Beyond impact investing: Why TradFi should be thinking about ReFi
Financing of private sector activities to abate carbon will become even more important to fight climate change. This is why multilateral development banks (MDBs), traditional lending institutions (TradFi) and those with “climate change” and “green financing” in their titles should take a moment to better understand the world of regenerative financing — ReFi.
COP27 has ended without the clear commitment to hold global warming to 1.5°C above pre industrial levels. Alok Sharma’s warned on Monday 14th November that this could be the COP where “we lose 1.5°C”, but unfortunately the political process to achieve sufficient national commitments to hold that 1.5°C line was not enough. COP28 will need to push to gain those commitments to help prevent global warming from approaching the disastrous 2.0°C line.
The science has been well documented. We must abate 1000 gigatons of CO2 from human activities by 2100 if we are to limit global warming to 1.5°C above pre-industrial levels. Already we have approached 1.2°C above pre industrial levels. As each round of COP shows, political consensus has been extraordinarily difficult to achieve. Thus, we need to activate every avenue possible to foster the impactful activities that can stem climate change.
Financing of private sector activities to abate carbon will become even more important in our fight against climate change. The entirety of the task is enormous. Financing needs to become more committed to smaller scale projects and more streamlined. Even small projects are important to the fight against climate change.
We need to activate every avenue possible to foster the impactful activities that can stem climate change.
Many MDBs and TradFi institutions have expressed the intent to support small scale impact projects. Measured impact investment in 2020 totalled $636 billion between private funds and public institutions. This may seem hefty, but measured impact investments managed by private funds and institutions is still only around 4 percent of the global private capital industry, which grew to more than $7 trillion by May 2020. (IFC: Investing for Impact: The Global Impact investing Market 2020)
The term “impact investing” is said to have been coined around 2007 by the Rockefeller Foundation. Impact investing seeks to look beyond only financial return and value a project by its social and environmental impact. ReFi is a continuation of impact investing which leverages web3 technology and web3 principles, particularly emphasizing the role of investors as change agents to shift the economic analysis of a project away from extractive principles toward regenerative goals, hence the term “regenerative finance.”
MDBs must understand an important difference between impact investing and ReFi. ReFi is much more Gen Z. From a ReFi perspective, impact investing is still traditional financing which looks primarily to financial return with social and environmental impact bolted on as a by-product. A key principle of ReFi is that it first considers the outcome of the project and it uses technology to increase the transparency of projects. The economic return of a project is the byproduct, not the driver. Gen Z is notable for its distrust of institutions and rapid examination of the story behind an institution, company, or brand. ReFi empowers that deeper examination through technology.
A key principle of ReFi is that it first considers the outcome of the project and it uses technology to increase the transparency of projects.
Web3 technology powers ReFi. Web3 technology seeks to empower internet users to influence social (and environmental) interactions while being able to earn the benefits of participating in the internet. This technology is often open source, such that developers can build what they and their community wants, rather than rely on centralized internet operators (i.e. web2) to own the apps and data (that is being mined from the users). This may seem a bit philosophical, but web3 represents a shifting mindset of internet users, who are increasingly aware that an individual’s personal data is being mined by web2 players for profits that are not shared. Hence, web2 is seen as a continuation of the extractive economics that has driven climate change and other social ills, which our internet savvy younger generation will need to solve.
ReFi developers are rapidly applying technology to climate change and other social and environmental issues. Take for example carbon credits. A number of ReFi projects are launching which seek to fund nature based projects that abate carbon emissions. Members of the ReFi community recognize that a carbon credit is not a carbon credit. With technology we can look behind the carbon credit and assess the quality of the underlying project and judge the quality and permanence of the carbon credit. Blockchain technology allows a carbon credit to be transferred with all information of the underlying project and chain of custody fully transparent.
We foresee that the ReFi community will go even further. A month ago, together with my Silta co-founder Ben Sheppard, I had the privilege of participating in a workshop of ‘Accelerating Digital Environmental Assets’, organized by Sidewalk Infrastructure Partners (SIP) and Google Cloud at the Google Campus in Mountain View, California. There, some of the brightest minds in ReFi were looking hard at the need to increase investment in climate change mitigation by 95X in the coming decade in order to cap global warming by 1.5–2°C by 2050. The emerging ReFi community is putting together the tools to turn Gen Z into change agents. Further they are asking deeply important questions such as “how do we also take into account the co-benefits associated with climate action, such as measuring the interactions within a diverse ecosystem if a forest is preserved?”
MDBs and TradFi should take note of the dynamism of the ReFi community and importance of leveraging technology and community cooperation to finance impact projects. If we are to mitigate climate change, hunger and social inequalities, we must adopt smarter, streamlined systems and approaches. It seems the issues facing the world are compounding faster than traditional systems can manage.
If we clearly understand the urgent need for more renewable energy and nature based projects, then MDBs and TradFi need to catch up with this century and take lessons from ReFi, especially on how to use technology to streamline financing, increase transparency and monitor performance.
Disclaimer: This article is for informational purposes only and is not intended as any kind of investment advice. Read our full legal disclaimer here. For further information, email us at contact@silta.finance.
