Leveraging Export Finance as Tool for Impact Investing

The United Nation’s 2030 Agenda for Sustainable Development and accompanying Sustainable Development Goals (SDGs) are facing a funding gap of at least US$42 trillion. Nowhere is this gap more evident than in Africa, which despite progress in recent years and huge growth and development potential, lags far behind the rest of the world in key human development and economic indicators, and it is here that a significant portion of spending to meet the SDGs will need to made. Given that Africa lacks sufficient capital of its own (a problem of the developing world at large, which has 80% of the world’s population but only 20% of is assets, massive amounts of international funds will need to flow into the region, particularly as it still lacks a widespread sophisticated banking and investing infrastructure. Investec plc, the international banking and weath management group, is among the leading instiutions working with others to develop innovative financing models that can mobilize significant amounts of private capital for both impact and profit.

For Fani Titi, the chief executive officer of Investec, financing sustainable development is an urgent priority and one in which private sector businesses have a critical role to play: “The task of development is so huge that it cannot be left only to governments, nor can it be left only to civil society who will agitate for change. Business is an essential partner on that path towards development.” By leveraging its existing businesses, assets and capabilities in innovative ways, Investec is aiming to have a meaningful impact in closing the SDG funding gap and to improving the lives and livelihoods of one billion Africans.

Investec has made its commitment to sustainable development and the SDGs a cornerstone of the its strategy.

The Need for New Approaches for Development Funding

Given its African roots and strong presence in South Africa, Investec has first hand experience with the development needs of the continent, recognising that high-quality infrastructure, in particular, is essential for Africa to achieve the Sustainable Development Goals. Africa’s current infrastructure financing gap is estimated to exceed US$165bn across power, water, transport and communication networks.

Given the size of the need and the challenges of mobilising traditional investment capital for the region, Investec believes that one of the keys to funding this infrastructure (and the remaining SDGs) Export finance’s huge potential to channel impact investments in developing regions is just beginning to be tapped. will be the re-purposing of existing flows of capital to maximise their development impact. Chris Mitman, Investec’s Head of Export and Agency Finance, believes that export finance can have a important role to play in this regard. Says Mitman, “Export finance is already a commonly-used mechanism for promoting trade flows in emerging markets. However, it also has a huge potential to channel investments towards highly impactful essential infrastructure projects in developing regions. This potential is just beginning to be tapped.”

Leveraging Export Finance for the SDGs and Impact

Export finance is a well-established area of banking that supports the world’s trade. The WTO estimates that 80-90% of the US$19 trillion of annual world trade is facilitated by some form of trade or export finance. Export finance provides medium to long term crossborder debt financing, with the market split roughly evenly between private sector players and government export credit agencies (ECAs).

Export credit addresses risk, cost and time, all essential barriers for emerging markets. Firstly, regarding risk, the involvement of an ECA, offers credit insurance as well as direct financing, improving the risk profile of a transaction from project risk to sovereign (ECA) risk, allowing for increased private sector participation. Secondly, ECA debt guarantee products are highly rated, reducing the cost of debt for both private lenders and the borrowers. And thirdly, ECAs offer longer repayment periods for emerging market borrowers, in some cases up to 18 years, providing a critical runway for long-term climate-friendly infrastructure projects.

As one of the leading private sector players in African export finance, Investec seeks to lead in private sector infrastructure investment. Says Mitman: “Export finance is one of the most effective financing mechanisms to fund and de-risk infrastructure projects for both private and public sector financiers. Moreover, it has an established track record in sustainability, ESG and compliance that makes it an ideal vehicle for broader impact goals as well.”

Export credit addresses risk, cost and time, all essential barriers for emerging markets Due to the sovereign or quasi-sovereign nature of ECAs, export finance projects include a high degree of due diligence and controls. All export finance lenders adhere to sustainable lending practises, which includes strict debt sustainability and value-for-money assessments, leading to ECA loans having a very low rate of default at less than 0.3% globally (between 2007-2017). Further, these practises include strict ESG diligence based on IFC Performance Standards and World Bank Safeguard Policies, as well as strict compliance and control over the disbursement of funds and the use of proceeds.

