Innovative Financing Mechanisms for Sustainable Change: The Case for Danish Investments in India

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Denmark’s foreign investment portfolio started to take a new shape after the formation of various investment funds supporting companies from other countries focusing on social and economic reasons. Although Denmark’s foreign investment has declined over the past decade, the Investment Fund for Developing Countries (IFU) is gaining momentum through its investments in underdeveloped countries.

Investment Fund for Developing Countries (IFU)
The IFU is an independent financial institute, reporting to the Government of Denmark and focusing primarily on investing in companies in underdeveloped countries, including Africa, Latin America and South Asia. The central idea is to stimulate companies working in the social and environmental sector in these countries to create an impact and support the 17 UNSDGs. He recently partnered with private investors and formed the Danish investment fund SDG in 2018 with a total capital of DKK 4.86 billion.

Danish SDG Investment Fund
The Danish SDG Investment Fund is a newly created fund under the PPP model, which includes the IFU and six other private pension funds, as shown in Figure 1. They mainly invest and advise companies in the field of renewable energies, infrastructure, agro-industry, etc. The investment is made either by acquiring equity capital or by granting long and short term loans to these companies. Various Danish companies also assist and supervise these companies with their expertise and knowledge in these fields. The fund is managed by IFU itself, which has a solid experience in these markets for around 40 years. All pension funds and the IFU, as well as the Danish state, contributed a total of DKK 4.1 billion to the Danish SDG investment fund, as shown in Figure 2.

Objectives of the Danish investment fund SDG
The Danish SDG Fund has so far invested in various developing countries. Such a model is a win-win for everyone. Investors get a 10-12% return and companies have access to Danish technology and mentorship. Together, this partnership is driving faster progress in sectors like renewable energy, advancing our approach to sustainability.

Some of the recent investments of the Danish SDG Fund include:I. Africa: The Fund has invested nearly DKK 47 million in an educational platform business in Africa to encourage more students to pursue higher education in Africa (currently only 10% of the total population).

  • II. India: Leap India, a food storage company, has raised $ 23 million from the Fund. The company hopes to create vital infrastructure to store food in steel silos and serve the poorest segments of the country, such as Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh, etc.
  • III.Mexico: Und has invested nearly $ 20 million in Vinte, a Mexican green housing company that primarily focuses on innovations in the real estate segment by providing more eco-friendly homes for Mexican families.

Other large funds under IFU
Financing of Danida’s sustainable infrastructure:
The DSIF focuses on providing subsidized loans to developing countries that invest in sustainable infrastructure projects in the areas of transport, energy, water supply and sanitation. Private banks in Denmark provide the financing, but the Fund provides the funds for the payment of interest on the loans for a period of up to 10 years. Private banks treat this device via the DSIF as a sovereign guarantee. Hence, the loans are considered to be virtually risk free. Thus, soft loan funds are backed by risk-free securities from Denmark, instead of riskier infrastructure projects from other countries.

2. Danish Climate Investment Fund:

Launched in 2012, jointly with IFU, the Danish Climate Investment Fund (DCIF) promotes climate-related technologies by helping finance. It invests primarily in companies focused on mitigating climate deterioration and capturing greenhouse gases. The DCIF was set up for 4 years with a target of 12% CAGR for its investors. The profits from the investments will be distributed according to a predefined model specified by the IFU.

Danish investments in India (under the IFU)
Numerous IFU-led investment funds have invested in India over the past two decades to help companies create social and economic impact consistent with the UNSDG. These investments are estimated to have created 36,817 jobs with a total foreign investment of DDK 1,110.5 million. Such a large investment in business, creating social impact in India, has led to a widespread increase in various other factors such as total employment, standard of living and technological infrastructure with a good return on capital. The sectoral distribution is illustrated in Figures 3 and 4.

Danish investment funds have enabled various developing countries to contribute to the UN Sustainable Development Goals by producing cutting-edge technologies in the fields of renewable energy, air conditioning, sanitation, transport and utilities. infrastructure. However, there are still challenges in such a model. Investors in private pension funds in Denmark are looking for risk-free investments with greater stability, but those infrastructure investments discussed above are risky for such a portfolio. These projects are not always predictable and can cause investors to withdraw their money from their pension funds at any time. Thus, these pension funds should benefit from a higher contribution from government-backed securities and the IFU to make them less risky.

– Rama Seth, IIM Calcutta and the faculty of Copenhagen Business School

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[This article has been published with permission from IIM Calcutta. Views expressed are personal.]

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