Does Financial Investment Contribute to Poverty Reduction or Exclusion, Climate Change and Net Zero Carbon Emissions?
Fifi Rashando
Responsible Investing I Inclusive Finance I Diversity & Inclusion I ESG I Social Impact
This blog provides some guidance to design?#ESG (Environmental, Social, and Governance)?#investing ?and to operationalise three pillars of?#sustainabledevelopment ?:?#economicviability . ,?#environmentalprotection ?and?#socialcohesion ?.
#Economicgrowth ?has played a key role in?#povertyreduction . According to?CDC research ?(2021), rapid poverty reduction is closely linked with increase in?#investment , especially in?#emergingcountries . It encourages people to send their children to schools, who eventually get better economic returns from investing in education.
Over the past 40 years, the number of people in China with incomes below US$1.9 per day has fallen by close to 800 million. According to the?World Bank (2022) , the key drivers of its successful poverty reduction are?rapid economic growth?through provision of inclusive economic opportunities and raising average incomes as well as?effective governance,?which drives growth supported by poverty reduction policies.
Nevertheless, at the same time, investment may contribute to?#incomeinequality ?and?#socialconflict ?, creating a?#wealthgap ?or even contribute to?#climatechange ?and?#netzeroemissions ?.
Like?#China ,?#Indonesia ?is on its way to becoming a middle-income country. Indonesia has lowered extreme poverty from 19% in 2002 to 1.5% in 2022. (World Bank - 2023 ). However, Indonesia is still facing some critical challenges such as:
a.?#Ruralpoverty ?remains the most important driver of poverty reduction. The lack of?#accesstofinance ?in the?#agriculturesector ?is a major impediment to Indonesia poverty reduction. The key obstacles include: an absence of written records, banking history, insufficient collateral, lack of clearly outlined business plan(s), compounded by the risk that comes with trading in a single commodity (which requires further risk assessment analysis from lending institutions). Furthermore, the remote location, and unclear address in hard-to-reach rural areas, exacerbates these challenges. Overall, this limits growth, financial inclusion, equality and the?digitalisation of rural communities .?
Both the?#GovernmentofIndonesia ?and the Private sector provide?#loanguarantees ?or?#creditinsurance ?, however the percentage?is the lowest relative to other sectors. According to Jarot Indarto, Senior Planner at the Ministry of National Development Planning in Indonesia, only approximately 12% of SMEs in the agricultural sector have access to finance.?
b. Around 50% of Indonesian women are excluded from the labour force as well as the?#digitaleconomy . They are constrained by?#gendernorms ?and home care responsibilities, hence limiting?#livelihood ?opportunities for households. Furthermore, it is critical to avoid unintended non-financial consequences of increased access to finance. E.g. increased access to finance might sometimes be associated with increased rates of?#genderbasedviolence ?(GBV). Gathering data on women’s preferred channels for accessing finance and safety concerns can help mitigate unintended consequences whilst designing product and service offerings. Adopting Responsible Investment Principles can help ensure that these considerations are taken into account during the investment process.?
c. Climate change has become the cause of economic shocks, particularly agricultural yields. More than one-third of Indonesians remain economically insecure. They can be pushed into poverty due to COVID-19 or climate change.
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Often, ESG investing relies on?#ESGrating ?providers that measure the environmental and social risks that impact their?#financialviability ?only rather than measuring society cohesion and environmental protection. According to?Stanford (2021) , most ESG ratings are not?#evidencebased ?, but incentivise the “showing” over the “doing.” E.g. Despite Philipp Morris selling 700 billion cigarettes per annum, in 2021 it was added to the Dow Jones Sustainability Index (DJSI) which are supposed to be leaders in ESG in North America.?
In this blog, I would like to propose that when designing a?#financialinvestment ?vehicle as well as ESG strategies, we need to integrate the three pillars of sustainable development. Without economic viability, it would not be called a financial investment, but aid which creates dependency, makes people rely on handouts. The second and third pillars (environmental protection and social equity) have to be integrated so potential risks and unintended harm could be identified and mitigation strategies could be prepared in advance.?
In addition to the sustainable development pillars, we could also adopt some relevant rules and principles which promote sustainable investment through iincorporation of environmental, social and governance, such as:
In summary, whilst designing an investment vehicle, it is important to use climate change,?#digitalisation ?, as well as?#diversityandinclusion ?lenses. A?#blendedfinance ?approach, utilising investment and capacity building funds to directly address the United Nations Sustainable Development Goals, could be adopted so the investment will enable social cohesion as well as environmental protection.?
Author:
Fifi Rashando is the Sustainable Development Services Director, providing mentoring, consulting, and end-to-end project management in ESG and impact investing to organisations in the public, private and social sectors.