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Sustainable Finance/Sustainable Investing/ESG


This is the second publication from The middle Road and its pdf version can be downloaded from the Publication section on The middle Road. Sustainable Finance word is used interchangeably by Sustainable Investing and ESG. It is less elaborate than the publication and not a substitute for the original. You can read the publication on the Sustainable Finance here. This report however does includes videos focussed on sustainable finance/sustainable investing/ESG and additional graphs. Before we begin our journey on sustainable finance developments, lets understand the actors within the sustainable development sector.

Actors within the Sustainable Development Sector

United Nations is the principal actor driving sustainable development goals supported by the following actors. UN as an umbrella brand networked into different specialized agencies like UNDP (global development arm for sustained development), UN/DESA (home and pioneer of SDGs) and UN Capital Development Fund which focuses on mobilizing both private and public capital for least developed countries.

Sustainable FinanceOrganization for Economic Co-operation and Development (OECD), a Supranational Organization headquartered in Paris, with 38 high-income members, is a major international organization driving sustainable development globally. It captures quantum of international aid through Official Development Assistance (ODA), a term coined by OECD’s Development Cooperation Directorate (DAC) in 1969 and a gold standard in international aid. Official development assistance (ODA) is defined by the OECD Development Assistance Committee (DAC) as government aid that promotes and specifically targets the economic development and welfare of developing countries. 


ODA is the largest source of external finance flows for emerging economies for funding development projects. The definition of ODA grants is revised from time to time and includes a minimum of 25% grant elements, among other parameters. (Beyond ODA flows: definition and research framework).

UN stipulates a grant ratio of 0.7% of GNI for OECD countries towards contribution to ODA. Only a few countries meet the grant ratio target with Sweden leading the group in terms of participation as a percentage of GNI while the US leads in the total amount. (Annexure: Refer to the publication here) In recent years, China, although not a part of the OECD group, is a significant contributor to development assistance. India is playing a vital role in international development in Asia and Africa. Apart from foreign direct investments and personal remittances which are tuned towards the private sector, the core responsibility of government borrowings is through the issuance of sovereign bonds. (Refer Masala Bond section in this report).

Sustainable FinanceOther significant forms of external financing assistance in development sector include philanthropic assistance through foundations, international sovereign bond issuance across various multilateral institutions, climate finance through PPP (public-private partnerships) as a critical enabler in forging multi-stakeholders’ alliances among different sets of actors within the development arena. (Beyond ODA flows: definition and research framework). The rise of sustainable finance is a result of the rise in different sources of development external funding facilitated by the PPPs.

According to the UN, the net ODA totalled $149B in 2018, down 2.7% in real terms from 2017.

OECD works with multiple actors within the development sector, including multilateral banks, policymakers and think tanks to layout foundation for social and economic well-being. MDBs further form the most vital component of fostering public private partnerships, a key partnership to attract $5-7T worth of capital per year in meeting SDGs target by 2030. MDBs work along Government-backed institutions and are the most critical enablers presently and include multilateral institutions, especially Multilateral development banks, bilateral aid agencies, development institutions, supranational organizations, sovereigns, agencies, among others.  These are chief actors who define and promote sustainable finance globally and are playing a pivotal role in financial innovation, primarily through blending finance and sustainable bonds.  Civic societies through non-profits think tanks, philanthropists, activists and social change enablers are catalysts in promoting social issues. (Naomi Klein, The middle Road, Podcasts section, The Rise of Patient Capital).

Sustainable Finance

The most prominent foundations in the world are focused on the philosophies of leading social change icons.  Foundations, charitable and religious institutions apart from government-backed organizations are the primary source of concessional finance. Financial Institutions, insurance funds, pension funds and the emerging impact investors are fostering incremental capital in the development sector. (refer Sustainable Finance/Sustainable Investing/ESG publication here). Seed accelerators example Y Combinator, Techstars, incubators and start-up platforms like Slush work as catalyst in boosting social entrepreneurship while social stock exchanges are a step in the right direction. Angel Investors, Venture Capitalists and even private equity are playing an increasing role in the social ecosystem. Corporate social responsibility is playing a defining role in imbibing ESG as a theme in investing.

Sustainable Investing/Sustainable Finance/ ESG  is now a global mainstream phenomenon with Global Sustainable Investment Alliance estimating the market at $30.7T in 2018 an increase of 34 per cent over previous year in five major markets. IMF defines Sustainable Finance/ Sustainable Investing as incorporation of environmental, social and governance (ESG) principles into business decisions, economic development and investment strategies. Europe accounts a lion’s share of sustainable investing with assets at $14T followed by the US at $12T and Japan $2.2T. The largest increase between 2016 and 2018 is in Japan which grew by 300 percent.

