“Well, emerging markets were down 3% again today.” This is how an institutional investor kicked off a meeting with one of my colleagues recently. An institutional investor, in it for the long run. I have been amazed by the short term focus of many long term investors, and by their reactions to recent volatility in public markets. Based on their investment behaviour, it is hard to recognize an underlying long term view, or understand which investment beliefs are driving their strategy. Emerging markets down another 3%? Let’s get out of there!
Many initiatives were set up in recent years acknowledging the need for a long term investment approach and for more sustainable investments. The ‘Focusing Capital on the Long Term’ initiative and the ‘Sustainable Pension Investments Lab’, to name just a few. Apart from initiatives like these, numerous ad hoc meetings around the topic of impact investing are convened by asset managers, pension fund trustees, conference organizers or university alumni associations. No shortage of platforms to talk.
Still, long term impact investments are lagging behind. Despite all the good intentions expressed in closed door sessions, and even despite significant ambition levels publicly stated. So, there must be a shortage of platforms to invest?
At first sight, maybe. The minimum size of investments that large institutional investors are looking for is not always compatible with the size of individual impact investment opportunities. However, pooled vehicles do exist, or can be set up. A case in point is NLII, the Dutch Investments Institution, established by institutional investors to create a better match between the supply and demand of long-term financing in the Netherlands and by doing so remove bottlenecks in the financing of solutions such as access to finance for SMEs and sustainable energy.
Invest for impact in emerging markets…
As global problems are most pressing in emerging markets, investors who seek to invest in solutions must look beyond current volatility and continue to allocate to emerging markets. Emerging markets in a much broader sense than the BRICS countries that are causing most of today’s volatility. These investors will see that impact investing in emerging markets, when guided by a long term vision and executed properly, is a serious alternative to other forms of investing:
- It can bring diversification benefits to a portfolio,
- It has the potential for market rate returns combined with measurable impact, and
- It can add stability.
…and find surprisingly stable opportunities
Indeed, impact investing in emerging markets can add stability! There is no rationale for extrapolating current volatility in BRICS’ stock markets to the entire spectrum of investment opportunities in emerging markets. Stable value and stable income can for example be realized in private debt, where scarcity of long term funding offers decent risk-return opportunities to lenders capable of selecting the best projects and companies. Companies that are willing and able to implement ESG standards - thus supporting positive impact - and highly committed to servicing the debt that enables them to grow. FMO has been lending to such companies for decades. Our loan portfolio generates stable returns that make for quite boring graphs when plotted against hugely volatile public market indices…
Let’s scale up now!
The trend is positive for impact investing. As Frank van Beuningen, pioneering social entrepreneur and impact investor here in The Netherlands, puts it: “22 years ago none of my friends believed that making a profit and having an impact could go together, and look where we are today!”
I see this positive trend and it encourages me. But at the same time, I am getting impatient. Why is there so much talk, and so little large scale investment activity? It is about time that more institutional investors do what Frank named his impact investing community of families and private individuals ‘PYMWYMIC’ after: put your money where your mouth is! And as your money can have so much more impact in emerging markets, seek impact and stability there by looking beyond public markets volatility. After all, you are in it for the long run!