Podcast transcript: Episode 19- Driving Sustainability and Innovation.

Transcript

Host: Hello, everyone. Welcome to the Experience podcast for PwC on driving sustainability innovation. Sustainability has become a hot topic that is refocusing governments and companies to move away from enterprise value creation to share value creation. And this value creation tries to strike a balance between creating value for people, the planet and prosperity.

Consequently, achieving sustainable development now has to be green and inclusive and to sustainably develop countries are required to invest heavily in physical and human assets. And of course, the physical assets are infrastructure. We all know, the business of investing in infrastructure has very high financing needs with our infrastructure physical gap in Nigeria running into trillions. And we know infrastructure is important for creating socio-economic prosperity, and improving standards of living for people, it has to build resilience for the planet and mitigate climate change. Therefore financing infrastructure is imperative. To discuss this, I am most privileged to welcome our guest speaker of the day-Mr. Chinua Azubike, who is the CEO of InfraCredit. You are welcome Chinua.

Chinua: Thank you Rukayat. It's a pleasure to be on this podcast.

Host: Okay. So we'll like to start by asking you to just briefly introduce your organisation and what sustainability or ESG means to you.

Chinua: Thank you. InfraCredit was established to solve a market gap as a specialised Guarantee Institution to provide long-term local currency credit enhancement through guarantees to enable infrastructure and companies to raise financing from the capital markets and thereby attract long-term investments from domestic pension funds and other institutional investors. 

Before InfoCredit establishment, there was a market constraint in raising long-term financing for infrastructure, especially private sector-led infrastructure and then in it getting the pension funds to allocate capital as domestic credit to the private sector to finance infrastructure. Most of the pension assets, which are currently around 12 trillion Naira are heavily invested, over 60% are invested in government debt securities, and not enough of it is being allocated to the productive sector of the economy. And so InfraCredit has mobilised, is established to do this. We are sponsored by the Nigeria Sovereign Investment Authority, alongside other highly rated DFIs, Garanko, who was a Co-sponsor in establishing us and we also have Care W development bank as a capital provider, Africa Finance Corporation, an equity investor, Infraco Africa an equity investor, and the African development bank as the tier 2 capital provider.

Host: Great, So like you mentioned earlier, one of the other news, you mobilise finance or help clients mobilise finances as the capital market.

It's seen as a good avenue for infrastructure financing. And most economists will also agree that like I said earlier, infrastructure is vital for having any thriving economy. Would you say there is a link between sustainability in financing infrastructure projects and is the capital market in Nigeria favourable for this?

If so, can you explain how?

Chinua: Yes. I think infrastructure plays a key role in all three dimensions of sustainable development: the economy, the environment, and the society. And as the world now seeks to meet these ambitious targets such as the SDGs and the Paris agreement on climate change, infrastructure is becoming more widely recognized as a critical asset class that can help support the energy transition. And infrastructure in itself shouldn't be viewed as an individual asset, but as part of an ecosystem, with a portfolio of assets that collectively hold the grid potential to deliver the three pillars of SDGs and the capital market has a specially important role to play as the source of where we can access domestic capital, local currency financing. The tenure of local currency financing can be sourced in the capital market.

And therefore, it does have an important role to play. And within that as well, I think when we now begin to look at sustainability and impact, then we now begin to, especially when we look at SDG-related infrastructure, I believe that smart use of public finance will need to come with much more private capital, blended finance will be critical to attracting private investment, especially where we're trying to finance SDG related infrastructure that contains what we call 'hard to mitigate downside risks' because of the perception. Because given the poverty rates in the country, we also know that some of these projects do carry a high perceived risk.

Host: Okay, thank you for that. As you mentioned, there are three dimensions to sustainability. I mean the issues range from climate change to tackling youth employment, issues of human rights to building secular economies. From your experience in structured finance investment on sustainability, what would you say the market regards the most, the major material sustainability issues, that business face and how can we use that as a pitch head to gain more buy-in for sustainability in hard-sell markets?

