuers can show impact or progress on the SDGs, their entire balance sheets theoretically become more attractive to investors, enabling counterparties to provide conventional debt, private loans, equity, trade finance, revolving credit facilities and relationship banking – as well as ESG-labelled instruments.
"We hope that there will be more demand for capital markets issuances for the entities that adopt this guidance, so that if they have an SDID they will get greater access to larger pools of liquidity," Mahtafar said.
Market signals
Issuers with SDIDs could access more favourable financing rates as the disclosure is also designed to create transparency via an impact data platform for issuers, investors and third parties such as auditors and analytics companies.
"Our endeavour is to harness market signals to sustainability data, providing enhanced financial terms to SDG-contributing entities and creating meaningful investing opportunities,” Cedric Merle Hamon and Leisa Cardoso De Souza, the other co-chairs of the IDT, said in a statement. They both work at the Centre of Expertise and Innovation at Natixis CIB's Green and Sustainable Hub.
As SDGs are at a country level they have been difficult for investors to use when looking at corporate finance, but more investors are using them as a framework and SDIDs could lead to buyside growth. Funds claiming to target SDGs reached €74bn in September, according to Morningstar.
"I think recognition and demand for SDG investing is growing and this [SDIDs] could further expand that market," Mahtafar said.
However, the European Securities and Markets Authority remains concerned about potential "impact-washing" – where statements that are not backed by sufficient investment strategies or holdings – and the claims that SDG funds are making. A report published in February found that SDG funds do not significantly differ from non-SDG counterparts or ESG peers regarding their alignment with SDGs.