Despite much debate in the market about the hows and whys of ESG integration, impact investing is steadily making its way into the financial mainstream. In 2021, the first year in two decades in which extreme poverty once again rose, with lasting consequences for the world’s most vulnerable people in particular, the financial industry once again demonstrated the importance of real, tangible impact.
The number of people escaping poverty has been declining steadily for almost two decades. However, the Covid-19 pandemic has reversed this positive trend. The number of people living in poverty has increased and the rate of escape from poverty has slowed compared to the pre-pandemic era.
According to Philipp Mueller (left) and Daniel Perroud (right), CEO and global head of business development at Schroders subsidiary BlueOrchard, Benelux investors, who have traditionally been a driving force in the impact and sustainability industry, can make a significant difference in the coming decades.
In the coming period, financial return will have to be combined with social and environmental impact. “Benelux investors are increasingly turning from ESG to impact investing because they want to know exactly what effect the investments will have. Countries in the Benelux area have an extremely sophisticated impact investment climate with the right intentions. Here, sincere questions are asked,” Mueller said in an interview with Fondsnieuws, Investment Officer Luxembourg’s Dutch-language sister publication.
BlueOrchard impact strategy
BlueOrchard, the world’s largest pure impact investor celebrating its 20th anniversary this year, has invested more than $8 billion in 90 countries to date. The investor is active in private debt, public debt and public equity and serves markets in microfinance, climate-focused insurance products and sustainable infrastructure investments. These investments have enabled an estimated 223 million low-income people in emerging and frontier markets to access financial services.
“The impact of our projects ranges from inclusiveness for women, job creation to financing education. Also, as BlueOrchard, through our InsuResilience Investment Fund, we have helped 25 million people worldwide get climate insurance. These are so-called parametric insurances, non-traditional insurance products that offer pre-specified payouts based on events such as natural disasters.”
Mueller continued: “Most of the people most at risk from climate change are obviously not adequately insured. Insurers have not yet fully penetrated those parts of the world, think of Pakistan, Cambodia or Nigeria. Insurance is a costly affair and still in its infancy there. That is an important private equity strategy for us.”
BlueOrchard manages the world’s largest microfinance fund of USD 2.5 billion in which 200 transactions take place annually with an average of USD 5 million per transaction. “About 99% of the funds lent by BlueOrchard have been repaid in the last 20 years,” said Mueller.
“We cover the risk by being highly diversified. The fund invests in 50 different countries and 150 different projects. From a portfolio manager’s perspective, that’s almost over-diversification but it’s necessary to protect investors from the risks.”
Sustainable infrastructure
The biggest opportunities in emerging markets are in infrastructure markets in emerging economies, said Mueller. “Mankind can no longer afford, for example, to expand cities in emerging markets in an unsustainable, energy-intensive way. We have the technology and the means to build sustainable infrastructure quickly and cheaply. That really will be one of the most interesting themes in the coming period.”
Emerging markets have an immense need for good infrastructure, good transport and electricity. “We invest in projects that are at the same time too small for large investors and too large for local banks; we are talking about an average investment of 15 to 20 million euros. Together with local developers, we look at which projects are needed and how they can best be financed.”
In Sub-Saharan Africa, we are in talks to finance the construction of 1,500 solar-powered transmission towers. Such regions are what they call “digitally excluded”, the best thing you can do for them is cheap, essential investments like internet access or river transport.’ Measuring the impact is also a lot easier this way, according to Mueller: “we see areas almost literally changing.”
Perroud acknowledged that these are relatively obscure multi-sector investments that require careful risk analysis. “We have to be constantly vigilant that we select the right companies. We enforce full-disclosure of impact data and make sure we contractually stipulate that we get insight into how, and to what extent, our investment makes an impact. That is an important part of the negotiations we conduct; our reliability as an impact investor depends on it.”
Benelux investors
“For the largest pension funds in for example the Netherlands or Belgium, our strategies may be too small to invest in. We are therefore developing strategies that are larger ($500 million) so that larger institutional investors can also get in,” said Perroud.
Although impact investing is gaining popularity in Asia, the majority of BlueOrchard’s investors are still European, consisting of insurers, pension funds and banks. Mueller: “We also have interesting encounters with family offices where the youngest generation is exerting pressure to invest the family capital sustainably.”