Chinua: Different institutions may also have different definitions of how they view sustainability or what some may even define as corporate social responsibility. But I think for us we went through a process. Firstly, we had to refine our theory of change. And that's a very important step in trying to create a lens through which you see the impact that you are looking to have. And our theory of change frequently aims to first transform the debt capital market, increase the infrastructure development in Nigeria, and catalyse unlocking local currency finance, which is mostly infrastructure.

We support viable projects, but we intend to intervene in two ways: alleviate financing bottlenecks, build a better understanding, and improve intermediation, but ultimately drive economic growth and improve the quality of people's lives. So we set out how we want to address this and assess impact both at the project level, at the market level, and then at the end-user level. And to achieve that we needed to put in a framework.

and that framework enables us to begin to put in a monitoring evaluation and learning, a toolkit that we apply in evaluating the impact that we have. And so, that is some work that has to take place within the institution and also should permeate into the culture of the institution.

So it becomes less of a functional responsibility but something that becomes more within your value system. And then, it takes a bit more than normal business practice to transition or pilot into making sustainability a mainstream consideration when providing financing.

And so I think it has to start from the leadership. It requires some level of shift in vision and leadership towards driving institutions, to look in that direction. But the important thing is the fact that I think that it's also good business practice, because if we look at, some of the potential benefits and add current benefits that we see in accessing blended finance that can help to reduce or mitigate risk like I had to mitigate risks that are perceived on projects that have strong impact outcomes, then you begin to impact positively on the environment while making profits as well. So it really requires a shift in commitment and philosophy for institutions. 

But I hope that by being able to demonstrate so, hopefully, InfraCredit, given the approach we're taking, can show a demonstration effect for the market to see that you can be focused on or begin to address the impact on sustainability and climate issues and at the same time operate a successful business model. So I think those examples would be very useful to act as an incentive for others to follow -perception obviously is a big issue where people feel that there's a perception, especially in less developed countries that there are more priorities that you want to address and that. Taking on the additional cost or the burden of prioritising sustainability could affect profitability. So that is a perception issue, but I think it's better addressed through examples ultimately.

Host: So I would like to re-emphasize three very important things you said there about being an impact-driven and purposeful organisation and truly embedding ESG into what you do, including your governance and risk management and very importantly, that tune at the top. Now to just kind of take the last point you made about value creation and even maybe being more profitable if you imbibe ESG, I mean, many people say that the focus on environment, social and governance might actually make companies lose focus on profits. It's now a move from shareholder capitalism to staple that capitalism and you're trying to create that shared value. So how do you manage these multiple expectations from diverse stakeholders in driving ESG-related initiatives? And what advice do you have for others?

Chinua: This is a very good point because at InfraCredit we do have a mix of investors. We have the AFC, which is sort of more Private sector-led, and also profit-driven, alongside being impactful, but also ensuring that they make a commercial return. And then we have the NSI, which also has a social impact responsibility but also wants capital protection. And then we have Infraco, Africa, which is an impact investor but all want to see sustainability. And so we do have the pension funds that invest in the guaranteed instruments that we bring to market that want to ultimately see the impact that their investments have in creating jobs, supporting local economic growth, and supporting gender inclusion. They would love to see that but are not willing to take some of the risks associated with making direct investments. So, managing stakeholders involves a delicate balance. I think a degree of sort of influence in managing the relationships between different categories of stakeholders.

I think, firstly, we have a core mandate and we also try to demonstrate that we are not shifting or diverting away from the mandate of being able to provide access to long-term local currency finance for infrastructure, to issue these guarantees profitably and ensure that our portfolio is not risky and have a high probability of default. So that risk acceptance criteria is something that clearly, we still need to maintain but of course, you know that as you shift towards trying to be impactful there is this question around how much more risk are you taking versus the reward you're looking for? Because when you measure reward in terms of impact-adjusted returns versus risk-adjusted returns - you have to balance this. And so, we've aimed to maintain to a large extent our risk appetite to continue to achieve commercially sustainable growth. 

But we are now engaging closely with donors and development partners that are actually motivated to take on certain types of risks because their reward is more on the impact side than on the financial return. And what we propose to them is to blend by working closely with them in identifying projects that otherwise meet our criteria and their criteria, and they are willing to share risk in financing these projects where they either come in to take a First loss on the capital structure or provide some kind of risk sharing that ensures that we do not compromise on our commercial and risk acceptance criteria. 

