www.ifc.org/thoughtleadership NOTE 64 • FEB 2019 Institutional Investing: A New Investor Forum and Growing Interest in Sustainable Emerging Markets Investments By Svetlana V. Klimenko, Eric Bouyé and Morten Lykke Lauridsen Achieving the Sustainable Development Goals is estimated to require additional financing on the order of $2.6 trillion in emerging markets and low-income countries in 2030. A substantial increase in private investment is required to close this financing gap. Fortunately, institutional investors—who control the magnitude of funds needed—increasingly see sustainable, long-term investing and allocations in infrastructure as intriguing prospects. These investors face challenges to realize these opportunities, however. The Investor Forum held at the 2018 G20 Buenos Aires Summit, which included some of the world’s largest investors, focussed on solutions to these challenges. The resulting Buenos Aires Call to Action calls for a more regular dialogue with policy makers at the highest level and underlines the need to break away from the short-termism that plagues current investment strategies. It also highlights a series of concrete actions designed to increase the flow of sustainable long-term investments. According to new research from the IMF, there is a and view the SDGs as a useful framework for future need to substantially increase spending and investments collaboration between the public and private sectors, they in developing countries to achieve the Sustainable also have important considerations that are rarely brought Development Goals (SDGs).1 The financing gap in 2030 to the forefront in global discussions on development is estimated at $500 billion in low-income countries and finance. This was in evidence at the G20 Investor Forum, $2.1 trillion in emerging markets, which represent some where over 40 leading institutional investors met with 15 percent and 4 percent of GDP in these countries, finance ministers and international financial institutions respectively. to discuss sustainable long-term investing and scaling up investments in infrastructure.3 As stated in the UN Addis Ababa Action Agenda on Financing for Development, private investments can play a The Investor Forum key role in closing the development financing gap.2 A key challenge in this regard is attracting private institutional To augment the voice of investors, the first ever high-level investors, who collectively manage the trillions of dollars Investor Forum was held at the 2018 G20 Buenos Aires needed to realize the SDGs. Summit. The Forum was hosted by the Government of Argentina and the World Bank Group, with participation While institutional investors are indeed interested in long- from investors with combined assets under management of term investments that support sustainable economies, About the Authors Svetlana V. Klimenko, Lead Financial Management Specialist, Financial Management & Anticorruption, Operations Policy and Country Services, World Bank; Eric Bouyé, Head, Quantitative Strategies and Asset Allocation, Treasury, World Bank; and Morten Lykke Lauridsen, Principal Economist, Thought Leadership, Economics and Private Sector Development, IFC. Their emails are sklimenko@worldbank.org, ebouye@worldbank.org, and mlauridsen@ifc.org respectively. 1 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Investor Forum, November 2018, G20 Summit, Buenos Aires, Argentina. Photo: World Bank Group more than $20 trillion. The Forum led to the adoption of align their policy and regulatory frameworks for the Buenos Aires Call to Action, which identifies tangible long-term infrastructure financing. There is a need steps to boost long-term, sustainable private investments to broaden the scope of co-investment platforms that can tackle development challenges and promote to include and incentivize a greater role for local economic growth. institutional investors. Stronger local engagement can help to reduce political risk for international investors. Key messages from Buenos Aires Scaling up private investments in infrastructure in emerging markets requires further expanding the Several key messages emerged at the Investor Forum and investor base. IFC’s MCPP Infrastructure and IBRD’s are reflected in the Buenos Aires Call to Action.4 Highlights proposed “Infrastructure Loan Refinancing Facility” on infrastructure investing and sustainable investing from are good models for mobilizing private investors. the dialogue include: Sustainable Investing Infrastructure Investing 1. Governments could increasingly support private 1. Governments will require substantial assistance and sector-led efforts to rationalize corporate disclosure expertise to frame long-term visions, develop bankable to promote long-term investing and value creation. investment programs, structure projects in a way that Specifically, this would involve: identifying and appropriately allocates risk, and carry out transactions consolidating existing, relevant environmental, in a transparent and well-governed way. Bankable social, and governance (ESG) disclosure standard- infrastructure investments should start with a clear setting; promoting investor use of such consolidated vision about what infrastructure assets are needed to disclosures, which includes quantitative and qualitative deliver desired services and how those will be paid for information; eliminating any regulatory barriers to the in a particular social and economic context. Delivering agreed disclosures; and over time, incorporating these resources through multilateral and national facilities disclosures into international accounting standards will help foster the development and use of standards (International Financial Reporting Standards and U.S. that can reduce transactions costs. Generally Accepted Accounting Principles). 