Since the term was officially coined in 2007, impact investing has been rapidly gaining both credibility and popularity with investors. According to the Global Impact Investing Network (GIIN), the market which had doubled in 2018, continued its solid growth in 2019, reaching USD 715 billion globally by the end of the year. Impact investing can take place across a range of asset classes in both developed and emerging markets.
But the more the industry develops, the more emerging markets appear to offer impact investors an even broader range of opportunities than their developed counterparts.
The meteoric growth of this strategy, which aims to generate a positive, measurable social and/or environmental impact as well as financial returns, was boosted by the launch of the United Nations Sustainable Development Goals (SDGs) in 2015. This collection of 17 global objectives represents an agenda for reducing poverty, protecting the planet and ensuring that all people enjoy peace and prosperity by 2030. The SDGs can be split into two categories: those that address the planet’s environmental challenges (such as climate change), and those that deal with ways of improving people’s lives (such as education and healthcare).
Unsurprisingly, emerging countries tend to be further away from attaining most of the SDGs – especially the social ones than developed countries. For example, a significant proportion of their populations do not have access either to water or to preschool or higher education. Their institutions also tend to be less resilient and their regulatory frameworks less comprehensive. This means that there is much greater potential for investors to capture improvements in SDG performance in emerging markets. For example, simply connecting a community to water and electricity networks will quickly make the lives of a large number of people dramatically better.
As regards the environmental goals, emerging countries tend to do better than their developed counterparts in terms of emissions per capita. But their populations and economies are also growing much faster, which poses challenges that will have to be tackled through more efficient energy use and renewable energy production.
Companies that help to solve emerging markets’ problems could well experience faster growth, a stronger regulatory tailwind and potentially superior profitability. For instance, a higher-education provider in a country with low education levels is likely to see strong demand far into the future. Similarly, demand for clean energy is extremely strong, and renewable energy producers are likely to find regulatory incentives to make the required investments.
Of course, impact investing in emerging countries throws up a number of challenges. One of the first that comes to mind concerns disclosure and reporting. The impact investing methodology is in its infancy globally and is particularly patchy in emerging countries, where companies tend to lag behind their European or American counterparts in terms of sustainability reporting, making it harder to assess the impact of an investment. Also, because there is lower awareness of environmental issues in emerging markets, demand for sustainable solutions, companies and investments has also been lagging so far.
Looking ahead and despite these hurdles, emerging markets appear to be a fertile hunting ground that holds plenty of potential for impact investors. The topic of sustainability is much lower on the agenda in these countries, meaning that groundwork is still needed to raise awareness and establish standards. However, many emerging-market companies are open to investor engagement and very willing to take their suggestions on board and draw on their experience. Private equity and venture capital investors have been on the lookout in these countries for quite a while: about 50% of their impact funds are invested in emerging markets, which bodes well for listed equities.
They are already some strong players well worth a look in most emerging markets, with countries like Brazil, China, South Africa, India or Thailand being the largest sources of opportunities. Take Indian healthcare company Cipla for instance. It has played a historic role in developing antiretroviral therapies in emerging markets, particularly in Africa, and remains committed to providing affordable treatments for major diseases in low-income countries while also gaining market share and maintaining profitability in higher-income countries.
According to the GIIN, attaining the SDGs by 2030 will require an estimated USD 2.5 trillion of investment per year in emerging markets alone.
Finding and supporting the companies that will benefit from this expenditure – a key tenet of impact investment in emerging markets – may seem a tall order, but the rewards will be great. Companies that can help to solve emerging markets’ most pressing issues are those best placed to benefit from regulatory reforms, as well as achieving faster growth and superior profitability over the long term.
Head of Global Emerging Equities