Stockholm (NordSIP) – The International Finance Corporation, IFC, seems like an obvious choice to deliver the keynote message about sustainable investing in emerging markets at this year’s Phenix Capital Virtual Impact Summit. Not only was it an IFC economist, Antoine W. Van Agtmael, who once coined the term “emerging markets.” Also, as Peter Cashion, CIO and Global Head Climate Finance, Financial Institutions Group of IFC, reminds us, his institution was probably the world’s first-ever impact investor. Since its humble beginnings in the 1950’s IFC has been steadily promoting the idea that it is the private sector that can transform developing countries.
What Ruth Horowitz, Head of IFC AMC and IFC Vice President, Equity Mobilization Division, seems most proud of, however, is IFC’s more recent achievements. A couple of years ago, in consultation with a core group of external stakeholders, IFC developed and launched the Operating Principles for Impact Management. These principles support the development of the impact investing industry by establishing a common discipline around managing investments for impact.
The fireside chat between Cashion and Horowitz inevitably turns towards the effects of COVID 19 on emerging markets. They focus on the opportunities that the current situation has created, a chance to transition to a new economy. The investment needs are enormous, but it is essential to step back and consider carefully how to deploy capital in a holistic way.
“Banks alone do not have the muscles to deliver the necessary financing,” according to Horowitz, who applauds the way capital markets are mobilising to support the transition towards a more sustainable economy in emerging markets. Green, blue and transition bonds are just some examples of financial innovation that she mentions. Another example is IFC Catalyst Fund, providing capital to renewable energy projects and to companies that develop resource-efficient, low-carbon products and services in the emerging markets.
“We are standing on the precipice of something really big,” says Cashion, seeing in the crisis created by COVID 19 a genuine opportunity to build back better.
In a follow-up discussion titled ‘Scaling up Sustainable Investments in Emerging Markets’, a group of experienced investors share valuable insights from a practitioner’s perspective.
Even though investment opportunities, including sustainable ones, abide in emerging and frontier economies, these markets are often perceived as too risky and therefore avoided by institutional investors. What could be done to change this? Liz Lloyd, Chief Impact Officer of CDC Group, is proud of how her organisation, alongside other development finance institutions (DFIs), contributes to building an ecosystem that makes it possible for institutional investors to feel more confident when entering emerging markets. Providing venture capital financing means taking some of the dreaded early-stage risks.
Sandeep Farias, Founder and Managing Partner of Elevar Equity, suggest another solution. According to him, the way to attract institutional capital is to have more “skin in the game”, i.e., deploy your own capital first to attract other investors. He also laments what he calls “the broken link between sustainability and affordability” and argues that the nature of the solutions that should be available in these markets needs to be different, suitable for low-income communities, for micro- and small-business enterprises.
Targeting the lowest income part of the population is precisely what SilverStreet Capital has been doing since 2007, providing financing to small-scale farmers, typically women, in Sub-Saharan Africa. Despite this, Gary Vaughan-Smith, Founding Partner and CIO of the fund, has managed to attract plenty of institutional clients like pension funds, family offices and DFIs. He shares a simple recipe for achieving this: formulate a viable investment thesis aiming for realistic returns, gather a good track record, create clear and standardised documentation and assemble a strong team on the ground. And then he adds his secret ingredient: do not forget political risk insurance, something investment committees appreciate, according to him.
Farias agrees and adds that if you genuinely contribute value to the customer on the ground and make sure that the businesses you invest in are profitable even after subsidies disappear, the capital will automatically flow. “We need to get creative,’ he concludes.
Speaking of thinking differently, Arturo Benito, CEO and Founder of Impact Bridge, argues for getting strategic about capital allocation. Rather than allocating most of the resources to climate change mitigation, as we are doing now, he points out, we need to shift focus towards financing climate change adaptation solutions. “Even if we are optimistic, we know that it is bound to get worse before it gets better,” he adds.
Prompted by the moderator, Mirjam Garzon, Founder and Managing Partner of MG impact AG, to give some advice to a hypothetical institution just about to venture a direct investment in emerging markets, the participants have plenty to say: make sure you are in for the long-term; scale up slowly and sustainably; find the right partner with proven track record and integrity; make well-informed decisions.
Investing in emerging and frontier markets, that crossroad of challenges and opportunities, has never been easy. The financing needs of these countries are enormous, and they are also among the most vulnerable to the effects of climate change. The current pandemics is only exacerbating an already dire situation. At the same time, it is here that the highest growth is predicted to be in the years to come, and, we hope, it will take place sustainably. Some investors, at last, seem to be rising to the challenge and putting their money where it is most needed, contributing to a sustainable transition.