Currency routs in Argentina and Turkey. Political and economic isolation in Russia. Recession in South Africa. Economic and financial risks in emerging markets once again have investors on edge. What does this mean for impact investors exposed to emerging economies?
More than half (56%) of the $226 billion in impact investing assets under management identified in this year’s investor survey from Global Impact Investing Network are in emerging markets. Since 2013, annual growth rates in allocations to East and Southeast Asia (28%) Middle East and North Africa (26%), Latin America and the Carribean (15%) sub-Saharan African (14%) have all outpaced the overall average (12%), according to the GIIN.
Patience is a virtue. “Emerging market volatility means all investment – including impact investment – is likely going to suffer. As long as you have a financial return expectation, currency devaluation is going to scare you,” says Randall Kempner of the Aspen Network of Development Entrepreneurs. “Impact-first’ impact investors, he says, are more likely to wait out the storm. “They tend to be more patient than other impact investors, and more likely to have invested in businesses that are less exposed to forex fluctuations.”
Dan Zook of ISF Advisors, an advisor to investors in smallholder agriculture, says long-term capital may be more durable. “When short-term capital flees a country due to volatility, then the long-term sticky nature of impact or SDG capital can become even more valuable,” says Zook.
By supporting long-term investment in impact-driven businesses, says Sebastián Welisiejko, Argentina’s secretary for socio-urban integration and the former head of the Global Steering Group for Impact Investing, “the very nature of impact capital plays an important role in protecting workers and communities from financial shocks.”
Local resilience. Local impact investors that invest locally may be the sweet spot. “Most impact industries are focusing in areas like affordable housing, health, education, access to energy and financial inclusion,” says Rodrigo Villar of New Ventures Mexico. “All these industries are tackling local issues where international volatility is not as direct or related as other industries could be.”