2. Co-investment platforms play a central role, but they 2. National and international regulators and supervisors could be more effective and have a greater catalytic of banking, insurance, securities, and pension funds effect if they engage local investors and if governments should work together with investors to clarify 2 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. and promote the idea that fiduciary duty requires Given the geographic diversity, number, and seniority of the integration of material ESG factors into investment interviewed executives, the interviews can be considered processes. Further improvement of disclosure of a reflection of views widely held by the global investment material ESG information—via Global Reporting community. Overall, the interviews revealed a significant Initiative (GRI), Sustainability Accounting Standards degree of consensus among global investors on the principal Board (SASB) etc.—is critical, and quality, reliable, concerns, opportunities, and actions needed. public data is needed. At present, legal liabilities are The investors noted two significant drivers of change. The hampering this in some developed countries. Emerging first of these is the shift toward sustainable investment markets may have an opportunity to leapfrog and practices—including the adoption of environmental, social, establish better regulations, avoiding these sorts of and governance principles in investing—which result in legacy issues. part from consumers and employees who want to work for 3. To expand impact investing it is important to adopt and do business with companies with good ESG practices. harmonized operating principles and practices. The The second driver of change is a growing recognition creation of a standard for impact investing will bring among companies that their investment decisions have discipline to the market and help investors identify real systemic and sustainability implications. International and distinguish impact investments from other types attention to the Sustainable Development Goals supports of investments. Impact investing should be recognized this trend and makes it increasingly difficult for investors to as a strategy that combines both financial return and turn a blind eye to the impact of their investment decisions. impact objectives based on the growing evidence that While there was no consensus among the interviewed there does not have to be a trade-off between the two. investors about what constitutes sustainable investing— There is growing evidence that benefits for society and views covered a continuum from negative/exclusionary the planet on the one hand, and financial benefits for screening to ESG criteria/performance to impact policy holders on the other, are not mutually exclusive investing—all executives were interested in it and stated and can in fact be complementary. that their funds were practicing sustainable investing to various degrees and in different ways.7 A Survey of Investors Investors face constraints for sustainable investing Sustainable Investing—Opportunities and scaling up allocations to infrastructures, yet those and Challenges constraints are generally not centered on concerns about Interview respondents identified the advancement of SDG investments underperforming other assets.5 In fact, sustainable, long-term investing as an area of significant most investment executives do not share the perception interest and opportunity. The trend toward sustainable that sustainable investing involves lower returns. Instead investing was associated with changing perceptions about the the biggest hurdle to sustainable investing is the lack of a role of private corporations in society. While all respondents framework that can bring it into mainstream investing. still saw creating value for shareholders as fundamental, These barriers could be partly overcome through local ideas about the best ways to go about it are changing. authorities’ commitment to policies and regulations aligned for sustainable long-term financing, identification Several respondents cited the report issued by the European of local partners in emerging markets who can navigate Commission’s High-Level Expert Group on Sustainable and manage the local political environment, and better Finance, which begins with the notion that the purpose information and data about the investment opportunities in of finance is to serve the real economy, rather than being emerging markets, including in infrastructure. an end to itself.8 Furthermore, respondents highlighted a number of common observations, including: (i) a longer- Those are some of the important messages garnered from term focus in investment decision making; (ii) a desire to interviews the World Bank Group conducted in preparation support sustainable economies; (iii) the changing role of for the Investor Forum with senior executives—mostly chief private corporations in societies as “universal owners” that executive officers and chief investment officers—from 34 take system-level views; (iv) the rising voice of members global institutional investors. of the Millennial generation, many of whom want their The major topics covered in the interviews were: (i) current money managed for purpose as well as for profit; and (v) perceptions regarding today’s economic and investment increasing attention to the SDGs. environments; (ii) mega-trends shaping existing and future Long-termism was highlighted as a major theme in the investment strategies; (iii) sustainable investing along interviews and it touched on several related topics. Many multiple dimensions; (iv) infrastructure investing; (v) investors were aware of and