Sustainable Finance

The rise in sustainable investment in recent years is strongly enabled through the inclusion of ESG model among pension funds in Japan. Sustainable Investing has come a long way from following a negative screening of companies and sectors example gambling, tobacco to incorporating more action driven bottoms up approach including best in class screening, ESG integration, sustainable themed sectors, norms-based investing, impact/community investing, corporate engagement and shareholder action. 1

What’s Environmental, Social and Governance ESG?  

Sustainable FinanceE stands for managing environment ecosystem with a focus on reducing carbon footprint through climate mitigation and climate adoption.  Climate mitigation directly targets reducing carbon emissions through businesses, policies, interventions while climate adaption signifies focus on renewable, water and energy efficiency, clean technology etc. Focus on green and low carbon buildings are key focus areas of US government agencies Fannie Mae and Freddie Mac, leading global agencies in green securitization. Fannie Mae, targets low carbon buildings and financing for energy and water efficiency improvements of at least 20%. 6

McKinsey defines S as the community relations between various set of actors within the business sand social ecosystem including labour relations, diversity and inclusion. Both E and S signify corporate social responsibility for businesses and their role in playing a defining role in promoting social and environmental causes. A lack of clear quantitative and qualitative model in mapping and calculating outputs based on ESG are impediments in measuring accountability and impact but companies are nevertheless, setting their own benchmarks.

G relates with governance and best business practices of the company including accounting and disclosure practices, transparency and regulatory management etc. Better governance factors enable shareholder and societal value over the long term visible through sustainable performance of companies like P&G compared to Enron.

The upcoming EU e-directive and EU carbon neutral policy by 2050 compels organizations to be regulatory compliant for sustaining businesses.

Companies compliant with ESG framework are more likely to add value as compared to companies which lack the foresight in developing sustainable practices. In five ways that ESG creates value, McKinsey outlines top line growth, cost reductions, reduced regulatory and legal interventions, employee productivity uplift and investment and asset optimization as key enablers in generating a long-term advantage. Refer to the original publication here.

Impact Investing

Sustainable Finance

Impact Investing is a more focussed sub set of Sustainable Finance/ Sustainable Investing and ESG. The Global Impact Investing Network, the foremost body, championing impact investment globally defines impact investment as those made to generate positive, measurable social and environmental impact alongside a financial return. The key aspect of impact investment viz a viz other investments is its prime intention to create a positive social or environmental impact. Impact Investing investment philosophy ranges from market driven risk adjusted return to concessional and capital preservation.

Impact investing a direct measure of serving underserved markets for social and economic good still ranks $500B.

Sustainable bonds including green bonds are slowly but steadily rising. One of the most important features of any stock exchange   is to be a market maker in that segment i.e. to buy and sell securities at a spread remains a suspect. Further, social enterprises are patient capital generating positive cash flows over long period of time. There is an ongoing debate as to their potential to give above average return. (Refer the section: The Way Forward)

Blended Finance

Sustainable FinanceBlended Finance is an integral part of impact investing in turn a subset of sustainable finance/ investing/ ESG. It will play a critical role in achieving the target of Sustainable Development Goals (SDGs) by 2030. Going forward, there will be more synergies between Blended Finance and SDGs in the development sector. Blended Finance works as a strategic tool for development finance for the mobilization of additional finance towards sustainable development in developing countries. This is a defining change in the scope of blended finance from its work as various financial structuring instruments to its strategic use as a form of finance to eradicate social inequity.

Blended Finance is not a panacea for the global development crisis, but stills works as an innovative way to pool in commercial capital to aid risk-adjusted return for development projects. The means to attract additional capital for implementation of SDGs through governments, foundations, development finance institutions through concessional (soft loans with lower interest rates and/or longer repayment duration) or non-concessional resources or through public or private relationship gives a defining new policy perspective to blended finance. The key objective of blended finance is to catalyse implementation of Sustainable Development Goals globally.  Blended Finance works in offering private investors a first loss guarantee, mezzanine or senior debt to cushion against potential losses with actors from development space i.e. donors, multilateral development banks and development finance institutions taking equity first loss. Subordinate debt or junior equity is the first loss capital cushion i.e. in case of adversity they incur the losses and are always next in line of cash flows to senior debt or common equity. Although the field proposes a lot of promise, only $81B of blended finance has been raised for development work over the last four years according to OECD. Much of the capital is deployed for infrastructure and climate change with Africa attracting 30% of total contributions followed by Asia (15%). Various kinds of instruments are used to mobilize capital like Shares in CIVs, Guarantees, Syndicate loans, credit lines and direct investment in companies. Going forward let’s look in detail at how shares in CIVs collective investment vehicles) work. “India stood third among middle- and high-income countries between 2012 and 2014 attracting $1.28B of blended capital.” OECD

