Transitioning towards Regenerative Finance from Impact Investing

First was ESG investing and then impact investing. It started as socially responsible investing, with investors filtering out stocks or entire industries from their portfolios based on business activities such as tobacco production or the production of fossil fuels. It then transformed into a general investment strategy that as a priority, looked to create positive, measurable, social or environmental impact whilst generating a financial return. 

But a new way of thinking has emerged. A new paradigm signalling a transformative shift toward sustainability and regenerative practices. This movement, known as Regenerative Finance (ReFi), is gaining momentum and reshaping the way businesses, investors, and individuals approach finance. 

In this article, we explore what ReFi is, how it differs from impact investing and why it is tipped to become the new Green way of investing. 

Understanding ReFi

ReFi can be seen as a holistic approach to finance that goes beyond profit maximisation and incorporates social, environmental, and ethical considerations. Its core principle lies in fostering sustainable and regenerative practices that generate positive impacts on communities and the planet. Unlike conventional finance, which often prioritises short-term gains at the expense of long-term sustainability, ReFi seeks to create enduring value by aligning financial decisions with the well-being of all stakeholders involved.

ReFi combines two distinct disciplines: Web 3.0 decentralised finance (DeFi) and regenerative economics. DeFi seeks to eliminate opaque, centralised infrastructure and democratise access to financial services. Regenerative economics emphasises balanced, circulatory capital flows. It incorporates good externalities while caring for people and the commons.

ReFi vs Impact investing

In the realm of sustainable finance, two distinct approaches have emerged: ReFi Web3.0 Investing and traditional Impact Investing Web 2.0. While both share a common goal of generating positive social and environmental outcomes, they differ in their underlying philosophies, methodologies, and the technologies they leverage. 

Impact Investing focuses on making investments that generate measurable positive social or environmental impact alongside financial returns. It align investments with specific impact themes, such as renewable energy, affordable housing, or gender equality. Typically investor funds are invested in companies, funds, or projects that have been screened and evaluated based on their ESG performance. Impact Investing does not rely heavily on specific technologies. It  pools together investor funds into unitised private impact investment fund under a managed investment scheme and then invests into sustainable assets. 

Impact investments are typically highly illiquid – there is no secondary market for private funds, and there may be restrictions on redemptions, limiting investments to long term investors. These investments typically have higher fees and expenses than other investment vehicles, and such fees and expenses will lower returns achieved by investors. They are also restricted to sophisticated, wholesale and high net-worth investors. 

ReFi utilises blockchain, cryptocurrencies, and decentralised finance (DeFi) to create a more inclusive, transparent, and regenerative financial system. It emphasises the potential of technology to transform traditional financial structures and promote sustainable and equitable outcomes.

ReFi harness the power of smart contracts, decentralised applications (dApps), and tokenisation to enable transparency, efficiency, peer-to-peer interactions and most importantly to enhance market liquidity and address the issue of stranded assets. Stranded assets refer to investments that may become difficult to sell or unprofitable. Tokenisation offers a solution by dividing these assets into tradable digital tokens, enabling fractional ownership and increasing market accessibility. 

Here's how tokenisation in ReFi helps solve the problem of stranded assets:

• Enhanced Liquidity: Tokenisation allows previously illiquid or difficult-to-trade assets, such as a solar power plant or wind turbine to become more liquid. By representing ownership as digital tokens on a blockchain, investors can easily buy and sell fractional shares, increasing the overall liquidity of the asset. This increased liquidity provides opportunities for investors to exit their investments and reduces the risk of being trapped in unprofitable or illiquid assets.

• Fractional Ownership: Tokenisation enables fractional ownership, meaning that large assets can be divided into smaller units represented by tokens. This fractional ownership model makes it possible for a larger number of investors to participate in the ownership and investment of an asset. 

• Global Market Access: Digital tokens can be easily traded across borders without the need for intermediaries, lengthy settlement processes, or costly regulatory compliance. 

• Increased Transparency and Trust: Blockchain-based tokenization provides a transparent and immutable record of ownership and transactions. This transparency and trust help mitigate concerns around stranded assets, making them more attractive and viable investment options.

• Secondary Markets: Tokenisation also paves the way for the development of secondary markets for previously illiquid assets. 

These benefits not only mitigate the risks associated with stranded assets but also unlock new investment opportunities and promote a more efficient and sustainable financial ecosystem.

Why ReFi Is Gaining Momentum

The escalating climate crisis and growing concerns about biodiversity loss have placed sustainability at the top of the global agenda. ReFi offers a financial framework that actively addresses these challenges, attracting individuals and organizations seeking to invest in a greener and more sustainable future. Millennials and Gen Z, in particular, are driving demand for sustainable and impact-driven finance. As these generations accumulate wealth, their investment choices are shaping the financial landscape, with ReFi providing a compelling option.

ReFi is not just a passing trend; it represents a fundamental shift in the way finance operates. As the movement gains momentum, we can expect mainstream adoption together with new and innovative financial products. Examples include green bonds, impact funds, and sustainable mortgages. These offerings will provide investors with diverse options to align their financial objectives with their values.