With the summer period approaching, everyone will get out and enjoy time with family and friends. Stepping away from work can also invite inspiration, reflection and contemplation. In this blog, Impact Orange Partners would like to invite you to explore unbeaten paths with us that we, as investors, often (wrongly?) label as risky.

When it comes to investing with impact, we generally agree that the most impact per euro invested can be achieved in emerging markets. Moreover, this impact is usually not a one-off, but structural in nature. Also, as a rule, there is no doubt about additionality, contribution and materiality. At the same time, we often disqualify this part of the world in advance on the grounds that these investments are too risky and have too low a return . In addition, the governance of such investments in terms of monitoring, measuring and reporting is not always (yet) mature.

To be clear, emerging markets represent over 75% of the global territory, nearly 90% of the population, and 80% of global gross domestic product (GDP) growth, but only 11.7% of global market capitalization.[1] Reasoned from the point of view of the SDGs, which aim at the imbalance in the world, it sounds very illogical to exclude this part of the world from capitalization. Of course, here, in the Netherlands, local impact can also be realized. But it is certain that our current societal challenges are global in nature, and they will not be solved if capital is allocated primarily or exclusively locally. The preference for local impact that we hear in many investor discussions can lead to investment decisions that are not made on the basis of the right arguments and estimates of risk/return . And that has far-reaching consequences.

It may be that pension funds want to meet the wishes of participants as a result of participant surveys. But it is clear that the preference for mainly local investment is in any case not aimed at achieving the highest possible impact. The interesting thing is that we don’t want to be forced to invest (exclusively) in the Netherlands (or Europe), because then we would miss out on returns or run a higher (concentration) risk. While this works differently with impact, because we do not have an objective to have the greatest possible positive impact.

Diversification is a widely accepted investment principle that says it is wise to  spread risk and return by investing in different asset classes. The same principle can also be applied to spread impact risk and return by investing in different markets. This is not about investing exclusively locally or mainly in emerging markets, but about finding a good balance based on the objectives for impact, risk, return and costs. As always.

Each investment case is based on a consideration of the elements (impact,) risk, return and costs. The only question is whether, when it comes to investing with impact in emerging markets,  the assessment of risk and return is done correctly. It could also be that we wrongly assess the risk as too high and the return as too low, based on the region in general rather than the characteristics of the underlying investment. And the question is how well we are able to assess the risks and returns of investment cases on the other side of the world from the Netherlands. There is no doubt that there are many interesting impact propositions available there and equipped professionals on the ground who could help us with that.

In other words, excluding a significant part of the world from capital to address global challenges seems too simplistic and, moreover, does not lead to the best investment decisions. The question with which Impact Orange Partners would like to send you on holiday is, how can we work together in the industry to ensure that impact investment decisions are made on the basis of investment cases that are based on a careful and correct consideration of the elements of impact, risk, return and costs – also for emerging markets? So no OIMBY, no NIMBY, but a balance.

Impact Orange Partners would like to bring passionate investment and impact professionals together to think together with us about how we can remove any misperceptions about impact investing in emerging markets .

Are you excited? Please contact us at info@impactorangepartners.nl.

* Only In My Back Yard, Not In My Back Yard

[1] Source: https://www.globalxetfs.com/emerging-markets-outlook-2024-overlooked-underpriced-and-ripe-for-outperformance/.