The Russo-Ukrainian conflict has put to light the flaws in the global supply chain. An event in eastern Europe is not only disrupting the financial services system, but has been polarizing the world, with the west on one side, Russia’s allies on the other, countries weary of aligned movements on one side and national interests of emerging giants sitting on the fence – by Vichal Pattoo, Chief Business Development Officer, Ashton Financial Partners.
Featured in Investor’s Mag, 21th Edition, June 22 – Aug 22
There are lockdowns still happening in certain areas of the world. Shanghai, being one of the busiest ports, was not in operation for over a month. The economy of Sri Lanka crashed and it is likely that Bangladesh and Pakistan could follow. Israel and Iran possibly will go into war. Zimbabwe has asked all the commercial banks to freeze all outgoing loans.
Lots of negative things happening around the world one would, certainly, rightly assess. But, is there only one side on a coin?
While everyone would focus on these during times of uncertainty, for the expert investor, there are opportunities.
How do we maintain the value of our assets? It is certainly not by keeping our cash in the banks that value will be eroded by inflation. The bank will pay an interest rate and you feel secure that the money is in safe custody. But have you ever asked yourself how much the bank earns using your funds and investing them into something as simple as asset backed secured loans?
With the local currency in Mauritius losing value, it is imperative that we place our funds in an instrument that will not only give us a better return than banks, but more importantly which shall reduce the impact of a lost in value of our currency for there is a second opportunity to have an appreciation of the value of the investment for when the currency will appreciate.
In comes the ESG
An abbreviation for ‘Environmental, Social and Governance’ and a widely-used term to refer to sustainability in the financial and investment sector, ESG principles are the three parameters in measuring the sustainable and ethical impacts of investments on society. At the core, ESG sets a guiding framework for responsible investment and today, ESG is increasingly being used as a baseline for measuring the success of companies and investors.
The global trend is accelerating due to the current world crises, and is moving towards ESG mainly in the energy and agricultural sector.
According to Bloomberg assets in the ESG sector are poised to reach 41 trillion dollars by the end of 2022. Vanguard Asset Management when assessing the risk to return ratio comparatively for broad markets and ESG markets found that ESG funds have neither systematically higher nor lower raw returns or risks than the broader market.
The opportunity
According to surveys, institutional investors and professional asset managers are largely interested in using ESG to compete on risk adjusted returns and risk management. Morgan Stanley performed a study of 120 institutional investors and found that 70% have integrated sustainable investment criteria into their portfolios.
An extra 14% are actively considering it in their decision-making. According to a BNP poll conducted in 2019, over 50% of institutional investors and asset managers want to consolidate their businesses and include ESG due to higher long-term gains and a solid reputation. Less than 30% do it for altruistic reasons. ESG is also being included in other portfolio products, ETFs, for example. According to a Bank of America survey, ESG smart beta strategies have grown in popularity.
The Potential of ESG sector in Mauritius
Mauritius faces the inherent vulnerabilities associated with a Small Island Developing State (SIDS). The country suffers from geographical isolation, scarce natural resources, sensitive ecosystems, limited human and institutional capacity, and is highly susceptible to natural disasters. As a result of its economic success, the standard of living on Mauritius has increased with significant changes in consumption patterns. These new demands placed on an insufficient natural resource base are
resulting in increased environmental problems. A green economy transition for Mauritius implies
more investment shifted into sectors such as renewable energy, low-carbon transport and improved agricultural practices.
The recent hikes in price of petrol, brought in an inflationary shock within the Mauritian economy, coupled with that the increasing price of coal, and the ending of Independent Power Producers (IPP) contracts is making Mauritius rethink its strategy.
Green Energy
The target is to reach a 60 percent renewable energy production till 2030 from its current standing which is around 25%. Meaning the potential for growth is immense. There is more and more ESG bonds issued and represent an enormous potential for ESG funds.
Both the Financial Services Commission and the Bank of Mauritius have issued guidelines for sustainable and green corporate bonds, to facilitate capital raising and encourage secure investments in ESG bonds that will be used mostly to finance energy needs.
https://www.bom.mu/sites/default/files/guide_sustainable_bonds.pdf
The target is to raise over 20 billion Mauritian rupees in sustainable investment within the next 10 years.
Already a private company, CIM finance, plans to issue green bonds to finance five categories of projects.
These categories are, namely:
- renewable energy (including the purchase, installation and maintenance of technologies such as solar panels);
- energy efficiency (projects that reduce energy consumption or mitigate greenhouse gas emissions in building construction);
- clean forms of transport (the purchase of electric and hybrid cars whose level of CO2 emissions is less than 79g and public transport projects);
- sustainable water and wastewater management (projects that improve water quality, efficiency and conservation);
- and green building (construction or renovation of certified sustainable buildings).
For investors, therefore, it is important to note that the framework exists and the potential for return is interesting. Contrarily to government bonds which are mostly sold to banks and the secondary market cell through bidding, green bonds will be available to retail investors as well. Thus making it an alternative investment to the current market.
Green and Sustainable agriculture
The Russo-Ukrainian war has also caused rising prices of wheat and edible oil, and disrupted a lot of the supply chains. Mauritius since the last budget has decided to encourage local production, and there has been experimental production of rice and corn and other cereals. With new agricultural practices, the country has decided to offer land for a nominal lease for modern agro businesses.
Mauritius uses about 40 percent of its land for agriculture, consisting mostly of sugar cane, which makes up 90 percent of the country’s entire crop yield according to NewAgriculturalist. Home to more than 1.3 million people, Mauritius produces roughly 100 percent of its demand for fresh vegetables and just under 50 percent of its demand for fruits.
While these statistics may look appealing, the country still imports more than 70 percent of its food requirements. Producing only 5 percent of the meat requirements and 2 percent of the dairy requirements, Mauritius relies heavily on international trade and is vulnerable to any.
Agricultural value added in Mauritian economy
It is expected that there are opportunities to the tune of 50 billion Mauritian rupees in agro processing in Mauritius and has got a potential for growth up to 50 % of food imports. Relying on imports only for land intensive cereals crops and meat excluding chicken and pork.
Conclusion
Be it as retail investors, institutional investors or private equity or debt instruments investment in ESG, Mauritius represents a huge potential of an excess of 70 billion Mauritian Rupees worth of projects and a return comparable to market returns with similar risk factors. Therefore better returns than banks and better food security which are considered the new gold standard.
At Ashton Financial Partners Ltd, we can help you structure your investments or seek the required permits and licences enabling you to take advantage of these opportunities. You can reach our team of experts at contact@ashton-corporate.com for a free consultation.