This article is part of NordSIP Insights – Investing Sustainably in Emerging Markets Read or Download the entire publication here.
The acceleration of sustainable investment and ESG practice ever since the Paris Agreement has been tremendous. While impact investment remains out of reach for too many investors, this emerging asset class is also experiencing somewhat of a boom of late. Philipp Müller (Pictured), CEO at Swiss-headquartered impact pioneer manager BlueOrchard, part of the Schroders Group, tells us about the industry’s journey on the occasion of the firm’s 20th anniversary.
The history of BlueOrchard starts in 2001 when, by the United Nations’ initiative, the firm became the first commercial manager of microfinance debt investments worldwide. “At the time, Kofi Annan was Secretary-General of the UN. He focused on how to implement solutions to the Millennium Development Goals, the predecessors to what we now know as the Sustainable Development Goals,” Müller explains.
“In 2001, BlueOrchard was founded as the first commercial manager to join the existing initiatives organised by NGOs and specialised banks, such as Grameen, to help drive microfinance into the mainstream. Later other managers emerged or were spun out of BlueOrchard, and together we were able to prove the benefits for the end beneficiaries while building a very resilient track record. Meanwhile, we witnessed a professionalisation of the entire value chain, growing from the initial NGO-centric market to a more mature industry with regulations, credit bureaus and consumer protection agencies ensuring a safe space for both lenders and borrowers,” Müller explains.
BlueOrchard soon widened its scope from its initial focus on microfinance to offer impact investment funds, deploying more capital to fund entrepreneurs in emerging and frontier markets. “Through both private equity and public and private debt, it was possible to scale up the deployment of capital that drives positive change in emerging and frontier markets,” Müller continues. “It has been exciting to partner up with leading development finance institutions (DFIs) as well as work on dedicated mandates to advance particular themes. For example, we have been supporting female entrepreneurs. Another advantage of thematic funds is that they are attractive for investors who seek a direct impact that focused on their particular goals.”
The most crucial development in the impact asset class is on the investor side. “The idea that there is a trade-off between doing something good and making money has been disproved. Larger investors with vast pools of capital are now accessing the space. It has taken a while, but we can finally accelerate impact investing,” Müller says. “The financial system is moving at an increasingly rapid pace away from the 80’s notion of ‘greed is good’. The new generations also care a lot more than their parents about what money can achieve beyond pure financial profits. The Nordics, where society is more egalitarian, have always been far ahead. They provide an encouraging model for how market forces can be used for the greater good.”
Lack of scale is a common obstacle for large investors entering into impact, but Müller dismisses this argument. “There is so much demand for capital, scale is definitely achievable, mostly through a larger footprint and by targeting capital intensive asset classes. On the bond side, there are many projects to be financed. There is a once-in-a-generation opportunity to finance infrastructure projects which are sustainable from the outset. When travelling to emerging markets, you immediately see the tremendous need for infrastructure. Anything from effective transportation means to renewable energy can drive lasting positive change both for the climate and for society, simultaneously. By nature, some projects will always be more niche, but that is not to say that investors can’t find the scale they need to invest in impact,” he says.
Climate insurance is one of the exciting opportunities BlueOrchard has been investing in. “Improving resilience for farmers is now possible thanks to parametric insurance. Today’s technology that integrates weather observations with advanced data analysis allows much cheaper insurance. This is an exciting project where, together with DFIs, we are opening up new investment opportunities that could ultimately be very large and profitable. Here we can talk about additionality in several aspects,” Müller explains.
“Climate change and increasing inequality are global challenges that need immediate attention. Even if impact investing has made significant strides and momentum is accelerating, it is not fast enough. These investment opportunities also need to be accessible to everyone, and it is not yet the case. People want it, but they can’t invest because of regulation or other barriers. One of our top priorities is the democratisation of impact investing,” he adds.
“Since 2019, we are also very proud to have become part of the Schroders Group. Partnering with such a renowned global asset manager provides us with a tremendous opportunity to expand our reach and offering. It also allows us to bring our know-how and impact management and assessment techniques to an asset manager that already overseas over half a trillion pounds in assets. Both these advantages perfectly meet our main goal, which is to make impact investment solutions accessible to all and to advance the conscious use of capital which benefits society and the environment,” Müller continues.
At the moment, Schroders and BlueOrchard are collaborating to launch a climate change mitigation and adaptation investment strategy. Schroders is providing the initial capital and the investment network. “This is an important initiative, and we will definitely benefit from having Schroders’s backing to reach our goal faster. The fact that a global firm like Schroders is focusing on impact shows a long-term vision which will truly benefit investors and the planet.”
Müller, who has been with BlueOrchard since 2018, was well placed to take over the reins as CEO. “To join BlueOrchard was a no brainer for me,” he comments. “I had been working in financial services for a long time, and I was ready to take on a new challenge aligned with my values where I could drive change at scale. I’m passionate about solving global issues, and I already knew that we need financially viable solutions to address them. Charity can support a cause, but in many cases it’s a one-off. This works for many causes, but certain issues can benefit from an impact investment approach that can help to bring lasting change at scale. With BlueOrchard, I found a firm with an amazing track record and a large footprint, both geographically and in terms of its impact methodology.”
At first, Müller was responsible for investment solutions, thereby influencing its product offering and asset allocation. In this role, Müller was often in contact with investors to understand their needs. “I got the opportunity to build an in-depth knowledge of our client base and their requirements. This way, I could help design and build attractive offerings to channel capital towards worthwhile investments. When the board asked me to take the reins as CEO, I didn’t have to think twice. The appointment humbled me.”
The timing could have been better, given that Müller took over as CEO just as the pandemic-related restrictions came in place. “I was working in Peru when things started getting serious,” he remembers. “Since then, it’s been tough not being able to travel far given that we have such a global presence, but I’m happy with how we have come together as an organisation to face the challenges.”
“I’m proud of what the team has achieved,” Müller continues. “We’ve had long workdays, most of us in the confinement of our own space, but we managed to synchronise our efforts and to reach our target effectively. When we saw the impact Covid was having on communities where governments couldn’t deploy the types of rescue packages and the social safety net we have in our countries, we decided to secure 200 million jobs in those regions. We also worked hard to build out our platform to reinforce its resilience in times like these.”
The case for microfinance is especially telling in times when financial markets are unstable. One of the main advantages of the asset class is its diversification effect. Müller explains why, despite the pandemic, the returns continue to be stable. “65 per cent of the portfolio of end borrowers are located in rural areas. Agriculture is an important sector, which means they are far less affected by global crises, even in a pandemic,” he says. “People still need to get to the market to sell or buy fruits and vegetables, for example. There is no social security system that allows you to work from home, so life goes on. There are winners and losers, of course, and some institutions are more resilient than others, but mostly, in our markets they are sufficiently capitalised to weather extreme events. Health-related crisis, earthquakes or weather-related catastrophes are unfortunately not an exception in these regions, which means they have built resilience over time. Emerging markets are far less risky than some people think,” Müller concludes.