involved in initiatives focused on investing in emerging markets; and finally, (vi) the potential getting both companies and investors to take a longer-term role of the World Bank Group and by extension other view when making and evaluating their investment decisions. international financial institutions (IFIs).6 Engagement and stewardship were discussed as tools to 3 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. ensure that portfolio companies have sustainable long- as sustainable investing is going mainstream, so should the term strategies in place. Some respondents highlighted the efforts to introduce market-level adjustments to create a importance of supporting engagement strategies via changes level playing field in this new era. to the fee structures, timeframes, and performance metrics in contracts between asset owners and asset managers. Infrastructure—Opportunities and Challenges Most respondents declared that they used ESG standards The institutional investors interviewed expressed for mainstreaming sustainable investing. All respondents considerable interest in infrastructure investing. In the viewed ESG integration as a good way to mitigate post-2008 environment, the traditional bank-centric downside risk; some also felt that it was a source of upside intermediation was shifting toward a system in which opportunities by identifying companies with good or institutional investors play an increasingly important role in improving ESG performance. Many interviewees cited a providing long-term capital. Many of the respondents said lack of high-quality and comparable data on companies’ they were trying to figure out how to become successful ESG performance as a major barrier to better ESG players in this space. integration, and some called for standards for nonfinancial Infrastructure investment is seen as attractive for many reporting. Ideally, it was felt, all companies should be reasons. In the right environment, infrastructure assets required to report on their nonfinancial performance can provide a hedge against inflation, generate stable according to a set of standards, just as listed companies are cash flows, and help buffer returns in a financial crisis. required to do for their financial performance. The investors saw the bigger-picture need to invest in Several respondents pointed out the need for a balance sustainable infrastructure to mitigate pressures in coming between generations so that returns earned for current decades to adjust to global megatrends such as aging, generations do not inhibit the returns that can be earned migration, global warming, inequality, and urbanization. for future ones. A long-term view takes account of the Many respondents said they would like to increase their effect of investment decisions on future generations. Most investment allocations to infrastructure, but also said they of the interviewees—particularly pension funds that have are struggling to find ways to do so. long-tailed liabilities—raised this strategic imperative. When asked about constraints, respondents highlighted In the same vein, several respondents discussed how the their investment requirements. These include stable cash growing wealth and voice of Millennials is putting pressure flow, moderately low risk, acceptable rates of return, on them to create investment products that both earn and assets that hold a credit rating. Many infrastructure required returns and contribute to a sustainable world. projects don’t meet these requirements. Furthermore, three According to the interviews, there is substantial variation main constraints were highlighted. in the extent to which the 17 SDGs are de facto influencing First, the pipeline of bankable projects is limited, and the investment strategies, although all respondents were familiar perception is that public investment sometimes crowds with them. Some investors said they were using them as the out the private sector. The size of available projects is also basis for sustainability-themed strategies such as climate and important because large investors need to invest in large low carbon, water scarcity, and food security. Those doing increments. Detailed feasibility studies and robust business so pointed out that 17 goals are a large number, so they had cases are important to attract investors, who require high- created themes by combining the relevant elements of different quality information on which to base investment decisions. SDGs. Others expressed skepticism about whether the SDGs lent themselves to creating or influencing investment strategies. Second, investing in infrastructure often implies new Despite this variation, there was a consensus that the SDGs and unproven investment environments that entail high were a useful framework for thinking about collaboration transaction costs. This introduces uncertainty and risks between the public and private sectors. that are difficult for investors to manage. The lack of standardized documentation, benchmarking, and There were many references to the value of creating the performance data for the sector is seen as contributing necessary market standards of nonfinancial performance to these transaction costs, and to the overall market metrics and pricing mechanisms for positive and “ambiguity” on how to treat investments in infrastructure. negative externalities. This could help to adjust capital allocation to reward companies that are creating long- Third, financial and prudential regulations disincentivize term shareholder value. The Global Reporting Initiative long-term investing due to their high capital requirements, and the Sustainability Accounting Standards Board were independent of the underlying investment risk. cited as leading the work to