Sustainable Finance

One of the major strategic use of blended finance is to enhance funds in the development sector especially in low and middle-income countries. In order to attract capital from the private sector especially institutional investors the idea of catalytic first loss capital evolved. The capital can include both concessional and non-concessional finance, IFC deployed about $560M of concessional development funds between 2010 and 2016 to support more than 100 projects in 50 countries. This signifies the skew towards concessional finance as part of blending. Development Finance Providers take the first loss capital through guarantees, grants, insurance working as different ways of blending capital for credit enhancement.

Sustainable FinanceGuarantees work in covering the first set of losses while Grants might include first loss guarantee or deployment of capital without any repayment over a fixed time period. Grants also include money for technical assistance for completion of the project specifically to develop capacity and scale up the business model. While guarantees are the most widely used in blending capital especially in infrastructure projects, more instruments including pay for success (social and development bonds among others), securitization, hedging, and junior equity/ subordinate debt and collective investment vehicles are incorporated today. 

“To mitigate the risk of currency volatility in Africa, the currency exchange fund (TCX) launched a currency exchange to buffer volatility through swaps and forward agreements. Many development institutions invest in dollar or euro which is converted into the local currency in Africa and open to currency risk. TCX removes the risk though absorbing any loss of capital due to currency fluctuations which can be a huge deterrent for investors investing in Africa.” Graph: The middle Road


Collective Investment Vehicles include a structure which rewards cash flows in terms of seniority i.e. senior debt over subordinate debt or junior equity. Collective investment vehicles or funds are designed as special purpose vehicles to attract the pool of capital from different actors including development finance providers, foundations, endowment funds, high net worth people and institutional investors including pension and asset managers. These funds. The structure blends multiple cash flows into tranches vehicles pay back structure is loosely inspired by private equity depending on the risk appetite of investors. The deal flows as a waterfall structure wherein senior debt gets compensated before subordinate debt or junior equity. Junior equity are the last tranches and are compensated with residual cash flows derived after paying senior and mezzanine debt respectively. The structure could have mezzanine trance which is in the middle between senior trance and subordinate trance and has the second line to cash flows from the project. Senior tranche has an investment grade rating for attracting institutional investors.

This structure does not follow the usual risk adjusted return compensation since private investors have the first return with a cushion on first loss from the project cash flows. This structure helps in attracting more capital through a preferred return to investors so development providers can diversify to more projects in low or middle-income countries. Another success of blended capital is Danish Climate Investment Fund (KIF) which invests in the renewable sector the sub-Saharan region in Africa. However, still a lot must be done in attracting private capital. As stated before, only $81B of blended finance has been generated for development space in four years, a puny amount compared to $100T in global debt capital markets.  Refer to the publication here.

Rise of Impact Evaluation

Sustainable FinanceImpact Investing rise is not only to correct market failures in addressing the most pressing social, environmental and governance problems but to incorporate an evidence-based mechanism for measuring accountability into giving. Over the years, as philanthropy evolved from charitable giving from foundations and philanthropist to development financial corporations, multilateral banks and impact focused asset managers, an impact evaluation criterion started to emerge. A rise in corporate social responsibility and awareness to social issues especially with emergence of technology and millennial’s brought in an increased level of responsibility among civic societies.

To measure the social and environmental impact, impact investing set standards for measuring social impact. Impact reporting and Investment Standards (IRIS), managed by GIIN set out performance standard guidelines to measure and record outcomes for impact investing.

Impact Evaluation carried out through Social Return on Investment, a matrix involving multiple stakeholders to define the scope of analysis, identify key performance indicators, calculate monetary values and SROI ratio (impacts/inputs) and manage values through making systems which have the ability to capture the value created or destroyed.7  Impact Evaluation can range from merely computing the percentage of students passing each year for measuring success of intervention in schools to conducting random control trials which could take years to provide conclusive evidence of causality of interventions. Another tool to calculate social good or adverse social effects is valuing positive or negative externalities related to the service/product. Lean data methodology is worth a look.

Green, Blue, Social, ESG, Sustainability, Sustainable Development Goal and Thematic bonds are derivative of ESG theme. They implement social and environmental good outcomes and collectively termed as Sustainable Bonds.