But at the same time, because they are willing to absolve a certain level of risk, we can price the deal and participate in supporting infrastructure. An example could be, we started looking at solar mini-grids providing energy in rural areas. We're looking at a company that provides rural telephony in rural areas and a company that provides cold storage and Agro cold storage infrastructure, solar powered in peri-urban and some rural areas and an aggregator that produces maize working with a smallholder farmer and is looking to scale up his storage infrastructure, which is like cocoon bags that are movable and modular. Now, when you take these companies and assess the type of business model that they operate versus, your traditional 10-megawatt, 20-megawatt power plant with a PPA, right? A Power Purchase Agreement, that is, to a counterparty that is satisfactory; and so either you have an NNPC signing a PPA with the power plant, which is one of the projects we finance, or a company providing power to commercial uptake in the urban area. So these are less risky types of projects. And the reality is that when you look at the impact comparably, you find that these other projects are impacting a significant amount of end users, that it is solving job and poverty reduction challenges, it's solving significant problems we have with, for example, the cold storage, the post-harvest losses.

However, a lot of these types of projects don't have sufficient data and performance history, and also they have a perceived risk of high default because of the quality of the end users.

Now we are working with development partners to risk-share because at the end of the day, when you look at the type of infrastructure that they're providing, it's about how you define infrastructure.

Because the infrastructure to these end users is the essentiality of service and the essentiality of service is, for example, a containerized solar-powered storage service is an infrastructure to the market women, to the smallholder farmers. It is critical. It's essential to them, but it may not be infrastructure in Lagos because we have access to energy and we have access to storage. And the same thing with the solar mini grid in rural areas. So the definition of infrastructure begins to evolve when you look at what is essential service for the underserved and unserved market as it were. Nut naturally because they are underserved and even the unserved market is what represents what you call non-consumption. Cause non-consumption is those who don't seem like they can access or afford a particular service. So data doesn't exist on the ability to pay. So this is why we're working closely with the development partners like Fresh Development Agency(FCDO) and similar other development partners. Who are motivated to support these sorts of projects, but to blend, and leverage their investments because on a singular basis, their investments may not have the catalytic impact, but working with structures, financial structures that can create a capital structure whereby they take a first loss and catalyse private capital. At the same time, we build a sustainable financing model into the project that ensures they can scale and you know these models are very replicable, but importantly they can scale. And ultimately the question for us and which is what we see from the data is that the infrastructure deficit at these levels ultimately runs into hundreds of billions of Naira.

So when we talk about the infrastructure deficit, I think we should also not limit it entirely to roads, power to the grid, your traditional type of rail and all of those traditions. But you also need to look at the infrastructure that will be pulled in by the local economy. And more importantly, you know, those on the set that contribute over 40% plus of the population or, I would say these are over 80 million Nigerians that don't have access to this infrastructure. And, when you now look at the number, they actually have quite a sizable amount of end users, but again, they contribute a high-risk profile offtake.

But then I think the capital structure we propose, which we're working with development partners, could help to mainstream this type of infrastructure and address the perceived risk of default. So again, this is moving from, trying to make sure that we maintain our risk acceptance criteria. So we manage that with our stakeholders, but at the same time, risk sharing with other partnerships that we can bring in that can enable us to achieve our mutual goals, shared value, and shared success, ultimately. So this is the sort of engineering that we need to manage as an institution.

And I'm sure many others, probably would have similar types of questions especially if you're set up on a commercial basis.

Host: Absolutely. I mean, that's the beauty of sustainability. Once you put that lens of how you include everyone leaving no one behind and looking at the different stakeholders and of course collaboration and risk pooling, it is also important because everyone is being purposeful. Yes. So you often see that collaboration to really ensure, you serve the underserved. 

So now I would like to move to discuss specifically climate. I mean, where COP is rounding up today and definitely I'm sure, you too are looking forward to seeing the outcomes that will come out of that. And when you look at Africa in particular, we are in a very special category and zone of that, just transition. So yeah, I mean, many people feel that since we are not big emitters we should actually be on the other side of receiving help to adapt to climate change.

