Michael Wehrle, head of investment solutions at BlueOrchard, talks about the firm’s experiences in the first half of this year, as part of our mid-year impact Q&A series.

How would you characterise the fundraising market in H1 2023?

We see more attention by investors for impact investing. Many investors are concretely considering allocations to impact investments. While general interest in and awareness of impact investing has increased, conversations and timelines tend to be affected by the market and economic environment and certain investor-specific constraints such as the denominator effect.

In terms of asset classes, we continue to see solid demand for our private debt funds, which offer stable, uncorrelated returns and allow to further diversify global portfolios.

How has the political backlash against ESG affected your business?

The political backlash against ESG has not had any significant impact on BlueOrchard’s business. We believe that companies that are well-managed from an ESG perspective are more likely to generate sustainable long-term returns, and that investors have a responsibility to consider the impact of their investments on society and the environment.

However, we recognise that the political climate around ESG issues can impact the broader investment landscape, and we are monitoring developments closely.

The impact investing market is scaling up and going mainstream; how is this affecting your business?

Achieving impact at scale is essential to address social inequalities and climate change. We welcome the development of the impact investing market from niche to mainstream in view of the financing needs to address social and environmental issues, in particular in developing countries.

However, a potential challenge in this process is the risk of impact-, green-, or SDGs-washing. The more players that enter the field, the higher this risk becomes. We believe that integrity is the most important aspect of impact management, and investors are increasingly focusing on sound and transparent impact measurement methodologies, metrics and frameworks.

Which impact themes, sectors or strategies do you see as being most exciting and untapped?

BlueOrchard focuses on two main impact themes: inclusion and climate action.

Financial inclusion investments – for example, investing in institutions providing financial services such as loans to individuals and MSMEs – remain crucial to support job creation, gender diversity and inclusion and reducing inequalities. This theme can provide stable, uncorrelated financial returns across market cycles and economic environments.

Climate change adaptation, such as affordable insurance solutions, can strengthen the resilience of vulnerable households and MSMEs to extreme weather events. These investment opportunities are driven by economic growth perspectives and use of technology and data.

Sustainable infrastructure assets in developing countries provide investors with resilience to economic downturns, inflation protection, low correlation to other asset classes and predictable cashflows. This theme also provides a positive impact of the quality of life and economic development of local communities and countries.

Which impact themes, sectors or strategies do you plan to avoid because they are over-capitalised?

BlueOrchard primarily focuses on inclusion and climate action in emerging markets. These markets tend to be most vulnerable to social and environmental issues and suffer from a significant funding gap, while developed countries continue to attract more capital.

Do you use benchmarks to evaluate your impact and why (or why not)?

No. Given our managed funds have an impact objective, the use of traditional benchmarks is less relevant. Portfolio construction should come from the sustainability and impact strategy, rather than the benchmark. We consider a significant part of the market as not fitting our impact objectives or doing significant harm that can’t be mitigated. We see improvement in the availability of ESG benchmarks in public markets, but still struggle to find impact benchmarks that fit our standards.

How will the development of generative AI affect your business? Are you using, or planning, to use it?

A responsible use of generative AI may allow fund managers to analyse and use data more efficiently and effectively and contribute to a more comprehensive and transparent impact management and reporting.

However, we are also aware of the challenges and risks associated with this technology, such as data privacy concerns and the potential for biases in the algorithms. We are are actively exploring generative AI’s potential applications and are committed to using it in a responsible and ethical manner, and will continue to monitor developments in this field closely.