Overview of Global Bond Market

So, what are Green, Blue, Social, and Sustainable Bonds? To delve further into sustainable bonds, it’s essential to have a global perspective of capital markets. Global Capital Markets, both debt and equity, play a fundamental role in funding economic activity, especially in well-developed markets — for example, in the US, 67% of the funding economic activity. Sadly, until recently, the prime importance of economic growth has been growth in shareholder value. The rise in awakening to the significance of wellbeing, along with monetary growth, has embedded the Sustainable Financeimportance of positive social and environmental impact within the business ecosystem. Backed by an increase in social activism, empirical evidence-based research, civic societies, corporate social responsibility, and awareness due to proliferation of the internet, sustainable finance/ sustainable/ ESG  investing is emerging as a sunrise sector to address long-pressing issues like inequalities within the global ecosystem.

In the US, the debt capital markets provide 80% of the financing compared to bank loans, which dominate less developed markets. Well-Regulated and functioning capital markets i.e., primary and secondary markets, are the most critical enablers for catalyzing a sustainable economic and social impact. Primary markets facilitate secondary markets through a deep network of market makers.4 Market Makers add liquidity into the system by both buying and selling securities, including during times of distress. Market makers drive the buy and sell the spread of securities and move credit within the system. During the credit crises, the LIBOR, the benchmark used to gauge short term lending between banks shot, up undermining loans leading to a credit freeze.

Sustainable Bonds: The Dark Knight

Sustainable FinanceThe global bond market is about $100T with the US leading the bond market. Capital markets play a pivotal role in enabling capital to projects and ventures addressing the most complex problems globally.

“In 2006, UN PRI, principles of responsible was launched at New York Stock Exchange. The PRI was signed by 32 institutional investors with $2T in asset under management included prestigious CALPERS, a UN PRI board member.”

Emerging as the most direct attempt to catalyse social good and boost social entrepreneurship, Sustainable bonds are becoming a major capital markets tool especially in impact investing sector.

Sustainable Bonds are emerging as key financial tool within the Sustainable Finance/Sustainable Investing/ ESG ecosystem. They are regulated financial instruments like other fixed income securities. Emerging as a new asset class, Sustainable Bonds specifically target social and environmental good. Sustainable bonds include Green/Blue Bonds which cater primarily to climate change, life below water and life on land, Social Bonds focus to target underserved or underprivileged sectors enabling social good usually with a focus on affordable housing, education, vocational training and micro funding. Sustainability/ESG/ SGD bonds target both social and climate themes. The first sustainable bond (Green Bond) was launched in 2007 by European Investment Bank and today is the largest segment among all the sustainable bonds.  Green Bonds are expected to reach $1T in terms of outstanding issuance by 2020. Refer to the original publication here.

Green Bonds

Sustainable FinanceEuropean Investment Bank issued the world’s first Green Bond, called a Climate Awareness Bond (CAB) in 2007. It has issued over € 23.5B Green Bonds across 11 currencies. Green bonds prime target projects in climate mitigation involved in the reduction of carbon footprints, and climate adaption (increase adoption of renewable energy) (SDG 7).

Both these themes help in aligning to the Paris agreement of keeping global warming less than 2°C. Clean energy remains the largest segment.  Other themes include clean water and sanitation (SDG6), affordable and clean energy (SDG7), buildings and transport (SDG9), city infrastructure (SDG11) and sector followed by low carbon buildings and transport.  Sustainable industry, innovation and infrastructure remains the next key SDG goal addressed by green bonds. As green bond market develops, more thematic bonds overlapping various SDGs will play a larger role in development sector incl.  agriculture (SDG15) and e-mobility.


Social Bonds enable, develop, and implement new and existing projects with a positive social outcome. Backed by Social Bond Principles to make the process transparent and more accountable, the proceeds target population with disadvantages including disabilities, marginalized communities, under-educated, etc. for specific.

Sustainable FinanceLaunched in 2013, Social Bonds have grown 28 times until 2018 thanks to the development of Social Bond Principles backed by ICMA, a global framework for issuing these bonds. Issuances of Social bonds up to May 2018, were only at $16.5B, dominated by public sector especially banks and supranational organizations esp. multilateral organizations. Danone, the French multinational was the first corporate to issue Social Bonds.

IFC launched the first social bond “Banking on Women” followed by “Inclusive Business” although both did not strictly follow the Social Bond Principles. (Social Bonds, Impact Invest Lab). Although Social Bond follows the socially responsible investing principles, the largest investors still are driven by financial gain.

Sustainability/ ESG/SGD Bonds work on the core mandate of implementing both positive social and environmental impact. The proceeds of the bonds finance and co-finance a combination of green and social projects and typically aligned with the standards laid out by green and social bond principals.

