Institutional investors are investing more in emerging markets in line with the SDGs and Denmark’s PKA pension fund (Pensionskassernes Administration A/S) is one fund that is leading the way. The fund targets 10 per cent of its $40 billion assets under management in alternative ESG investments and an increasing portion of that is now invested in emerging markets via allocations to green bonds, infrastructure, microfinance, water sanitation and a specific SDG fund.
“We have been investing in emerging markets for a couple of years; we are relatively new,” says Dewi Dylander, deputy executive director of ESG at PKA speaking at PRI in Person in Paris.
A key priority in the emerging market allocation is to invest alongside partners. This led PKA to invest alongside the Danish government in Denmark’s Investment Fund for Developing Countries. The Danish state bears much of the risk, and under the fund around seven of the 17 SDGs are supported in investments in countries including Ukraine and Pakistan.
The pension fund’s investment in microfinance is a particular “success story,” she said. Microfinance investment via banks in India and Latin America began at PKA with a specific intent by the pension fund’s board to invest to help women.
“When our board discussed which SDGs to support, there was a voice saying why not do something for women,” she said. The microfinance allocation returns around 15 per cent, but the investment isn’t “mainstream.” Microfinance is structured around giving larger loans each time borrowers repay, but she warns it is a complex investment involving thousands of small loans.
“It’s a difficult business case,” she said. “It relies on the loan takers paying back the loans.”
Dylander said PKA has had less success investing in Africa. A long pipeline of projects “hasn’t materialised,” and PKA only has one investment in Nigeria. It has another investment in South Africa in its specific Danish-government backed SDG fund.
Drawing private investment into emerging economies is essential because public finance will never be enough, said Thomas Pellerin, principle investment officer at the IFC, part of the World Bank. He said FDI investment in emerging markets had fallen, but that with low yields in developed markets, emerging markets offer exciting opportunities.
“We don’t see enough institutional investors in emerging markets,” he said. The reasons are complex but include a lack of tools to navigate risk, and understanding of emerging market risk, he said.
Together with partner institutions, the IFC has developed a new tool to help and is using the trust embedded in its strong brand to draw more investors to emerging markets. “We don’t want to be the only ones in emerging market sustainable investments,” said Pellerin.
It is starting to work. Last year the IFC and Europe’s largest asset manager Amundi, announced the successful launch of the world’s biggest green bond fund focused on emerging markets, the Amundi Planet Emerging Green One (EGO). The fund is expected to deploy $2 billion into emerging market green bonds over its lifetime and includes a $256 million cornerstone commitment from the IFC.
“We have found an interesting balance between risk and yield,” said Stanislas Pottier, chief investment officer at Amundi. “It is our duty to find assets where we know we will have a rapid impact. We need yield, and we all have a responsibility to address the SDGs for a just transition. It is a question of how to innovate and find the right products, so money goes where we need it.”
Olivia Albrecht, senior vice president and head of ESG business strategy at PIMCO, said integrating ESG in sovereign bond investment in emerging markets involves various processes.
“Bonds are not like the equity markets. There are no natural levers to pull regarding engagement with sovereigns,” she said.
Regarding corporate bond issuance in emerging markets, PIMCO ensures attendance at roadshows, a natural point for dialogue. The investor’s giant size at $1.8 trillion AUM also gives it an ability to influence corporates around innovative funding, including green bonds, social bonds and SDG aligned bonds.
“We have a seat at the table with issuers,” said Albrecht.
Regarding sovereign engagement, the investor also strives to be as active. Drawing on its expertise in each country (she warns against bracketing emerging markets together in one asset class) direct engagement with issuers is possible, she said.
“You can engage with sovereigns, but it’s a long-term dialogue and we have to go through different channels.” It doesn’t always change sovereign behaviour but PIMCO’s influence is significant. For example, during political upheaval in South Africa under President Zuma in 2015, PIMCO embarked on a “timely visit” to the country where it met key policy makers. From this, the fixed income investor was able to “crystalise” research and “glean the depth of the problem.” It translated into the investor downgrading South African sovereign risk before credit agencies.
In another example, Albrecht told delegates that PIMCO also changed behaviour at an emerging market quasi-sovereign oil company with a lax safety record – following years of engagement.
“Ultimately the company did adopt international standards in 2018 for health and safety,” she said. “SDG frameworks are being built out. Try and link the financing gaps with the SDGs,” she advised.