Looking ahead to 2023, what we find most interesting is the U.S. renewable energy sector. The Inflation Reduction Act (IRA) represents a turning point for the U.S. renewable energy sector. Broad economic support that directly benefits solar, wind, energy storage, and clean hydrogen should drive capital investment and growth in the future. In addition, the IRA should accelerate the decarbonization of the U.S. energy sector.
However, from an impact investing perspective, it is important to evaluate the opportunity set, as there will be winners and losers, underscoring the need for bottom-up fundamental research.
The International Finance Corporation (IFC) estimates that there is a US$5.2 trillion financing gap for micro, small and medium-sized enterprises (MSMEs) in developing economies. This year, we expect this gap to narrow because MSMEs contribute significantly to sustainable growth in developing economies by creating jobs, reducing inequality, and stimulating economic activity.
Social bonds offer impact investors an effective tool to channel capital from banks and financial institutions to MSMEs in developing economies. Unfortunately, social bond issuance in 2022 was down by more than 50% from the previous year. Impact capital markets-both on the issuer and investor side need to mobilize capital toward these SMEs to support socioeconomic progress, promote financial inclusion, and enable social equity. We need all market participants – banks, financial institutions, and investors – to redouble their efforts, commitment, and capital.
The main trend we will see in 2023 is the amount of greenwashing taking place in the sustainability-linked bond (SLB) market, i.e. securities where the future coupon is linked to the achievement of sustainability performance targets. While this seems like a good idea, in theory, we have seen several companies exploit this structure by including unambitious targets that are measured just prior to the bond’s maturity. The SLB structure could be a powerful tool for companies that are serious about the transition but do not have projects to finance in a green or social bond format. Unfortunately, the SLB label is exploited by issuers simply to reduce funding costs.