The threefold challenge of impact investing in emerging countries

The term “impact investing” (II) first emerged in 2007 at a meeting of the Rockefeller Foundation. It defines investment with the aim of generating a positive social and environmental impact alongside financial returns.

Supported by powerful international institutions such as the G8, OECD and the United Nations, II is a constantly growing market that was estimated at $715 billion, at the end of 2020 by the GIIN (Global Impact Investing Network), whose members are considered key players in the II ecosystem.

A complex ecosystem

Impact investors generally fall into one of two main categories: private impact investors (PII), which include foundations and third-party investors such as private equity funds, pension funds and other institutional investors, and development finance institutions (DFI), which are government-backed financial institutions.

On the demand side (i.e. where the financing needs occur), the actors are social businesses, cooperatives, profit-making companies with social objectives and non-commercial undertakings that require capital to grow in pursuit of social or environmental aims. They range from small to large organisations.

In the Philippines, for example, many profit-making social enterprises are emerging, such as Filipina Home-based Moms, a company that trains Filipino mothers in digital skills to help prepare them for jobs online. In a different field, Futuristic Aviation and Maritime Enterprises is developing a transponder for tracking small fishing boats at sea to improve the safety of fishermen.

The GIIN has estimated that achieving the UN Sustainable Development Goals (SDG) in emerging countries by 2030 will cost around $2,500 billion per year.

In this context, channelling new private capital flows into social businesses creates opportunities for emerging countries to progress toward achieving the SDGs, alongside initiatives in the public sector, which is also part of the II ecosystem in these countries.

Our recent research on emerging countries in Asia sets out the main challenges that impact investing currently needs to overcome if it is to become more effective.

First challenge: limiting country risks

A suitable governance framework for the development of II requires efficient public administration, compliance with the rule of law, a low level of corruption and transparency in business procedures, all of which reduce the country risk for investors.

To this end, the OECD provides a framework for governments to promote II. The first step is to define the legal framework in which II will operate.

For example, this has been done in the Philippines and Thailand by adopting a legal definition of social enterprises. In contrast, the absence of such a definition by the Indonesian authorities has hindered the country’s development.

Second challenge: developing non-financial intermediaries

To achieve mutual understanding between II supply and demand, it is essential to share knowledge and experience in order to highlight what does and does not work, and to ensure that appropriate incentives are in place on both sides.

On the demand side, investment funds and support structures for contract creation and management skills development are increasingly used to encourage the emergence and growth of social entrepreneurship. There is also a need to improve local business communities’ understanding of the rules of the game. In this respect, the exchange of good practices can be very useful, which is why networking is essential in matching supply with demand.

The Asian Venture Philanthropy Network (AVPN) is a good example of such a network. Other examples include American accelerators such as Dao Ventures and the Rockefeller fondation.

Third challenge: measuring the non-financial impact

Evaluating the impact of II is difficult in terms of both measurement and data on II. Some of these difficulties are not new. The social impact of microfinance has been the subject of considerable debate. However, progress has been made in this area thanks to the GIIN’s creation of the Impact Reporting and Investment Standards (IRIS), a catalogue of performance measurement tools used by impact investors to measure the social returns on their investments.

These measurement tools are among the first to allow investors to measure and compare II between investments or portfolios. There are also alternatives such as the Lean Data methodology by the Acumen Fund. Nevertheless, the many limits of existing measurement methods are unanimously recognised.

Specific approaches

The issues at stake for II in developed countries – standardisation of procedures, transparency, the danger of “impact washing” – also exist in emerging countries but with some specificities.

Firstly, standardisation must be balanced with the need for specific (local and idiosyncratic) approaches. Otherwise, it may force companies to adopt strategies that are inappropriate for the management of development and costly in terms of resources.

Secondly, the challenges of transparency must be weighed against the issue of political power, as these challenges differ between countries under democratic and non-democratic rule. Although the challenge of impact measurement concerns all countries, it is even greater for emerging countries, to some extent, because of the inadequacy of information systems and fact that social impact is more important than environmental impact, and the measurement difficulties are more numerous.

Dubocage, E., Rousselet, E. (2022). « Stakes and challenges in the development of impact investing in emerging markets: the case of Asia » In Handbook of Banking and Finance in Emerging Markets. Research Handbooks in Money and Finance series, edited by Nguyen D., Edward Elgar, p. 376-392