How to implement an impact investing strategy in emerging market debt

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Insight Investment uses impact bonds as an umbrella term for fixed income issuances the proceeds of which are dedicated solely to projects intended to meet environmental or social criteria. This encompasses the universe of bonds referred to as green or sustainable as well as more specific outcome-oriented issuances such as blue, gender and transition bonds.

What is impact investing?
Defining “Impact”

The People theme includes six of the SDGs that can be thought of as seeking to improve the outlook for people and overall societal inclusivity, such as gender equality.


In our view, goals that look to improve environmental sustainability could be considered to have a Planet theme, which would include affordable and clean energy.


Prosperity at a communal level is another impact theme Insight believes encapsulates a number of SGDs well. A good example is industry, innovation and infrastructure. Under the Prosperity theme Insight also include the final two SDGs of peace, justice and strong institutions, and partnerships for the goals.

Unparallelled opportunities in emerging markets for making a positive impact
What emerging markets offer for impact investing
Most of the world’s population, and nearly all of the poorest people, live in EM countries

The countries of the EM are home to 85% of the world’s population1, so when considering how it could be best to address the furtherment of social and gender equality and other SDGs, contained within the People impact theme, it is worth understanding the sheer scale of the potential to make an impact in EM.

Similarly, Insight believe an investment oriented toward UN SDG objectives such as no poverty, providing clean water and sanitation or quality education in the emerging markets is likely to help achieving a demonstrable impact aligned to the People theme.

As the UN Sustainable Development Report 2022 shows, the goal of reaching no poverty remains difficult, particularly as 99% of the world’s poorest live in EM countries2. Figure 2 shows that much of Africa still faces major challenges, while other EM countries such as India, Pakistan and Indonesia, to name just three, continue to face significant challenges.

Most of the world’s land mass is within the EM

With 77% of the earth represented by EM2, there is significant scope for impact capital aligned to the Planet theme within EM. The need to focus on SDG 13, climate action, is clear, particularly for EM where Insight can regularly witness the devastating effects of environmental disasters and climate change.

Most of the energy supply in EM is reliant on fossil fuels

If you are serious about making an impact on fossil fuels at a global level, you cannot ignore EM, where over 70% of the energy supply is reliant on fossil fuels3.

Given the existing dependency on fossil fuels as the source of so much energy supply in EM, they arguably should be a focal point for capital. It may help enhance Prosperity, aligning with SDG 9 focused on industry, innovation and infrastructure, as well as address the Planet theme through improving the provision of affordable and clean energy (SDG 7) – where the UN Sustainable Development Report 2022 shows there are significant and major challenges remaining across much of the world (see Figure 3).

The scale of opportunity
Potential financial benefits of EM investments

This yield surge and spread widening is occurring while leverage among EM corporates is generally less than half that of US corporates, and with interest cover at decade highs.

Last, despite the challenging macro backdrop globally, Insight believe the fundamental outlook for EM corporates also remains positive.

Attractive features for performance potential
The rapidly expanding impact opportunity set in emerging markets

The opportunity set for achieving impact began a decade or more ago with the introduction of green bonds, but it has grown substantially since then, and now accounts for a significant proportion of EM issuance. At the end of September 2022, impact bond issuance in the EM had represented 31% of all EM issuance for the year to date7 (Figure 6), with the hard currency impact bond universe now totalling over USD 250bn outstanding, from over 200 issuers.

The first generation of EM impact funds mostly focussed purely on green bonds, those with specific projects targeting environmental outcomes. As the broader market has evolved and matured, Insight can now see a wider opportunity set in public fixed income. Insight expect this will improve both potential financial returns and the potential breadth and extent of impact through three types of impact security: ‘impact bonds’, and bonds from what Insight refers to as ‘impact issuers’ and ‘improving issuers’.

An impact bond is one that specifies its proceeds will be used to have a positive environmental or social impact. Common types include green bonds, social bonds and sustainability bonds. As data availability and issuer frameworks have developed, it has now become possible to also target impact via issuers whose revenue (impact issuers) or capex (improving issuers) is directly aligned to the UN SDGs or EU taxonomy. For all three types of impact security, Insight believe it is critical to assess the risk of ‘impact-washing’, to ensure capital is genuinely being used for the positive advancement investors target.

The opportunity for impact investing

Insight believe EM offers potentially unparalleled opportunities for making a positive impact, in a rapidly expanding investment universe that also has the potential to deliver very attractive long-term financial returns.

1 Source: Insight analysis as at December 2021, using International Monetary Fund (IMF) data and categorisation of Advanced, Developing and Emerging countries (Emerging markets = Developing and Emerging countries).

2 Insight analysis using World Bank data available on poverty, land mass and poverty as at September 2021, setting the poverty gap at USD5.50 a day (2011 purchasing power parity, PPP).

3 Source: BloombergNEF, New Energy Outlook 2020 dataset.

4 Source: International Monetary Fund: Fiscal Policy and Development: Human, Social and Physical Investment for the SDGs January 2019.

5 Source: International Finance Corporation – Climate Investment Opportunities in Cities (2018).

6 Source: JP Morgan GENIE Index, EM and DM respectively. As at 28 September 2022

7 Source: Insight analysis of Bloomberg data, as at 28 September 2022.

1 Statista. Luxury goods China. As of end June 2022.

2 Dychtwald is also the founding CEO of Young China Global Group – a think tank and consultancy designed to create understanding about Eastern and Western millennials.

1173291 Exp: 16 May 2023

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