22 Jun Key Takeaways from Impact Alpha’s Panel on How Emerging Market Investors are Safeguarding Impact During COVID-19
Last week on Impact Alpha’s Agents of Impact call, industry experts shared insights on how emerging market investors are safeguarding impact during the COVID crisis. The panelists discussed the potential repercussions on impact investing and how investors are responding to the crisis thus far. Speakers included Neil Gregory, IFC’s Chief Thought Leadership Officer; Safeya Zeitoun, Impact Measurement Specialist at Symbiotics; Sandra Abella, Finance in Motion’s Director of Investment Management; DEG’s Julian Frede and Bertrand Badré, CEO and Founder of Blue like an Orange Sustainable Capital.
We share some of the insights below.
How bad is it?
The recent World Bank Global Economic Prospects Report predicts a 5.2% contraction in global GDP in 2020, fueling the discussion about the long-term impacts of COVID-19. According to Neil Gregory, we have yet to see the worst of it. While the report details the significant impact the crisis will have in emerging markets – contributing to half the global GDP contraction – Neil suggests the total impact of this crisis could still be partially unaccounted for since the World bank report fails to account for the informal economy. This informal economy is responsible for a significant amount of economic activity in these countries and it is precisely these businesses that have the least ability to weather the COVID-19 crisis due to limited access to formal safety nets or the formal relief assistance developed in response to COVID-19.
The immediate response from investors has been instrumental in helping companies navigate the many resources available and access the necessary relief packages. Investors have also been working on a case-by-case basis with businesses to provide additional financing and rescheduling of repayments for existing clients. Meanwhile, company managers have been working to mediate discussions between investors and partner lender institutions.
Symbiotic’s Safeya shared the firm’s perspective as a lender in the microfinance space. Symbiotics joined an industry-wide effort on data collection from end-users to understand how they have been affected and how SMEs are responding to COVID-19 in different markets. The organization has also co-signed a letter of understanding alongside Developing World Markets and Blue Orchard outlining how investors can better deal with their partners during this crisis, including problems with liquidity or solvency, rolling over investments, or restructuring existing transactions. Their goal is not only to assist existing clients, but also to minimize the impact of COVID-19 on the end-user, particularly those most affected by the crisis.
It is important that investors adjust their impact forecasts for portfolio companies due to the COVID-19 crisis. Furthermore, the current moment presents an opportunity to rethink how investors deliver impact as a whole. What is deemed “meaningful impact” now may not reflect what was originally stated in the investment thesis. As a result, there is the potential that expectations of impact will not hold up due to the crisis. The impact investing industry has a new goal: to help companies survive and provide impact in the future while providing basic needs to their workforce in the present. This crisis has made firms think more closely about how much they value their workforce. Companies whose products or services were delivering impact may now have to focus on their workforce instead of production. While they may have to halt sales, a focus on keeping their workers employed provides a different type of impact that is much needed at the moment. Neil suggests investors and managers look to companies that were able to continue providing paychecks during the economic shutdown and to learn from their experiences.
How to create resilience
COVID-19 has underscored how important it is for investors to have an active and dynamic engagement process with management. What was already integral to the Operating Principles for Investment Management in Principle 8 – reviewing, documenting, and improving decisions and processes based on the achievement of impact and lessons learned – has been demonstrated to be even more essential in times such as these. Neil believes that if investors were aligned with the Principles, they would have a greater ability to respond by actively managing the portfolio for impact, engaging with client companies and markets, and helping companies review targets and adjust to current conditions. When Bertrand was asked about launching the firm’s first fund during COVID-19 that raised just over $200 million, he shared some advice on how to respond to volatility. He suggested treating every investment as a microworld with its own set of risks and characteristics, employing flexible terms and structures in the financing, and working closely with portfolio companies from the very beginning of investment.
COVID-19 has highlighted the importance of investing in a way that is resilient to different shocks and should ill help investors to prepare for future shocks, such as those related to climate change. Julian of DEG expressed his view that this crisis has forever changed the risk equation and risk tolerance of impact investors as they adapt to respond to new challenges.
A positive trend that has emerged in the market is collaboration among investors to share information and make investments faster and hopefully, more responsibly. As impact investing gains momentum and simultaneously faces mobility restrictions imposed by the pandemic, investors are becoming more comfortable relying on due diligence conducted by other firms and streamlining the impact assessment upfront as it moves faster on investing. This increased coordination has been lacking for some time and its demand has accelerated amid the current crisis. According to the panelists, the same rationale applies to blended finance solutions: structures that allow for additional risk to help DFI’s finance more than they were able to independently are becoming more frequent and will likely be a big trend.