Impact investors cannot ignore emerging markets

North American and European markets receive the majority of impact investment capital. To maximise positive change, the balance must be redressed.

“When asked about their core geographic focus for their impact investment programme, 60 percent of LPs mentioned North America and 45 percent noted Europe. A far smaller proportion of investors view Asia-Pacific (15 percent) or the Rest of the World (9 percent) as a core focus.”

Long-time followers of the impact scene could be surprised by the findings of Rede Partners’ sustainability report, released last week. Emerging markets were arguably where impact investing began. Development finance money spurred private markets firms to invest sustainably, specifically with a view to making a measurable impact. And they are still doing it; BII’s commitment to Meridiam’s Urban Resilience Fund, which will support climate finance qualifying projects in African cities, is a recent example.

In 2023, impact investing is primarily a development markets game, as Rede’s survey highlights. With the “mainstreaming” of impact investing, additional LP capital has started flowing towards the geographies that institutional investors know best. A look at New Private Market‘s Impact 30 supports this point. Of the 30 best-capitalised impact managers, only seven could be said to have a substantive programme for investing in non-OECD countries.

This is concerning on two fronts. For one thing, global issues like climate change require global solutions. In an interview with New Private Markets, CalSTRS portfolio manager for sustainable investments Nick Abel said: “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.” This is primarily a reference to needs in the emerging world, he explained.

Secondly, emerging markets’ environmental and social issues are often more acute. The result is that, when it comes to education, financial inclusion or healthcare, a dollar will go much further in terms of impact in non-OECD countries. “There is an argument that, if you want the most bang for your buck, you should be investing in the southern hemisphere,” as Actis sustainability head Shami Nissan put it.

Nissan added that, for any managers or investors thinking of venturing into emerging markets, there is a lot to be learnt from DFIs: “They have great institutional knowledge to share.” For those that do take the plunge, the potential to deliver positive impact is huge.