create ESG measurement Many respondents felt that existing financial and and reporting standards at the company level. The World prudential regulations fail to accommodate the needs of Benchmarking Alliance was cited as having the potential infrastructure investing by institutional investors. The to contribute to standardizing impact measurement regulations ignore the particularly long-term nature through benchmarking.9 Respondents generally felt that, of the liabilities of certain institutional investors (for 4 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. example, pension funds, which need the capacity to The Forum also highlighted a gap in the engagement sustain their positions for long durations) and the needs of strategies with the private sector. The primary focus has infrastructure financing. traditionally been on the “demand” side—through creating markets and enabling environments in recipient countries. Investing in emerging markets is seen as particularly But the “supply” side is equally important. The proverbial complex, with higher business, political, and currency trillions of dollars needed are concentrated in the hands of risks, insufficient information about existing opportunities, a relatively few institutional investors. For them to act and and often a lack of institutional capacity in public and to invest their capital where it is most needed, they need to private contractual counterparts. Recognizing that this not only know where these opportunities are, but also to be complexity will be a reality for the foreseeable future, able to move forward within their regulatory environments. many investors emphasized the importance of finding local partners in emerging markets who know how to navigate Going forward, there is a need to rethink how and manage the local political environment. engagements should be built if the SDGs are to be realized by 2030, given the need for substantially increased Some institutional investors who were interested in investments. Discussions in the G20 can provide a strong investing in emerging markets stated that they lacked forward-looking platform for action and ensure a regular information about opportunities, as well as the necessary dialogue between policy makers and investors at the in-house skills and time to gather it. A few referred to highest level. G20 governments are uniquely placed to unsuccessful past experiences, but most were still interested host an ongoing conversation with the private sector, and in these types of investments. Scaling up investments in investors in turn are keen to continue the dialogue. emerging markets required finding the right partnerships and financial solutions to mitigate risks. A few of the Some of the biggest contributions on the part of Multilateral respondents were successfully working with IFC’s Managed Development Banks may come in the form of platforms for Co-Lending Portfolio Program (MCPP). mobilization, standards, and procedures—incorporating principles of sustainability and long-termism in their design. Going Forward ACKNOWLEDGMENTS The inaugural Investor Forum in Buenos Aires demonstrated the importance of bringing the “supply” The authors would like to thank Robert Eccles, Visiting side of global finance—represented by large institutional Professor of Management Practice, Saïd Business School at investors usually domiciled in advanced economies—into the University of Oxford, United Kingdom, for his contribution conversations with the G20 that focused on sustainable to the survey of investors and also the following colleagues development. Going forward, direct involvement, buy- for their review and suggestions: Fiona Elizabeth Stewart, in, and articulation of views from global investment Lead Financial Sector Specialist, Finance, Competitiveness & leaders will be critical for successful implementation of Innovation, World Bank; Catiana Garcia-Kilroy, Lead Financial the Sustainable Development Goals. Dialogue with G20 Sector Specialist, Finance, Competitiveness & Innovation, governments and international financial institutions World Bank; Helen Mary Martin, Senior Public Private enables these investment leaders to emphasize the Partnerships Specialist, Infrastructure, PPPs and Guarantees, potential of what could be achieved through their World Bank; Thomas Michael Kerr, Manager, Global participation, and to identify specific opportunities for the Engagement & Outreach, IFC; and Thomas Rehermann, way forward. Senior Economist, Thought Leadership, Economics and Private Sector Development, IFC. 1 IMF Staff Discussion Note. 2019: “Fiscal Policy and Development: Human, Social and Physical Investments for the SDGs.” SDN/19/03. 2 United Nations. 2015. https://www.un.org/esa/ffd/wp-content/uploads/2015/08/AAAA_Outcome.pdf. 3 Sustainable investing encompasses both corporate social responsibility, or CSR, which describes a company’s commitment to socially responsible practices, as well as environmental, social and governance, or ESG, practices. 4 For the full text of the Buenos Aires Call to Action (WBG, 2018) see: http://www.worldbank.org/en/news/feature/2018/11/29/buenos-aires-call-to- action-shaping-the-future-of-global-private-and-public-investments 5 Sustainable investing is about investing in companies and projects that will grow the real economy because they are profitable, they minimize negative externalities, and they maximize positive externalities. In turn, sustainable investing promotes sustainable development. Sustainable investing is often used as an umbrella term for a variety of investing styles that evaluate companies on ESG factors alongside traditional stock-picking metrics. 6 For a full report on investor perspectives refer to World Bank Group. 