Social Impact Bonds promote pay for success model for delivering a measurable and sustainable social impact. Social Impact Bonds, a misnomer in terms of bond since there are no coupon or interest payments as well as no capital protection. SIB operates as a quasi-equity and derivative like instrument where the payment is based on a predetermined outcome and involves multiple actors in its implementation. The social impact instrument is evolving into a public private partnership in developing countries through development impact bonds with government as outcome payers.

Sustainable FinanceSocial Impact Bonds, works to bring in accountability in terms of measuring benchmarks or keep performance indicators against the mission of projects to reward philanthropists or private donors. The project exceeded the targets with 160% of the final learning target achieved and 116% of the final enrollment target achieved. Fig: The middle Road

Educate Girls implemented the first development impact bond in India. 

Reforms and The Way Ahead

Sustainable Finance/ Sustainable Investing/ ESG has still a long way to go before it makes an enduring discernible impact within the social and development ecosystem. It has started on a promising note and hopefully will not turn out to be a bummer like The Dark Night Rises after the excellent and everlasting Dark Knight. Well, it seems highly improbable with all the support from multiple actors within the global arena. The EU push on ESG implementation among businesses is timely and impactful. China, Japan and India’s emphasis on SDGs is a game-changer, especially China’s overdrive on the climate and the renewable sector is worth emulating.

But we need to take any good news with a pinch of salt. 

Sustainable FinanceFirst, many ESG companies are involved in ESG washing, and the parameters for inclusion are broad for it to be making any meaningful social impact. Second, ESG is more aligned in bring the best business practices with a clear focus on financial return. Majority of the investors both in ESG and the impact investor ecosystem primarily target monetary gain. This is disturbing news. An article published in Stanford Social Innovation Review discusses the authenticity of market returns for social entrepreneurs. (SSIR: Marginalized Return). Acumen a serious and early impact investor’s portfolio has not made market returns. However, profits should not be confused with social innovation and impact. Many of the firms are making an indelible mark in underserved markets and enabling sustained social change. Further OECD has expressed concerns over objectives of impact investors, especially in emerging markets. (OECD, Social Impact Investment). SIBs have legal and other expenses in knitting the model together, making it expensive to implement for non-scalable options.

Social Stock exchange looks enticing yet for it to become mainstream looks difficult. First, it needs buy-in from multiple actors, including investment banks, for enabling liquidity. Second, the role of the market maker should be implemented by the government before; eventually, other market participants step in. The driven market system will not work in kick-starting the social enterprises as they are not supposed to deliver market return at least over the earlier years of their inception.

The US, the largest capital markets in the world, will not implement the model looking at the divergent political views within the social ecosystem. EU looks a good bet but the consensus within the EU economies will take time while China’s outlook remains ambiguous at best on this initiative. India can undoubtedly take the lead, but the model will take time to evolve and results limited to global replication. A global consortium body with multiple actors esp. multilateral institutions with key sovereign backing from various governments will be a killer enabler in fostering a global stock exchange.

Critical policy implementation is to get up a framework of quantitative and qualitative bench-marking sustainable development performance within states or zones exemplified by the foremost government-backed think tank in India, Niti Aayog. The policy is a positive nudge in implementing best sustainable policies both locally and internationally. The procedure is universal, globally replicable and can be customized according to local geographies.

Last three decades has seen a series of measured and concrete steps in reforcing sustainable practices towards a peaceful and fulfilling world. The global ecosystem is by far more complex and multidimensional and needs divine intervention for its successful implementation. But you never know, nature works in mysterious ways.



Refer to Sustainable Finance publication here.

References (Sustainable Finance/Sustainable Investing/ESG)

  1. Global Sustainable Investment Alliance
  2. Who Cares Wins
  4. SIFMA 2019 Outlook
  5. Margi SSIR
  6. Green Securitization Climate Bonds
  7. Social Bonds: Impact Invest Lab
  8. What is relationship between SROI and IRIS
  9. Better Business, Better World Report, The Business & Sustainable Development Financing, 2014
  10. Maximising the impact of partnership for SDGs

Carbon Pricing Kenneth Gillingham

The Global Climate Risk Report 2020

UN articles



Social Bonds 2018 Impact Invest Lab

Social Bonds IFC

Akshaya Patra

$. UNICEF Financial and Economic Impacts of the Swachh Bharat Mission in India


KPMG ESG takes centre stage

Special edition: progress towards the Sustainable Development Goals

#Green, Social & Sustainability Bonds, a high-level mapping to the sustainable development


Masala bonds Aviral Agarwal and Darshan Jain

Beyond ODA flows: definition and research framework

OECD Social Impact Investment      aga-ex-chairperson-thermax/


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