The biggest cheque-writers in impact investing have largely neglected emerging markets and the global south – until now. Altérra, the $30 billion climate allocation announced by the United Arab Emirates on Friday, heralds a new era of impact investing that has the potential to lead private and institutional capital to emerging markets by the billions.

TPG and Brookfield, whose impact verticals have largely – but not exclusively – focused on developed markets, have launched emerging markets strategies with anchor commitments from Altérra of $500 million and $1 billion respectively.

These are the two largest LP commitments by a single institution to an emerging markets private impact fund, New Private Markets’ database shows. Both commitments come from Altérra Transformation, the Emirati vehicle’s $5 billion sleeve for catalytic and concessionary investments in the global south. Altérra’s commitments should mobilise returns-seeking capital.

TPG: attracting institutions to the global south

TPG aims to deploy $2.5 billion from its Global South Initiative platform, which has an intended return profile commensurate with TPG Rise Climate I and II, a source familiar with the strategy told NPM. Indeed, $1 billion of the capital invested from TPG’s Global South Initiative will come from TPG Rise Climate II, a fund due to launch in the coming months.

The Global South Initiative is structured the way many emerging markets-focused funds are: there is a catalytic tranche of LP capital that accepts lower returns or absorb losses to reduce the risk for other institutional investors. Altérra’s investment sits within this catalytic tranche. In the senior, non-concessionary tranche will be institutional investors and capital from TPG Rise Climate II. TPG will market the initiative to its existing LP network, the firm said in an emailed statement on Friday; this includes a host of North American and European public and private pension plans.

Full circle

TPG’s 2016 launch of its Rise impact vertical marked the previous major shift in impact investing. For the first time, mainstream private equity fund managers such as TPG and Bain Capital were pursuing positive social and environmental outcomes while retaining the risk-adjusted return targets of their non-impact strategies. And they were marketing these impact funds to their usual roster of LPs: large, non-concessionary, institutional investors with bite-sizes in the tens or hundreds of millions. The size and risk appetites of these mainstream impact funds meant they were largely confined to investing in developed markets.

The impact investing industry, meanwhile, has its roots in emerging markets, with fund managers such as Leapfrog Investments, ResponsAbility and BlueOrchard investing in healthcare, education, financial inclusion and other social themes from the early 2000s. Much of this capital came from development finance institutions, mission-driven government-backed investors, foundations, endowments and family offices – investors with capacity to take on emerging markets risk. Some of these impact pioneers have scaled and expanded with the rest of the industry. Leapfrog, for example, formed a strategic partnership with Singaporean state-backed investor Temasek, to expand its platform. Actis, an emerging-markets focused spinout of the UK’s DFI, has grown into one of the largest impact firms in the world.

Funding gap

The need for institutional capital for climate themes in emerging markets is becoming critical. By 2050, Southeast Asia, South Asia and Africa are projected to account for 73 percent of global carbon emissions if these markets do not undergo a green transition. This is according to joint research by Leapfrog, Temasek and impact think tank CGAP, which used McKinsey’s Global Energy Perspective Decarbonisation Scenario Explorer (see page 11 of this report). These markets need $330 billion in climate investment per year between 2021 and 2030 to stimulate a green transition, the report states, citing 2021 research by the IFC.

Institutional investors have been slow to respond to this need. Current climate investments into Southeast Asia, South Asia and Africa only amount to 5 percent of the $330 billion annual requirement, the report found. For many large institutional investors, emerging markets present too great an investment risk: political and social unrest, currency risk, high interest rates and borrowing costs, lower consumer spending powers and fewer co-investors and exit opportunities.

“When you take a step back and look at climate finance flows – where they’re going in the world and where they’re needed globally – you quickly see that we’re under-investing in real world solutions at a global level,” said Nick Abel, sustainable investments portfolio manager at CalSTRS, in an interview with NPM earlier this year.

The climate theme can add an additional layer of risk, because many of the opportunities in emerging markets are venture or growth stage or involve development risk. That is due to change imminently, however, according to Leapfrog’s report, as commercial tipping points will soon be reached for many climate sectors and technologies for emerging markets. The firm identifies areas of climate technology where a “green discount” already applies in emerging markets; in other words, areas where the green alternative is now more commercially viable, and offers a lower-cost option to consumers, than the incumbent, less sustainable alternative. Examples include electric scooters in India, rooftop solar in Kenya and smart farming in Vietnam.

Now, there’s a new (and much bigger) LP in the emerging markets impact space; other investors may soon follow.