That certainly might cause a long-term setback on ESG. Then there is of course a lot of scepticism that it's leading to a lack of corporate board support for ESG. According to the financial times, there is increasing buyout of publicly traded companies to avoid ESG scrutiny.

How big of an impact and influence do you think these trends will have on sustainability? Do you think they have impacted sustainable investment impact, investing and infrastructure projects in particular? Well, what do you think the future would be as a result of this interplay?

Chinua: Thank you. Yeah, I think it's very evident that the world's climate future will increasingly depend on decisions made in developing economies. We all know Africa is vulnerable to climate change. 30 of the world's 40 most vulnerable climate countries are in Africa and yet we received, like you rightly noted, less than 3% of global climate finance. So certainly a just and fair transition would mean that we need to, and I know that this has been discussed extensively in COP 26, it is really ensuring that these commitments get to the ground. They are drawn and funded and they begin to have an impact in Africa.

Now, how will this happen? Because we've had commitments given since over the past decades and we haven't really seen a lot of these commitments being utilised fully. And a lot of these I think have also had to do with the mechanism. I believe that the participation of domestic private intermediaries with boots on the ground will be very critical to expanding this financing to get the ground, to finance projects in Africa.

And I believe a lot of the scepticism of the constraints companies are facing is the cost, the perceived cost and the real cost that it will take to transition. Given the poverty rate, even if we took Nigeria as an example, you know, we are the largest number of people without energy access in the world, 85 million Nigerians and we are also taking two considerations into the poverty rates in the country. So when we begin to look at what the priority for the average Nigerian is under such circumstances, then it gives you a good sense as to transitioning to net zero emissions and what transitional sources of energy, should be fair for countries that also have gas, which the federal government has highlighted that gas will play a major role in transitioning energy in the country.

So we think that this goes fundamentally to how blended finance will work and the strategies and approach to how linking these sources of funding to private capital and the role private capital will play in leveraging and catalysing these sources of finance that have been committed to Africa. And they should take currency risks, ultimately, because again, you know, committing money in dollars where revenues are in Naira, it's not a realistic means of funding a sustainable transition. So dollar-denominated financing, blending that financing with private capital, leveraging the local currency debt capital markets, and the local capital market to scale- I think it's going to be very critical.

And intermediaries like InfraCredit are aware. We believe we're very well placed to act as partners on the ground that can originate, aggregate structure and blend capital to bring the pension funds in as investors partaking in the senior trans. So they're not taking high risks. And then bring in the donor or the best-lost capital coming from these commitments to come in and mobilise impact hubs at the largest scale. We believe it is very possible, especially for what we see in terms of the opportunities on the ground. We just need to see capital come efficiently and predictably. I think that's really the challenge we're having. And we do hope that through instruments, like the Green Climate fund, institutions like ourselves can demonstrate how facilities like this can be mobilised to finance the type of projects that I talked about. So these are projects that have the potential to impact up to a million Nigerians if scaled up efficiently. So we think that the elements exist, it is really how we're able to organise and implement.

Host: Absolutely. I couldn't agree more. I mean if we put up that opportunistic lens we can actually structure a lot of projects that we can tap into the timely funds that would be made available.

I mean South Africa was very smart with that and we saw how the developed countries galvanise support because they had a clear project with tangible outcomes and impact. But I mean, now it is what it is. Nigeria has made that pledge to be a net-zero country by 2060.

But the twist out of all this is that gas has emerged not so clean, the U.S. government even pledging to cut down on their theme which warms up the planet. Is it about 18 times more? So it'll be interesting to see how Nigeria charts out the pathway to achieving that Net Zero transmission. 

So to now come down on how you feel all our climates pledges from the Ratified Paris agreement to this new Net Zero pledge by 2060, to what extent do you think all these will influence investment management and in particular infrastructure investment, given that the key sectors affected are all infrastructure related power from power to transport to industries as well? So, over to you Chinua, how do you think it's going to impact investment management in Nigeria?

Chinua: Thank you. So we also have to look at the impact of COVID in all of this and, sort of the adverse economic impact that COVID had had. Because that also sets the context for the appetite and the quantum of private capital that will play a critical role.

