Impact Management | June 26, 2024

Using data to mitigate risk perceptions of impact investing in Latin America and the Caribbean

Manuela Jiménez

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Guest Author

Manuela Jiménez

In recent years, impact investing has gained traction globally as investors increasingly seek opportunities that generate positive social or environmental impact alongside financial returns. Latin America and the Caribbean (LAC) region, with its diverse cultures, ecosystems, and socio-economic landscapes, presents a fertile ground for investments with an impact lens. 

However, despite the potential for high social and environmental returns, the perception of risk in LAC often dissuades investors from fully engaging in local initiatives. Leveraging data can be a powerful tool in mitigating these misperceptions and unlocking the vast potential of social and impact investing in the region.

The perceived risk associated with investing in LAC stems from various factors. Historically, the region has been characterized by political instability, economic volatility, and social inequality. These factors create a heightened risk perception among investors with different risk appetites and return expectations, deterring them from allocating capital toward impactful initiatives. Additionally, the lack of reliable data and transparency in the region further exacerbates this perception, making it challenging for investors to assess and mitigate risks effectively. 

Considering data plays a crucial role in mitigating the misperception of risk in deploying impact capital in LAC, Latimpacto started to conduct an annual Industry Survey, in order to identify real challenges investors face when investing in the region throughout the continuum of capital.

Leveraging data

In this sense, by leveraging data-driven insights, investors (with or without expectation of financial return) can make informed decisions, identify potential risks, and optimize their impact strategies. Some of the ways data can be utilized are through impact measurement and evaluation, due diligence, and impact reporting and transparency:

  • Impact management: Robust impact measurement frameworks facilitate the quantification and assessment of social and environmental outcomes. By collecting and analyzing relevant data, investors can track the progress of their investments, measure their impact, and make data-driven adjustments to optimize outcomes. A great example of this is the work done by ALIVE, Acumen Latam Impact Ventures, with their 2023 Impact Report. In this document, investors and potential investors can dive into the fund’s impact, gender and ESG initiatives, as well as the tools they have created in house to measure and manage impact (for context, see “Why this Latin American venture fund is listening to customers to drive impact and returns“). One of the most interesting results is that their first fund is now 100% 2X eligible, which means they have adopted and fulfilled a baseline for investing with a gender lens across asset classes, markets and regions.
  • Due diligence: Data-driven due diligence processes enhance transparency and accountability in impact investing transactions. By conducting thorough analyses of financial and non-financial data, investors can assess the credibility and sustainability of potential investment opportunities, mitigating the risk of investing in projects with limited impact or viability. This is the case of Yunus Social Business Brazil, an organization whose due diligence processes “…incorporate global guidelines and takes into account factors such as sector, business and company risks, as well as the projected five-year financial model, and involves a Theory of Change (ToC) with defined results and products.”
  • Impact reporting and transparency: Transparent reporting mechanisms based on standardized data metrics enhance accountability and trust among stakeholders. By adopting common impact reporting standards and leveraging technology-enabled data platforms, investors can communicate their impact effectively and build credibility within the impact investing ecosystem. In this regard, Impact Frontiers is making a massive effort to standardize how organizations communicate and report impact globally through a series of Impact Reporting Norms. Latimpacto is honored to represent the voice of LATAM in revising the first draft of these Impact Reporting Norms with actors of the impact ecosystem in the region.

Market analysis

As mentioned earlier, another way data can be utilized to mitigate the misperception of risk in investing with an impact lens in LAC is through market analysis. Comprehensive market analysis provides investors with valuable insights into the socio-economic dynamics, regulatory environment, and market trends across different countries in LAC. 

Data-driven market assessments help investors identify high-impact sectors and geographies, enabling targeted investment strategies. However, because of its level of maturity, the impact ecosystem in LAC had very few market analyses until the last couple of years. Latimpacto started to develop the Impact Survey in 2022 in order to provide valuable insights about LAC’s market in terms of tendencies, obstacles, and opportunities.

The latest version of this Impact Survey, aimed at organizations that deploy financial and/or non-financial resources in LAC with the objective of generating social and/or environmental impact, revealed that 30% of the surveyed organizations intentionally seek a financial return on their investments and 33% of them expect a market rate of return. This finding allows us to identify a trend within the ecosystem in which different types of organizations that prioritize impact are exploring impact investmenting at competitive rates. 

The 2023 Latimpacto Impact Survey results also revealed that around 90% of the surveyed institutions offer some type of Non-Financial Support, helping social enterprises and Social Purpose Organizations (SPOs) scale and achieve financial stability. Finally, perhaps one of the most important findings, is the proportion of investments in sectors such as Climate change and the environment (46%), Inclusive economic development (44%) and Gender (42%), supporting the statement that LAC stores a whole range of opportunities of investment in climate solutions, specifically in biodiversity, and gender-related initiatives.

Annual survey

Leveraging data is essential in mitigating the misperception of risk and unlocking the full potential of deploying impact capital in Latin America and the Caribbean. By harnessing data-driven insights, investors can make informed decisions, optimize impact strategies, and drive positive social and environmental change in the region. If your organization deploys financial and/or non-financial resources in LAC with the objective of generating social and/or environmental impact, we encourage you to be part of the change and strengthen the impact ecosystem in the region by responding to Latimpacto’s Impact Survey 2024

By doing so, you will help identify trends, challenges and opportunities; allow the work of your organization to be mapped; enable greater comparability between the data; encourage collaboration within the ecosystem; and, last but not least, help reduce the misperception of risk of investing in LAC. 

Besides developing the annual Impact Survey, Latimpacto is also fostering an AI ecosystemic mapping with the help of Impact Intelligence, which will help identify additional information that cannot be collected through the survey. As data availability and analytical capabilities continue to evolve, the impact ecosystem in LAC stands to benefit from enhanced transparency, accountability, and impact measurement practices, ultimately fostering sustainable and inclusive development. 

Manuela Jiménez is a knowledge and research professional at Latimpacto.