Publi­ca­ti­on of dis­cus­sion paper #02 Why Impact Inves­t­ing in Fron­tier & Emer­ging Markets?

To accom­pa­ny the published dis­cus­sion paper #02 Why Impact Inves­t­ing in Fron­tier & Emer­ging Mar­kets? plea­se find here an inter­view with Dr.-Ing. Nata­lia Real­pe Car­ri­l­lo, CEO at HEDE­RA Sus­tainable Solu­ti­ons and Dr. Juli­an Fre­de, Co-Foun­der and Mana­ging Direc­tor of the evo­lu­tiq Impact Advi­so­ry, both part of the BIII Working Group “Fron­tier and Emer­ging Mar­kets” (WG FEM):

As the major plat­form for impact inves­t­ing, BIII repres­ents the com­mu­ni­ty in Ger­ma­ny and the DACH regi­on. The­re is also the working group “Fron­tier and Emer­ging Mar­kets” (FEM). Who is part of it and what are your goals?

Our FEM Working Group com­pri­ses orga­niza­ti­ons and indi­vi­du­als from the DACH regi­on who are eit­her working or inte­res­ted in impact invest­ment in the­se mar­kets. Most par­ti­ci­pan­ts are from (or clo­se­ly rela­ted to) finan­cial insti­tu­ti­ons acti­ve in the­se mar­kets. The FEM WG’s pri­ma­ry objec­ti­ve is to enhan­ce under­stan­ding and ana­ly­sis, and to col­la­bo­ra­tively address the uni­que chal­lenges asso­cia­ted with impact inves­t­ing in emer­ging and deve­lo­ping count­ries. By faci­li­ta­ting the exch­an­ge of expe­ri­en­ces and encou­ra­ging peer-to-peer lear­ning, the FEM WG aims to increase and pro­mo­te invest­ment volu­mes ori­gi­na­ting from Ger­ma­ny. To achie­ve this goal, we gather best prac­ti­ce examp­les, estab­lish a net­work by orga­ni­zing events, mee­tings, and panel dis­cus­sions, and dis­se­mi­na­te fin­dings and recom­men­da­ti­ons. In this man­ner, we are con­tri­bu­ting to the ongo­ing deve­lo­p­ment of impact investing.

What is spe­cial about impact inves­t­ing in FEMs? How does it dif­fer from impact inves­t­ing in deve­lo­ped countries? 

Impact inves­t­ing in fron­tier and emer­ging mar­kets (FEMs) is distin­gu­is­hed by its dual focus on gene­ra­ting mar­ket-ade­qua­te finan­cial returns and crea­ting mea­sura­ble posi­ti­ve social and envi­ron­men­tal impacts. Unli­ke deve­lo­ped mar­kets, FEMs pre­sent a uni­que blend of chal­lenges and oppor­tu­ni­ties, inclu­ding navi­ga­ting spe­ci­fic risks such as uncer­tain­ties rela­ted to the cur­ren­cy, mar­ket, coun­try, poli­ti­cal situa­ti­on, and regu­la­ti­ons. Stra­te­gi­cal­ly col­la­bo­ra­ting with local enti­ties, lever­aging local know­ledge, and employ­ing inno­va­ti­ve finan­cing and risk manage­ment stra­te­gies are cru­cial for suc­cess here. FEMs offer a diver­se ran­ge of impact-risk-return pro­files, from micro­fi­nan­ce initia­ti­ves to invest­ments addres­sing cri­ti­cal issues, such as bio­di­ver­si­ty loss and gen­der dis­pa­ri­ties. This diver­ges from the approach used in deve­lo­ped mar­kets, whe­re finan­cial sys­tems are more matu­re and sta­ble, and impact oppor­tu­ni­ties and risks are different.

The paper out­lines very com­pel­ling reasons to invest in FEMs. Howe­ver, the cur­rent macroe­co­no­mic head­winds and geo­po­li­ti­cal uncer­tain­ties pre­sent chal­lenges for both deve­lo­ped and deve­lo­ping count­ries. What are your main takeaways?

Alt­hough the cur­rent macroe­co­no­mic head­winds and geo­po­li­ti­cal uncer­tain­ties do inde­ed pre­sent chal­lenges across both deve­lo­ped and deve­lo­ping count­ries, our ana­ly­sis of fron­tier and emer­ging mar­kets (FEMs) reve­als seve­ral key takea­ways about how to inter­pret or face the­se challenges.

  1. Resi­li­ence and Oppor­tu­ni­ty: Despi­te glo­bal chal­lenges, FEMs offer uni­que oppor­tu­ni­ties for impact inves­t­ing. The­se mar­kets often demons­tra­te resi­li­ence and poten­ti­al for growth, espe­ci­al­ly in sec­tors addres­sing social and envi­ron­men­tal needs.
  2. Stra­te­gic Col­la­bo­ra­ti­ons and Local Insights: Suc­cess in FEMs requi­res forming stra­te­gic part­ner­ships with local enti­ties and lever­aging local know­ledge. The­se col­la­bo­ra­ti­ons are vital for navi­ga­ting the­se mar­kets’ spe­ci­fic chal­lenges and risks.
  3. Diver­se Impact Pro­files: FEMs pre­sent a wide ran­ge of impact-risk-return pro­files. Invest­ments ran­ge from struc­tu­red micro­fi­nan­ce initia­ti­ves to ground­brea­king pro­jects tack­ling signi­fi­cant issues, such as bio­di­ver­si­ty and gen­der dis­pa­ri­ties. This diver­si­ty allows for tail­o­red invest­ment approa­ches ali­gned with finan­cial goals and impact objectives.
  4. Adap­ta­bi­li­ty in the Face of Uncer­tain­ty: The dyna­mic natu­re of FEM requi­res a fle­xi­ble invest­ment approach. Inves­tors must be adap­ta­ble, con­ti­nuous­ly asses­sing and respon­ding to the evol­ving eco­no­mic and geo­po­li­ti­cal landscape.