2018. “The Landscape for Institutional Investing in 2018.” https://openknowledge. worldbank.org/handle/10986/30901 7 For more details on the continuum of strategies for sustainable investing refer to the full report cited in endnote 4. 8 “Final Report of the High-Level Expert Group on Sustainable Finance.” 2018. https://ec.europa.eu/info/publications/180131-sustainable-finance-report_en 9 “Benchmarking Companies as a Driver for Change.” 2019. https://www.worldbenchmarkingalliance.org/ 5 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Additional Selected EM Compass Notes Previously Published by IFC Thought Leadership Note 63: Blockchain and Associated Legal Issues for Emerging Markets January 2019 Note 62: Service Performance Guarantees for Public Utilities and Beyond—An Innovation with January 2019 Potential to Attract Investors to Emerging Markets Note 61: Using Blockchain to Enable Cleaner, Modern Energy Systems in Emerging Markets November 2018 Note 60: Blended Concessional Finance: Scaling Up Private Investment in Lower-Income Countries November 2018 Note 59: How a Know-Your-Customer Utility Could Increase Access to Financial Services in Emerging October 2018 Markets Note 58: Competition Works: Driving Microfinance Institutions to Reach Lower-Income People and October 2018 the Unbanked in Peru Note 57: Blockchain Governance and Regulation as an Enabler for Market Creation in Emerging September 2018 Markets Note 56: A Practical Tool to Create Economic Opportunity for Low-Income Communities July 2018 Note 55: Peru’s Works for Taxes Scheme: An Innovative Solution to Accelerate Private Provision of June 2018 Infrastructure Investment Note 54: Modelo Peru: A Mobile Money Platform Offering Interoperability Towards Financial Inclusion May 2018 Note 53: Crowding-In Capital Attracts Institutional Investors to Emerging Market Infrastructure April 2018 Through Co-Lending Platforms Note 52: Crowding-In Capital: How Insurance Companies Can Expand Access to Finance April 2018 Note 51: Blended Finance—A Stepping Stone to Creating Markets April 2018 Note 48: Increased Regulation and De-risking are Impeding Cross-Border Financing in Emerging January 2018 Markets Note 47: From Farm to Fork: Private Enterprise Can Reduce Food Loss Through Climate-Smart October 2017 Agriculture Note 46: Precision Farming Enables Climate-Smart Agribusiness October 2017 Note 45: Beyond Fintech: Leveraging Blockchain for More Sustainable and Inclusive Supply Chains September 2017 Note 44: Blockchain in Financial Services in Emerging Markets—Part II: Selected Regional September 2017 Developments Note 43: Blockchain in Financial Services in Emerging Markets—Part I: Current Trends September 2017 Note 42: Digital Financial Services: Challenges and Opportunities for Emerging Market Banks August 2017 Note 41: Blockchain in Development—Part II: How It Can Impact Emerging Markets July 2017 Note 40: Blockchain in Development—Part I: A New Mechanism of ‘Trust’? July 2017 Note 39: Technology-Enabled Supply Chain Finance for Small and Medium Enterprises is a Major June 2017 Growth Opportunity for Banks Note 38: Can Blockchain Technology Address De-Risking in Emerging Markets? May 2017 Note 37: Creating Agricultural Markets: How the Ethiopia Commodity Exchange Connects Farmers and April 2017 Buyers through Partnership and Technology 6 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Note 35: Queen Alia International Airport—The Role of IFC in Facilitating Private Investment in a Large April 2017 Airport Project Note 34: How Fintech is Reaching the Poor in Africa and Asia: A Start-Up Perspective March 2017 Note 33: Creating Markets in Turkey’s Power Sector March 2017 Note 32: Private Provision of Education: Opportunities for Emerging Markets February 2017 Note 31: Improving Emerging Markets Healthcare Through Private Provision February 2017 Note 30: Masala Bond Program—Nurturing A Local Currency Bond Market January 2017 Note 29: Toward a Framework for Assessing Private vs. Public Investment in Infrastructure January 2017 Note 28: The Importance of Local Capital Markets for Financing Development January 2017 Note 27: How Banks Can Seize Opportunities in Climate and Green Investment December 2016 Note 24: De-Risking by Banks in Emerging Markets—Effects and Responses for Trade November 2016 Note 23: Energy Storage—Business Solutions for Emerging Markets November 2016 Note 22: Mitigating the Effects of De-Risking in Emerging Markets to Preserve Remittance Flows November 2016 Note 20: Mitigating Private Infrastructure Project Risks September 2016 Note 19: Creating Mobile Telecom Markets in Africa September 2016 Note 18: Seven Sisters: Accelerating Solar Power Investments September 2016 Note 16: Congo Call Center—Business Amid Fragility September 2016 Note 15: How Emerging Market Leaders Can Spur Technological Gains September 2016 Note 14: How to Make Infrastructure Climate Resilient September 2016 Note 13: Insurance Options for Addressing Climate Change September 2016 Note 12: New Ways for Cities to Tackle Climate Change September 2016 Note 11: How Business Can Insure Against Climate Risks September 2016 Note 10: How New Data Tools Can Assess Climate Risks September 2016 Note 9: Innovative Insurance to Manage Climate Risks September 2016 Note 6: Global Productivity Slowdown and The Role of Technology Adoption in Emerging Markets May 2016 Note 5: Infrastructure Financing Trends April 2016 Note 4: Infrastructure Finance—Columbia and FDN April 2016 Note 3: Blending Public and Private Finance April 2016 Note 2: Case Study—Bayport Financial Services April 2016 Note 1: Supporting Local Bond Market Development April 2016 7 This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. 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