If you remember, I think the government recently set an ambition to reduce poverty by 100 million people by 2030. Whilst an ambitious target it is, I think what is important in all of these now is that they are depending heavily on the role of the private sector in bridging these deficits. And for us, I think what is clear is that the cost of achieving SDGs and the Paris Agreement given COVID will be greater. And as we engage that partner, we are faced with certain questions, which helped us to shape our clean energy transitions road map: What are the options for generating the pathway that is aligned with the Paris Agreement without compromising growth and development? How long will InfoCredit need to transition to an investment strategy and portfolio that is aligned with the Paris Agreement? And what role can we and aspiring partners play to accelerate a green transition in Nigeria's infrastructure investments?-because slow economic growth would not help to deliver a quicker energy transition.

When we look at past energy transitions you would always suggest that high economic growth and high energy demand are more conducive to transition than a lower one. So affordability and accessibility will be key to ensuring that clean energy transitions are people-centred and inclusive. So we think that private capital will have a very critical role to play. There needs to be an incentive to help crowd in this capital to work alongside the government's aims to achieve this transition.

I think if there are sufficient incentives, the private market can actually accelerate this transition much faster and which takes me to the earlier point around we need to mobilise more blended finance. Blended finance will have an unprecedented role to play more than ever before in achieving carbon neutrality and Net Zero emissions targets as I've said.

So for us, we set a target of 2050 and we've set out a plan of how we intend to strategically begin to identify aligned- We already have a conditionally aligned project that we have a transitional plan set out in terms of how we begin to accelerate green and climate-smart infrastructure in our portfolio and how we can achieve Net Zero. So it's part of our strategy, which is why we were paying more deliberate attention to this. So I wouldn't know for most other institutions how much priority they would pay to this, but there should be an incentive. We believe that the incentives that can enable the private sector and these incentives can come with a tax rebate.

For example, if you are investing more in clean energy or you are a renewable energy company, what type of physical incentives can you get to drive that? So we know the challenges even with the tariff for importing solar panels into the country. It's a challenge. I think the government needs to pay particular attention to the physical incentives that they can put in place that can accelerate private capital to support the government's energy transition strategy.

Host: Absolutely. I mean, when legislation and the enabling environment match a lot, because like you rightly said we need the power, we need to unlock private sector financing for this. So now to move to impact investing. I mean, the emergence of impact investing has created that appetite as well for nonfinancial returns, beyond financial returns.

But of course, you know, it has come with its challenges from the supply side, from the demand side to the intermediation. As you said, the policy as well, the kind of incentive for investors to actually look beyond the financials. So would you say there has been increased awareness on impacting?

From your own experience, what are the drawbacks and what can be done to further deepen and strengthen and impact investing in Nigeria, which would help a lot to ensure we have that smooth transition?

Chinua: Thank you. Impact investing, I think it's probably very well understood theoretically. And I think the concept is very well understood by most, I guess, for most that I interact with. It's the, 'how' I think in terms of scaling, that's where it is a challenge. So, you know, you have different private foundations and trusts that provide donations. And so these are already happening. For these institutions, they are playing their own role in providing impact investments. The question really is how scalable can this be and how sustainable, or how much broader impact can this have, in being able to address a broader macro constraint in the larger population. And, visuals will have a very important role to play in this. But the important thing is when we look at data and statistics, we will probably begin to find that private giving is more than public giving. 

If you look at some data, I think, personal giving even though it's very fragmented- I think in the U.S. was estimated at some point that it was quite about $270 billion per annum, but not aligned with SDGs.

And so we have in Nigeria, you would see, I don't know what the figure is because we don't have that figure, but there's a lot of personal giving that is highly fragmented, not aligned, with SDGs. 

And there is the question around, what kind of structure or financing model or what approach would you take to begin to give monies and then blend them in a way that can be more sustainable. Because you find that a lot of times, the old ways that the donors, especially the, if you look at the overseas official development assistance, and grants that have come in need to transition from just purely funding programs and projects to finance. And it's not just at that level, I think for most of these sorts of project type donations or grants have not proven to be a sustainable means for having an impact. And so we need to look at financial mechanisms that can leverage these funds and aggregate them in a way that they can be linked to more sustainable outcomes in terms of creating jobs, and supporting innovation that can improve accessibility and affordability for the underserved, but ultimately creating for those that are accessing this infrastructure or these essential services that they can improve on their livelihood be self-sustainable.