Tar­ge­ting spe­ci­fic envi­ron­men­tal, social, and impact goals has long been the spe­cial ter­rain of govern­ments, phil­an­thro­py, and non-pro­fit orga­niza­ti­ons. Why would impact inves­tors do the same? What about the finan­cial returns? 

Impact inves­t­ing in FEMs meets the modern investor’s desi­re to achie­ve finan­cial returns while making a posi­ti­ve, mea­sura­ble impact on the world. Inves­tors are doing dif­fe­rent work, but come with a much stric­ter focus on eco­no­mic via­bi­li­ty, a cri­ti­cal add-on to the impact gene­ra­ti­on of many phil­an­thro­pic or public orga­niza­ti­ons. The work of pri­va­te impact inves­tors thus both resem­bles and dif­fers from that of public play­ers, as their man­da­tes focus more stron­gly on finan­cial return, which in our view is a neces­sa­ry add-on when tar­ge­ting investa­ble SDGs. Some examples:

Dual Returns: FEMs offer the poten­ti­al for mar­ket-ade­qua­te finan­cial returns along­side signi­fi­cant social and envi­ron­men­tal impacts, alig­ning pro­fit with purpose.

Uni­que Invest­ment Oppor­tu­ni­ties: FEMs pro­vi­de diver­se invest­ment oppor­tu­ni­ties in are­as such as bio­di­ver­si­ty and gen­der equa­li­ty, with their untap­ped or emer­ging mar­ket natu­re often lea­ding to com­pe­ti­ti­ve finan­cial returns.

Risk Diver­si­fi­ca­ti­on of a Glo­bal Port­fo­lio: Inves­t­ing across various impact-focu­sed initia­ti­ves helps miti­ga­te risks and poten­ti­al­ly enhan­ces returns, making it a stra­te­gi­cal­ly sound choice.

Inves­tor Demand: The­re is a gro­wing trend – espe­ci­al­ly among youn­ger inves­tors, fami­ly offices, and insti­tu­ti­ons – to invest in ways that reflect their values and con­tri­bu­te to socie­tal and envi­ron­men­tal bet­ter­ment wit­hout sacri­fi­ci­ng finan­cial gains.

FEM invest­ments come with spe­ci­fic oppor­tu­ni­ties and risks. What advice would you give to inves­tors who are new to FEM? 

Inves­tors new to FEM should find a part­ner. Or seve­ral part­ners. Going it on your own sim­ply takes too long in today’s cli­ma­te, and pro­fes­sio­nal part­ners are available for each coun­try, regi­on, sec­tor, and/​or impact topic. Such part­ner­ships mas­si­ve­ly redu­ce risks.

As for spe­ci­fic aspects to imple­ment, mar­ket rese­arch, port­fo­lio diver­si­fi­ca­ti­on, pro­fes­sio­nal gui­dance, pati­ence, and fle­xi­bi­li­ty are all cru­cial for impact inves­tors. A deep under­stan­ding of the eco­no­mic, poli­ti­cal, social, and envi­ron­men­tal con­di­ti­ons of the respec­ti­ve count­ries and sec­tors is vital, as is a firm grasp of the mar­ket struc­tu­re, regu­la­ti­ons, acces­si­bi­li­ty of the FEMs and the poten­ti­al oppor­tu­ni­ties and bar­riers. Stra­te­gies such as diver­si­fi­ca­ti­on redu­ce the risks of expo­sure to cur­ren­cy, gover­nan­ce, and cli­ma­te risks. Pro­fes­sio­nal gui­dance from fund mana­gers, finan­cial advi­sors, or expe­ri­en­ced inter­me­dia­ries can help inves­tors to under­stand and iden­ti­fy the chal­lenges and oppor­tu­ni­ties, as can uti­li­zing sys­tems to mea­su­re and mana­ge impactful invest­ments. Final­ly, FEM invest­ments may have fluc­tua­tions and uncer­tain­ties. For this reason, regu­lar moni­to­ring of port­fo­lio per­for­mance and its impact tog­e­ther with revie­w­ing the objec­ti­ves and goals achie­ved are key to ensu­ring the investment’s via­bi­li­ty. Alt­hough many of the­se ele­ments are fea­tures of pro­fes­sio­nal finan­cial port­fo­lio manage­ment, inves­tors are stron­gly advi­sed to also con­sider ESG risk and impact manage­ment for fur­ther finan­cial mate­ri­al. Impact inves­t­ing is incre­asing­ly pro­fes­sio­na­li­zing along the­se lines, e.g. through mar­ket signals on impact manage­ment quality.