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Emerging markets next on map for impact investing

David Bohigian expects impact investing to flourish in emerging markets.

More institutions see potential in area now dominated by others

Impact investing in emerging markets might be poised for a major growth spurt, as proponents see pension funds and other institutional investors taking an increasing role in a field that largely has been filled by government financial institutions, foundations, and more specialized private equity managers.

Large asset owners are starting to get more interested in impact investing — investments made with companies, organizations and funds that look for measurable, beneficial social or environmental impact, as well as a financial return— in emerging markets partly "because there is a growing recognition of impact investing as a style of investing generally. There are strong returns and very measurable impact," said Rekha Unnithan, manager of Nuveen's $650 million impact investing portfolio, where emerging markets account for nearly 40% of the overall strategy. "They are recognizing that this is not just a niche area."

David Bohigian, executive vice president of the Overseas Private Investment Corp., said, "I do believe we are at a tipping point for impact investing in emerging markets."

While governmental financing bodies like OPIC and some foundations have been ahead of other institutional investors in this area, "what's happening most recently is a blending of all three of these, where they (all the parties) understand they can unlock more capital working together," Mr. Bohigian said.

Abhilash Mudaliar, Seattle-based research director for the Global Impact Investing Network, said that "historically, there has been the mental dichotomy that there are governments and philanthropy on the one hand, and capital markets on the other. In recent decades, we've seen that dichotomy increasingly challenged."

According to GIIN's annual impact investor survey, 225 institutions, including pension funds, invested $35.5 billion in impact investments last year, a nearly 60% jump from 2016, and this year they are planning to increase capital invested by 8%.

Across all survey respondents, impact investing assets totaled $228 billion, with more than half, 56%, of that allocated to emerging markets.

EMPEA, the global industry association for private capital in emerging markets, found in its 2018 survey that 88% of limited partners — the highest proportion since the 2014 survey — plan to maintain or increase the dollar value of commitments to emerging markets private equity over the next two years, with the largest sectors being microfinance, energy, housing and financial services. The survey, released May 15, queried 107 limited partners in 36 countries with a collective $358 billion in private equity assets.

Real CIOs, real money

"Institutional (asset) owners have had a discussion with their stakeholders about what kind of investment they are looking for. You've got real CIOs making real investment decisions putting real money into these opportunities," OPIC's Mr. Bohigian said.

Global agencies are pushing impact investing in emerging markets as well.

On May 24, OPIC signed an agreement with the Association of European Development Finance Institutions that provides the framework for supporting more opportunities in emerging markets. There are similar agreements in Japan and Australia.

Another boost for impact investing on a global scale came from BlackRock (BLK) Chairman and CEO Laurence D. Fink in his 2018 letter to CEOs, when he wrote: "Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society."

To Patricia Dinneen, Boston-based chairwoman of EMPEA's Impact Investing Council, "what's really becoming evident is that emerging markets is impact investing, and people are beginning to recognize it. We are almost redefining the new mainstream," she said.

"The real driver for investors is risk mitigation and portfolio diversification. Every investment has an impact, and the objective is to expand and accelerate investments that benefit society and investors," Ms. Dinneen said, because pension funds, insurance companies and other fiduciaries want returns, and to align their mission and to satisfy the demands of their stakeholders.

She and others also are excited about the potential growth of underserved markets. "I think that's what's driving impact investing now. It's very good business economics to take care of the environment and your shareholders, but it's also this vast untapped market (of consumers) worldwide," Ms. Dinneen said.

Emerging markets represent "the fastest growing middle class in the world. If you treat them poorly, you'll be out of business. If you treat them as clients and treat them with dignity and respect, I think there's enormous value in being partners with them," said Gil Crawford, CEO of MicroVest, an impact investing emerging markets manager in Bethesda, Md. MicroVest has a $380 million portfolio providing private debt and equity capital to financial institutions serving micro, small and midsize businesses.

"Reaching emerging market consumers will be a focus for impact investors," said Andrea Kaufman, Washington-based vice president of impact investments for Prudential Financial Inc. The firm is more than three-quarters of the way toward its pledge to have a $1 billion impact investing portfolio by 2020.

More than in the past

Ms. Unnithan of Nuveen said: "In emerging markets, where the capital need is immense, (institutional money) is flowing more than it has in the past." Some large asset owners may be hesitant about the risks involved, "but when we think about a diversified portfolio, we believe we can manage those risks."

In its latest survey, GIIN found that impact investors invest primarily through private capital markets, with 41% of capital allocated to private debt, 18% to private equity and 14% to public equities.

Mr. Mudaliar said, "we are seeing robust growth" in other asset classes, in part due to demand from retail investors. "We would expect allocation through all asset classes to grow. In more relative terms, we imagine there will be faster growth in the public markets," he said.

In private equity, emerging markets attract prominent names like Bain Capital's Double Impact Fund and TPG Capital's $2 billion Rise Fund, whose investors include the $128.8 billion Washington State Investment Board and Sweden's 354.9 billion kronor ($40.4 billion) AP2 fund.

More pension funds are expected to jump in as impact investing advocates develop a formal benchmarking system; it now suffers from a lack of historical financial data and consensus on how to measure impact.

A few more years

Ms. Dinneen of EMPEA thinks it will be a few more years before there are simple metrics. In the meantime, EMPEA and other advocates are working with asset managers and investors to come up with a few relative outcomes that they want to achieve.

Despite the lack of a formal benchmark, 97% of respondents in the most recent GIIN survey said their investments have met or exceeded their expectations for impact, and 91% agreed when it comes to performance.

Teresa Barger at Cartica Management, Washington, a long-only, equity manager with a proprietary methodology for environmental, social and governance investing, thinks we are "moving toward a world where all investment is impact investing," but she stresses governance is key to ESG investing of any kind. "The preponderance of the research shows that the way you make money is by improving governance. You sometimes can make money by improving the E and the S, but where the real difference is made is in the governance," Ms. Barger said.

"We are trying to build a diverse ecosystem, including new products for retail investors, metrics and training for asset managers," Mr. Mudaliar of GIIN said. "We believe we will be in a world where it will be unacceptable to make (investment) decisions without taking into account these wider interests."