And I think it's now how you link what you call innovation that creates new markets and that creating new markets means it's creating jobs. It's creating access for those who didn't have access to and enabling them to move up the ladder and sustainably improve their livelihoods And this is an open question because of how impact or money, or private giving is isolated from linking it to sustainable outcomes and the mechanism through which this could be reorganised is one of the potential paths to being able to transition or change the way the market currently is.

But this, maybe, we'll need to start in my opinion, as a few impact investors coming together to say, okay, we will pull our capital, we will leverage it by walking alongside commercial funding. We will target innovation and target certain types of activities that we want to fund. We will provide demonstration effects. We would sort of publish and demonstrate to the market that these ways of funding are more sustainable means of leveraging our donations and investments so that others can follow. And ultimately we can begin to see more locations of impact investment that are linked with SDGs but also linked to commercial outcomes that create sustainability.

So that is not what is happening. So we keep having the same conversation most of the time because the capital is isolated. it behaves in a fragmented way and it's not very coordinated and aligned. And I think this is not just a Nigerian problem, but it's a global challenge as well.

Host: It's a very important and very strong point you're making there. I mean, we're in the last decade of achieving the SDGs and I totally agree with you. The funding can be mobilised to achieve high impact as opposed to everyone just doing his own thing. So I would like to allow you to give a closing remark or closing statement, and any advice you have, so this is your blanket closing. So any parting words, do you have any advice to give as a closing, what will it be?

Chinua: Thank you. So I think we have had very productive discussions around sustainability, SDGs, looking at transitioning and energy transition and climate change and how best to, what are the mechanisms and what approaches should be taken to achieve substantial impact.

I think we need to see an increased role that the private sector has to play in all of this. We need to recognize that being able to connect all of these seemingly fragmented activities into one whole lot strategy or philosophy towards a bigger outcome would require a lot of thinking around how best, to use innovation in not just the financial instruments, but innovation in creating essentials of providing products or services that allow for the underserved and unserved to access, otherwise what they are struggling to have access to. And how can that type of innovation be identified and structured properly and financed to scale? This to me, is one of the open questions. And even within the context of infrastructure, we have to look at it within the context of the economy in itself. So for less developed economies and countries that have high poverty rates, the definition of infrastructure can be slightly different from the definition of infrastructure in more developed economies. So while there are big infrastructure projects that presumably are assumed to have a significant impact. In countries that have high poverty rates, it can be a different type of infrastructure that can solve the poverty problem. 

So I think with that type of lens, we begin to open up our minds as to how we allocate, blend capital, identify infrastructure that is innovative and creates value and value in the sense that infrastructure either stores or distributes value, whether it's a road, whether it's a water utility, there's an underlying value, but that value is willingness and ability to pay ultimately. And that is really where the poverty problem creates a challenge. And this is where we need to be able to draw on risk capital, impact capital that will help to bridge that gap and allow for more sustainable financing, more like a viability gap finance, but we need to see more of that type of capital work with local institutions and that are also structured in a manner that they are considered transparent enough because one of the challenges we've had is that the lack of transparency in reporting impact is also a constraint. So that means that this needs to be incorporated into local entities that are willing to act as intermediaries.

I think there's a lot of hope, especially when we see the discussions that are being had and the commitments being given, we're hoping that over the next few months and years with COP26, we should see more active intermediation taking place, more active origination and structuring of projects.

So the outlook remains optimistic but is going to be heavily dependent on strategic partnership, innovation and creativity in capital allocation.

Host: Absolutely. Thank you so much Chinua for joining us today, it's clear you are an expert on this, you definitely are an enthusiast.

And it was a pleasure having you speak on this very important issue. So we look forward to having you back to discuss further and learn more from the invaluable insights you provide. Thank you so much and have a great weekend.

Chinua: Thank you. Thank you very much for having me, it's a pleasure.