Impact investing: Discussing opportunities in Asia and the Pacific

CANBERRA — In South, Southeast Asia, and the Pacific region, opportunities for impact investment are growing rapidly — and experts say Australia can leverage this growth, if investors’ perceptions of risk can be addressed. “When it comes to impact investing, perceived risk can overwhelm real risk. Part of where we are on the journey is still to understand the risk as the market matures and investments mature.” --— Simba Marekera, executive director, Brightlight Group In changing these perceptions, donors including the U.S. Agency for International Development and the Department of Foreign Affairs and Trade are playing a role in building the foundations for investment, including taking risks investors may not be willing to take. With this, they hope to build an evidence base to help investors understand the true risks, as well as the value of investing in developing countries and social enterprises. Opportunities and trends “Asia is fertile ground,” Rebecca Parkinson, associate director of credit portfolio management at IIX Global, explained in a webinar hosted by IIX last month. Setting the scene for the conversation, she explained that the demand for impact investing is on the rise globally. There is a growth in the number of sophisticated funds with defined impact mandates, as well as an interest from financial institutions and billion-dollar pension funds that are moving beyond environmental, social, and governance investing, and starting to set up dedicated impact funds. Additionally, some multinational companies are looking at championing sustainable and ethical supply chains and social entrepreneurship, she said. These global trends are being felt in Asia, which Parkinson said is seeing some of the fastest growth rates in impact investing. In South and Southeast Asia, Parkinson explained that the impact investing market is on track to grow from $40 billion to $100 billion in assets under management in the next few years, with the opportunities and level of majority for investors different in each market. Indonesia is experiencing growth in next generation entrepreneurship, while the Philippines has a strong culture of giving and a fast growing economy. Sectors of investment are also diverse, with opportunities in agriculture and ecotourism, among many others. Natasha Garcia, associate director of Innovative Finance for IIX, said that within Australia, investors are increasingly looking at impact investing. “Australia has seen significant growth in demand for impact investing with the market potentially reaching 32 billion Australian dollars by 2023 — so there is potential to scale significantly if large institutional investors get involved,” she said. But she said there continues to be a lack of financial products that are meeting investor demands. “At the same time, investors have yet to fully maximize the investment in and from Australia – especially into Pacific and South-East Asia markets,” she said. What is the hesitancy? Simba Marekera, executive director and head of investment solutions with the Brightlight Group, explained that when investors are looking at impact investment, they see the advantages diversification brings to their portfolio. But in the Australian markets, investors still have a lot to learn about impact investing to best leverage the opportunities it can provide. “When it comes to impact investing, perceived risk can overwhelm real risk,” he said. “Part of where we are on the journey is still to understand the risk as the market matures and investments mature.” The perceived risk means that many Australian investors are focused on the liquidity of the investment. Without an understanding of the true risk, liquidity provides them with an out if the investment does not turn out the way they expected. “Impact investment is personal and unique to every organization. It is unique to their culture and stakeholders, and being able to design a product around that is important.” --— Marekera The maturity of the market, he said, would see both perceptions of risk and the reliance on liquidity come down. But it’s still important to build the market to encourage impact investment. For investment consulting companies such as Brightlight, this means understanding the client and objectives in their investment and working to support them. “Impact investment is personal and unique to every organization,” Marekera said. “It is unique to their culture and stakeholders, and being able to design a product around that is important.” It is also important for public investment to help build the case for impact investment by taking risks that private investors may not be willing to make. Building the network Through Australian aid investments, DFAT is hoping it can help build evidence for investors. But Kristy Graham, assistant director of development finance with DFAT, said that it was important for public financing to have a clear goal and objective — and to not create markets reliant on its support. “The role of public finance in building a market is something we think about a lot and something we are acutely aware of,” she said. “When the market is sufficiently developed, we should be getting out and not be any longer interfering in how markets are functioning.” Sustainable pathways to exit are part of DFAT’s thinking in building investments, requiring measurements to be in place to identify when each market is sufficiently development. But an additional role for government is in making “early bets” to encourage innovation in a market. With DFAT, Graham explained that its work in impact investing had increased over the past five years, with the aid program interested in exploring different ways to use development assistance to catalyze private investment in the Indo-Pacific region. He laid out three ways in which DFAT was building the market for impact investment. First, it’s supporting organizations that are building the ecosystem, connecting markets, and bringing global expertise to the region — which includes its support to organizations such as Aspen Network of Development Entrepreneurs and Global Impact Investing Network. Second, DFAT is supporting enterprises to become investment ready — an area Graham said all donors can improve on. “As a donor, we’ve traditionally had a lot of SME support programs, but what donors haven’t been good at is providing those programs in a way that enables them to be investment ready,” she said. The second generation of programs being developed to support impact investing — such as the Frontier Innovators program — will focus on building enterprises to be investment ready. This includes providing business support services that help enterprises link to capital investment, enabling them to grow. The third area of support from DFAT is drawing investment to particular sectors or regions, including advancing opportunities for women. DFAT has supported the Women’s Livelihood Bond, which lends investor funds to microfinance institutions and impact enterprises whose activities benefit women in Southeast Asia. It will be launching a second tranche in September, demonstrating the business case for investing in women-owned SMEs. With gender a core priority of the Australian aid program, Graham explained that DFAT is encouraging partner organizations to look at all stages of investment processes to ensure it is supporting gender equality, including reducing unconscious bias that may see investors decide against supporting women-led businesses. DFAT hopes this will help investors identify new ways to potentially understand the impact they can make — including for women-led business — in developing countries. “There are some other programs we are working on in the design phase at the moment so expect to see more in that space,” Graham said.