Given these practices and characteristics, export finance solves many of the challenges facing "Export finance’s established track record in sustainability, ESG and compliance makes it an ideal vehicle for broader impact goals." Chris Mitman – Head of Export and Agency Finance, Investec investors that seek to fund sustainable development in Africa: the terms of export finance facilities are suitable for a wide range of development projects, the public-private partnership with ECAs reduces risk, and the model includes sophisticated diligence and monitoring of performance, risk and ESG factors as a basis for measuring impact more broadly as well. Despite, the use of export finance to fund sustainable development still being in its infancy, it is already making its impact felt. A recent study determined that just over 16% of the nearly US$140bn in annual ECA financing was applied to projects that can be classified as a ‘sustainable’, nearly all of which were in the power and infrastructure sectors.

The industry is at an early stage of measuring and reporting on impact. However, there are early signs of innovation. For example, Investec issued a Social Export Finance Loan to the Republic of Ghana for the development of critical healthcare infrastructure. The Social Loan – one of the first such structures in Export Finance – follows the principles of the Loan Market Association (LMA) Social Loan Principles, which includes impact reporting requirements.

Mobilizing the Industry for Change

Export credit today is still seen as a niche product for specialized desks at some of the world’s largest corporate and investment banks. But it also offers significant benefits to impact investors looking to deploy funds in emerging markets, not least of which is a significant capital multiplier effect. Given that ECAs typically fund 85% of projects and commercial investors the remaining 15%, export finance offers potential impact investors a 5.6x multiplier on every dollar of private sector capital mobilized. Given this untapped potential, Investec is working with other industry leaders to promote export finance to a broader audience of investors.

In line with the spirit and aims of SDG 17 Partnership for the Goals, Investec co-heads the Sustainability Working Group of the 16-member Global Export Finance Committee at the International Chamber of Commerce. The working group is collaborating with the Rockefeller Foundation to commission a White Paper examining the state of sustainability in the export finance market which will also make a series of proposed product and policy recommendations aimed at increasing the flow of export financing towards sustainable activities delivering impact against the SDGs.

The White Paper, which is being independently produced, has found broad support within the industry for this shift, with a survey of 500 participants in the export finance industry finding that 85% of respondents support the sector becoming more sustainable and impact driven. According to Mitman, By leveraging its existing businesses, assets and capabilities in innovative ways, Investec is having a meaningful impact in closing the SDG funding gap and to improving the lives and livelihoods of one billion Africans. the possibilities to support the SDGs appear to be unbounded. He says, “Large scale infrastructure financing projects can include targets progressing virtually all the SDGs goals, such as requirements for project sponsors to use clean energy, employ carbon efficient technologies and materials, make gender balanced hiring and subcontracting, or ensure equal access to infrastructure, including for marginalised groups. Given its established use in a region of the world in which other traditional finance models are still severely lacking, export finance can have a meaningful impact on Africa’s sustainable development and the achievement of the SDGs.”

Investec is an active participant in the ‘Force for Good’ Project on the future of capital in support of the UN Secretary General’s Strategy and Roadmap for Financing the 2030 Agenda for Sustainable Development.

About Investec

Investec is a leading Anglo-South African international banking and wealth management group. Its 8,200 employees provide a wide range of financial products and services to a diverse client base in 40 cities across four continents. Investec is dual listed on the London Stock Exchange and the Johannesburg Stock Exchange.

For further information please contact Lesley Whittle at Lesley.whittle@forcegood.org.

Force for Good is a platform dedicated to delivering a positive impact for the world through capital and ideas, both directly and in partnership with ambitious institutions seeking to have a material impact for good, as well as in galvanizing others to create a movement towards good.

The ‘Capital as a Force for Good’ report, published in December 2020, was produced in Support of the UN Secretary General's Strategy and Roadmap for Financing the 2030 Agenda for Sustainable Development.