Impact Investing in Emerging Markets

Within the impact investment system, emerging markets are on the cutting edge, with 30% of impact funds being directed towards developing economies around the world. A pre-pandemic study estimated a shortfall of 330 billion USD per year in Africa alone, so it is likely that the decrease in tourism and international aid has made these numbers even more extreme. Many of the 2.5 billion people who live on 2.50 USD per day or less reside in those countries where the need for impact investment is greatest, such as in Sub-Saharan Africa and South Asia.

Within these markets, investments are generally categorized in education, healthcare, nutrition, environment, infrastructure, and microfinance, as they all offer potential for returns and impact, but these sectors vary, as each market presents different barriers to investment and obstacles. Because emerging markets are less studied and returns are not as guaranteed, some investors have displayed hesitation about investing in these markets, yet many funds have seen emerging markets as unparalleled opportunities for making a true impact on the community level that is guaranteed to change numerous lives. Investors are likely to see specific improvements in these markets, as quality of life can be dramatically improved by increasing access to a single resource.

While impact investing has continued to expand its reach over the last few years, travel restrictions and global disruptions caused by the COVID-19 pandemic have amplified the perceived risks associated with investing in emerging markets. Due diligence is created online rather than being performed in person, and traveling to target sites has come with added risk. In addition, most industries have experienced strain or halted, creating delays in project implementation. More generally, emerging markets lack some of the communication that is required to ensure a project is successfully completed. An example of this setback is that many countries lack the environmental sustainability-reporting infrastructure that exists in developed markets, which creates difficulties in quantifying the effects of impact investing. One minor challenge for a pipeline development approach for firms is that there are few existing businesses that are prepared for an investment structure because of insufficient financial and operational capacities, so many funds must plan projects from the ground up. Many of these emerging market countries are largely community oriented with large rural populations, and this creates challenges with cultural traditions and complex land ownership laws.

The future of impact investing in emerging markets seems to be bright, as even though data on the returns are sparse, the indicators that do exist shed a positive light on their returns. This can be partially attributed to these markets being somewhat insulated from global macroeconomic events that negatively impact more established markets. With this in mind, there are many opportunities for further expansion into new countries. In East Africa, there is no evidence of impact investing in Eritrea or Somalia with very minimal work in South Sudan, Sudan, Burundi, and Djibouti. There, most aid is given through multilateral government loans, which leave many opportunities to strengthen the investing networks in these countries. Countries like these experience large absences of services provided by the public sector and have vast potential for improvement, which requires investment.

In terms of expanding investment into new sectors, public health and access to medical care have not been a major area of focus in emerging markets, yet as these markets become more of an area of focus, this sector will be crucial for improving quality of life. Investing in public health creates services and facilities, and through the provision of innovative products, the welfare of communities improves. In emerging markets, there are many startling statistics that stress a dire need for investment in healthcare. Indonesia, Kenya, and Zambia only have a single doctor to serve 100,000 people, which contrasts with 26 doctors per 100,000 people in the US. While many sectors like education and public health are important to improving quality of life in these countries, many firms see forays into impact investment through the financial services sector, as banks and MFIs can directly lend to small and medium enterprises. These transformations allow for increased investment and innovation, which can eventually trickle down into other sectors crucial for growth.

While the COVID-19 pandemic led to many dashed hopes of the prospects of global investments, there are also new hopes for the role of impact investments in strengthening economies weakened by the pandemic, specifically in emerging markets. 2020 reminded many investors residing in countries with established markets the importance of essential sectors, including healthcare, technology, education, and logistics, all of which were threatened by a new virus, and these gaps were exacerbated in countries with already crumbling infrastructure and governance. Where government programs fall short, the private sector is able to step in to assist. A GIIN report found that in March and April, 16% of surveyed impact investors expressed interest in expanding their investments, and many notable funds have made decisions to divest from environmentally detrimental companies and towards more sustainable investments. When asked about where they sought to invest next, 58% of those surveyed aimed to invest in sub-Saharan Africa, with 41% aiming to invest in Latin America. These statistics are promising for impact investing in emerging markets, even in a global economy recovering from the impacts of COVID-19.