This article is sponsored by Schroders Capital.
Emerging markets have been hit hard by the pandemic. Maria Teresa Zappia, head of sustainability and impact at Schroders Capital and chief impact and blended finance officer and deputy CEO of BlueOrchard, the microfinance and impact investing specialist in which Schroders holds a majority stake, explains why this has created opportunities for impact investors.
What opportunities are you seeing for impact investing in emerging markets?
The International Finance Corporation recently published its Investing for Impact: The Global Impact Investing Market 2020 report. It splits the market between assets invested for measured impact – for which there is a clear intent for positive impact and a measurement system in place – and those invested for intended impact, where the intent is in place but not necessarily the measurement. Using the broadest definition to include both measured impact and intended impact investments, under public and private management, the IFC finds the market to be worth almost $2.3 trillion in 2020, equivalent to 2 percent of global assets under management.
For us, emerging markets are the land of opportunities, with opportunity and social and environmental challenge two sides of the same coin. If you look at financial inclusion, for example, it’s clear that if you tackle those challenges in a small number of countries in Africa and Asia, you solve a lot of problems. There is also appetite from asset owners in developed markets to look at those opportunities.
We see opportunities in private equity and private debt, but also in the public markets. We have developed a new climate strategy for the public markets, launched in June with Schroders, and attracted a lot of investors. Bringing together climate, emerging markets and liquidity is really the best of all worlds.
What are the challenges in emerging markets?
Covid-19 has impacted emerging markets significantly harder, particularly India and Latin America. Nevertheless, BlueOrchard recorded a strong resilience of its investment portfolios throughout the pandemic despite the adversities. However, in many emerging economies there has also been an underestimation of the breadth of covid-19 in the initial phases.
In order to tackle some of the challenges posed by the pandemic in many emerging economies, we reinvented some of our investment processes to come up with new strategies. Last year, we raised a new mandate with several development finance institutions to support small and medium-sized enterprises in the aftermath of covid. That has proved successful, attracting both DFIs, that wanted to be at the forefront of providing liquidity in emerging and frontier markets as a substitute for government intervention, and private investors.
We are making sure all the progress in that fund is tied to financial inclusion and that the last 20 years of progress are not cancelled out by the pandemic. With diversification in the portfolio, we aim to offer resilience to financial institutions – covid has impacted different regions at different times so geographical diversification is valuable.
What are the challenges around achieving scale in impact investing?
All investors want innovation with a track record, but innovation can’t reach scale overnight – this is also true for impact investing. For example, we manage a fund in climate adaptation, improving access to insurance solutions in developing countries with the specific aim of reducing the vulnerability of smallholder farmers and low-income households to extreme weather events. There are few insurance solutions available in some markets, so we are building that strategy, which takes time.
In climate, there is more of a track record in mitigation than adaptation, and this is partly because resilience to climate change is in itself a sector where people and planet are strictly interlinked and local context is absolutely critical. All of this results in climate adaptation strategies in many ways as market building, where education and awareness are often a vital starting point.
However, in the area of financial inclusion we have been able to reach scale with a number of strategies and in public assets, for example, with bonds and tradable strategies, the markets are growing fast and scalability is easier.
How is the Sustainable Finance Disclosure Regulation affecting transparency and disclosure?
BlueOrchard was well prepared to meet the Article 9 requirements. The entire system of impact management was in place and the intent of the strategy was clear; however, we have further strengthened all aspects of disclosure and transparency. It will take time to see how much SFDR will change the impact investing market. We will have to see how it is implemented over time and how different regulators monitor what is disclosed versus marketing documents.
The other issue is that SFDR has been very focused on the planet, with climate at the forefront. The first consultation on social elements is getting underway, but for us, splitting people and planet seems like an artificial way of looking at this. Social and environmental change has more impact on communities at the base of the pyramid – it is difficult to have a top-down strategy focusing on climate without the human face.
Is there a shift in focus from impact measurement to compliance? How can investors align those priorities?
Managers can take regulatory requirements as an opportunity to change their business models and enhance their systemic monitoring. For us, the impact management and measurement frameworks we had somewhat anticipated SFDR requirements.
There is going to be a divide between those barely satisfying compliance requirements and those really improving and enhancing already existing measurement systems in place. There is a tendency right now to seek an Article 9 strategy as a nice addition to the portfolio. Looking forward, if we have more investors seeking those strategies, there could be a legitimate shift towards sustainable investments.
What lessons are there to be learned about the materiality of data?
We collect a lot of financial and impact data from investees and, as we are an impact investor, in the past we have always felt more data was better than less. However, we have moved from the volume of data to the quality of data as we believe the quality is crucial and that there is consistency on the indicators required.
If we invest in a financial institution in Nigeria, for example, and it has a portfolio of smallholder farmers or a gender empowerment strategy, what are the metrics to look at? The materiality of the data and the consistency around it is more important than the volume.
The industry has moved forward in providing best practice on reporting KPIs, so there is no longer any excuse for claiming not to know what data is required. There is now informed understanding, even if asking for some of the data is still difficult.
It is a shame to collect data and then not use it, so we are more selective on what we request and really focus on some fundamentals. The industry is moving fast and the last thing we want is to have indicators out there that are not telling the right stories.