Innovative Finance

What is Innovative finance?

It consists of a series of investment strategies and financial structuring methods that aim to mobilize more capital towards the solution of social and environmental problems, and deploy those resources in a more efficient and effective way.

Principles of innovative finance

For Latimpacto, innovative finance in an impact context incorporates
four principles. These are:

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Return

They seek to generate a social and environmental impact with different risk and return profiles.   
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Purpose

They have a purpose within the context of impact. This could be:

  • Scale social and environmental solutions.
  • Mobilize more resources (for example, through catalytic capital)
  • Increase the effectiveness of resources and/or impact.
  • Give access to financing, products, or services to populations in vulnerable situations.
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Tailored

They are tailored according to the needs of each social purpose organization and the interests of the investor.
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People Centered

They put people, particularly excluded people, at the center. In addition, they are offered responsibly (eg according to ability to pay, with financial education, etc.).

Innovative finance in Latin America and the Caribbean

Latin America and the Caribbean (LAC) is a paradoxical region. Most of its countries are considered high- and middle-income, although the region remains the most inequitable in the world. While the recent pandemic has increased extreme poverty, Oxfam estimates that the region produces a new billionaire every two weeks. In turn, the region has the largest amount of unused arable land, but loses around 3 million hectares to forest each year.
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What the experts say

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Daniel Uribe

Fundación Corona

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In your opinion, what is innovative finance?
Beyond the literal meaning of the term, which is already very clear, I interpret innovative finance in the current Latin American context as any financial vehicle that connects affordable capital with investment projects or solutions to the most pressing problems facing the region, both in the social as well as the environmental plane. Innovation at the service of a fair transition to a carbon-neutral economy, leaving no one behind.
Why is innovative finance important for the region?
Because, as everywhere in the world, it is clear that public funding alone is not enough to cover even a fraction of the investment needed to achieve the Sustainable Development Goals. But there is enough private capital, which needs to be placed through impact vehicles, hybrid funding (including public-private), in which different investors and actors combine capacities and their own risk-return-impact profiles to scale investment flows.
What is happening in the region related to this issue?
We are seeing increased funding through equity and debt instruments, in the impact and ESG (ESG) space, leading the way, from Viwala in Mexico to Sumatoria in Argentina, making affordable funding available to impact projects that it would never serve. traditional banking. This is being achieved with its own adaptations to the regional economic context, including its high levels of informality and volatility, through mixed capital strategies (blended finance), among others.
What do you expect to happen in the next 5 years?
I expect to see strong growth in the issuance of green, social, sustainable and sustainability-linked bonds in the region, issued by governments (national, provincial or municipal), corporations and even non-profit organizations. Green, social and sustainable bonds are the type of asset that has grown the most in the last decade, going from around $50bn issued globally in 2013 to around $1Trn last year. In our region there is everything to be done, building on promising precedents in Colombia and Costa Rica.
Do you have a failure related to this topic, or a tip you want to share with us?
Do not forget that financial instruments are only means. Powerful, but means to the end, which are only valid for their effective capacity to improve the lives of people, communities or the planet. All of us who are in this space have to keep in mind the dialogue between the programmatic and development objectives pursued by a certain investment and the financial solution that enables it. The "fetishization of instruments" can lead us to proposals far from the true impact. To ensure the latter, there is much to do in the region in terms of transparency and integrity of impact, in line with the global agenda led by efforts such as the International Sustainability Standards Board of the IFRS Foundation, the advances of the SEC in the United States , or the standards under development by EFRAG in Europe.
In your opinion, what is innovative finance?
Innovative finance is the finance of the future. They seek to improve the future of people. Gone are the days where you only seek to maximize profit. Today, finance incorporates risk, return and impact. It is incorporating compassion with finances.
Why is innovative finance important for the region?
Innovative finance is the finance of the future. They seek to improve the future of people. Gone are the days where you only seek to maximize profit. Today, finance incorporates risk, return and impact. It is incorporating compassion with finances.
What is happening in the region related to this issue?
More and more people are moving in that direction. Entrepreneurial initiatives are growing and bringing hope. However, the need is urgent and we have to accelerate. Every impact finance business has a purpose. For example, I know projects that seek to raise financing for farmers, and thanks to this, they manage to increase their income by 50% in one year.
What do you expect to happen in the next 5 years?
I hope that innovative finance will gain relevance and enter the “mainstream”, by offering a wide range of products available to all types and sizes of investors.
Do you have a failure related to this topic, or a tip you want to share with us?
It has been difficult to convince ESG managers to integrate impact more Often it just ends up being "green washing".
In your opinion, what is innovative finance?
Beyond the literal meaning of the term, which is already very clear, I interpret innovative finance in the current Latin American context as any financial vehicle that connects affordable capital with investment projects or solutions to the most pressing problems facing the region, both in the social as well as the environmental plane. Innovation at the service of a fair transition to a carbon-neutral economy, leaving no one behind.
Why is innovative finance important for the region?
Because, as everywhere in the world, it is clear that public funding alone is not enough to cover even a fraction of the investment needed to achieve the Sustainable Development Goals. But there is enough private capital, which needs to be placed through impact vehicles, hybrid funding (including public-private), in which different investors and actors combine capacities and their own risk-return-impact profiles to scale investment flows.
What is happening in the region related to this issue?
We are seeing increased funding through equity and debt instruments, in the impact and ESG (ESG) space, leading the way, from Viwala in Mexico to Sumatoria in Argentina, making affordable funding available to impact projects that it would never serve. traditional banking. This is being achieved with its own adaptations to the regional economic context, including its high levels of informality and volatility, through mixed capital strategies (blended finance), among others.
What do you expect to happen in the next 5 years?
I expect to see strong growth in the issuance of green, social, sustainable and sustainability-linked bonds in the region, issued by governments (national, provincial or municipal), corporations and even non-profit organizations. Green, social and sustainable bonds are the type of asset that has grown the most in the last decade, going from around $50bn issued globally in 2013 to around $1Trn last year. In our region there is everything to be done, building on promising precedents in Colombia and Costa Rica.
Do you have a failure related to this topic, or a tip you want to share with us?
Do not forget that financial instruments are only means. Powerful, but means to the end, which are only valid for their effective capacity to improve the lives of people, communities or the planet. All of us who are in this space have to keep in mind the dialogue between the programmatic and development objectives pursued by a certain investment and the financial solution that enables it. The "fetishization of instruments" can lead us to proposals far from the true impact. To ensure the latter, there is much to do in the region in terms of transparency and integrity of impact, in line with the global agenda led by efforts such as the International Sustainability Standards Board of the IFRS Foundation, the advances of the SEC in the United States , or the standards under development by EFRAG in Europe.