A new Luxembourg-based securitisation vehicle hopes to turbo charge financing into impact projects by providing them with easy access to the capital markets and taking them one step closer to achieving the crucial United Nations sustainable development goals, impact finance advisory firm Innpact told Delano.

The vehicle, branded Imagine Impact Bonds, will enable impact project developers, investment advisors, and fund managers to attract new private investors by issuing impact bonds on stock exchanges such as the Luxembourg Green Exchange or by direct placement, said Sigridur Torfadottir, associate director at Innpact and head of development of Imagine Impact Bonds.

“The idea is that we’re creating a platform so that any impact project, any size, any institute can access to the capital market. We can say gender bonds, education bonds, forestry bonds,” she said.

The vehicle’s so-called ‘sweet spot’ will be €5m-50m projects whose size makes it difficult to find funding. Above €50m and it’s possible to find a bank to structure the bond, pointed out Torfadottir.

“Within five years we aim to help mobilise the equivalent of €5bn of private investor funding to contribute to the sustainable development goals. In addition to contributing to the mainstreaming of impact finance, we aim to improve environmental and social governance, and impact management practices in the market and support impact themes facing fundraising challenges.”

Securitisation as a tool for impact project finance

Fundraising has been a critical problem in impact financing for years due to the untested nature of many impact projects. While those with a track record, such as solar farms, now found it relatively easy to attract financing, something like sustainable forestry with its long lead times finds it harder.

Numerous market solutions, including blended finance (where a public investor such as a development bank takes first loss on the investment) can help encourage private sector investment.

But securitisation can take this one step further.

“Securitisation is a powerful tool to finance impact projects in a fast and cost-efficient manner while meeting the structuring, transferability, and transparency standards required by institutional impact investors,” said Imagine in its embargoed press release.

In fact, Imagine is in good company with another Luxembourg-conceived sustainable-focused securitisation platform, , also aiming to broaden investor access to sustainable projects. 

Imagine’s platform is set up as a securitisation vehicle under Luxembourg law with segregated compartments for each impact project bond issuance.

The advantage of segregated compartments is that they can be tailored for each particular project. “In addition to issuing a bond based on a single loan or a collection of loans, Imagine is the perfect solution for managed accounts and other small-scale portfolio management, co-investments, blended finance transactions, and warehousing structures,” Imagine says in its investment literature.

, co-founder of Innpact, clarified: “Securitisation is in fact an efficient alternative to fund structures to deploy small scale impact investment strategies. It can also help first time investment managers build their track record through securitisation and then launch their fund one or two years later.”

The new securitisation law passed in Luxembourg earlier this year has created even more possibilities, said Gillin.

“The law broadens the opportunities we have to use the vehicle,” he said. “Changes in the law allows for more flexibility in the management of the underlying asset.”

The amendments to the 2004 securitisation law, passed by parliament on 9 February, allow the active management of securitisation vehicles in Luxembourg for risks linked to debt instruments.

Impact investment standards

The securitisation vehicle is an opportunity hold impact projects up to high standards of impact principles. Securities are issued under a ‘use of proceeds impact framework’ aligned with the  Green Bond Principles, the Social Bond Principles and the Sustainability Bond Guidelines as set out by the International Capital Market Association.

This framework is crucial, said both Torfadottir and Gillin. “We are coming up with a framework to measure impact because we want to develop the market as much as find investors,” said Torfadottir.

In the longer term, there could be potential for creating a secondary, liquid market into which any type of investor can invest. “The long-term view is that anyone can invest, it could even be tokenised,” said Gillin.

Imagine Impact Bonds is set up with Innpact and securitisation platform administrator Opportunity Financial Services.

This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg. .