Investors Urged to Expand Allocations to Frontier Markets | Asset owners

A structural imbalance in the way global investors’ capital is allocated poses a major threat to the world’s less developed regions, according to sustainable investing experts.

According to OECD data, private asset owners have invested more than $1 trillion in infrastructure assets globally over the past 10 years, but most of that capital has been deployed on developed markets.

“You have to remember that 80% of the world’s capital is locked up in 10% of the world’s stock exchanges,” said Paul Clements Hunt, CEO of The Blended Capital Group, at a conference organized by the Responsible Investment Association of Australia. (RIAA).

“Our failure to find effective flows to least developed countries is a huge, growing systemic risk for the 21st century,” Clements Hunt said.

As investors evolve their asset allocation to incorporate new asset classes and a broader range of ESG considerations, the frontier markets option has come into play. Clements Hunt said an allocation to these markets less developed and potentially riskier should not be the primary approach that asset owners take to investing, but an extension of it.

“[We’re] whereas a 1% allocation to frontier markets and development capital is and should be a natural part of the capital allocation process,” he said.

The World Bank identified this particular problem following the G20 meeting in 2020 and argued that although the world’s top 300 pension funds manage around $16 trillion, flows to frontier market infrastructure and marginalized communities were insufficient, where the economic benefits were massive.

For example, the lowest-ranked country on the Human Development Index, Niger in West Central Africa, hasn’t exactly grabbed the headlines for investors. It has 23 million inhabitants and is crossed by the Sahara desert. It is also the leading supplier of uranium to the French nuclear industry.

“By 2100 it will have a population of 86 million,” Clements Hunt said. “But effectively, it was abandoned by investors. So, whether through philanthropy, blended capital flows, or donor funding, we need to find a way to provide basic services to some of these least developed countries. Otherwise, it’s a huge systemic risk.

THE ASIA CHALLENGE

Most of Asia’s frontier markets – including Vietnam, the Philippines, Bangladesh and Mongolia – are competing to entice foreign investors to provide infrastructure financing for everything from agriculture and mining. mining, textiles and computers.

Alexis Cheang, head of sustainable business at Mercer in Australia, said many pension fund investment committees would be happy not to invest in frontier markets because they believe there is too much risk.

“There is therefore a conundrum in that certain markets are considered non-investable by institutions, mainly due to governance risk and capital controls. But on the other hand, the world cannot move towards a sustainable future without investing in these markets. So the question is, what kind of innovative financing can we develop to try to get capital to those who need it most?”

Sustainable bonds are a possibility, she said. “The $70 trillion clean green bond market has an almost infinite capacity to grow and become a significant component of the $90 trillion annual fixed income market.”

After offering mediocre returns in stock markets until the global financial crisis, frontier-focused portfolios have rewarded long-term investors ever since. The MSCI Frontier Markets Index fell from 8,500 in May 2009 to 34,500 at the end of 2021.

Ross Piper, CEO of Christian Super, told the RIAA conference: “Everyone will have a different moral position as to whether there are certain countries we should be in.” For super funds, this is a complex question, made a little easier by the evidence that active ESG investors outperform their less engaged peers.

The RIAAs A recently published report on the relative performance of super funds revealed that, for the first time, responsible investment approaches are influencing strategic asset allocation for the majority of super funds (55%, up from 39% in 2019) .

“This means responsible investing is considered when the allocation between different asset classes is rebalanced, to achieve financial return objectives, reflect risk tolerance and time horizon.”

THINKING FORWARD

Blended Capital’s philosophy is based on the idea that disruptive digital technologies have the power to transform lives, communities, ecosystems and the health of the planet.

Advances in connectivity and innovative fintech solutions are accelerating financial inclusion in many frontier emerging countries. The digitization of government services and the push towards cashless societies are helping to formalize typically large parallel economies.

“Providing sustainable development for the 2.4 billion people at the base of the socio-economic pyramid – the last-mile marginalized – will determine true success in the 21st century,” said Clements Hunt.

“By 2050, some 70% of the world’s 9.7 billion people will live in cities, and the carbon intensity of those cities will be determined by infrastructure investment decisions made over the next 15 years.

But governments at the national, provincial and municipal levels lack adequate fiscal resources to tackle the scale of the ever-evolving low-carbon infrastructure challenge, he said.

“Understanding this financial gap, it is clear that the savings of billions of ordinary citizens will need to be mobilized into productive, climate-smart investments that meet the needs of end-beneficiaries, communities and investors.

This includes the significant assets of wealthy families – nearly $50 trillion, controlled by some 10 million people worldwide – that will need to be invested in the transition to low-carbon infrastructure this decade, at a time when we are witnessing the greatest intergenerational transfer of private investment. richness.

According to Rami Sidani, head of frontier investments at Schroders, 10 years ago, frontier equity investments were dominated by oil-price sensitive Middle Eastern markets. Now many of them have shifted to emerging markets, allowing investment to move to a more cohesive set of low-income and less-developed countries that are more exposed to export-led development.

“Most of the markets we invest in are emerging economies that have been growing at over 5% per year. A relatively low base of financial inclusion indicates the sustainability of these rates for an extended period,” Sidani said.

Vietnam is the largest market within the emerging market investment universe. It is also one of the best stories of structural growth in the developing world, he said.

Responsible investment strategies used by super funds


Source: RIAA

¬ Haymarket Media Limited. All rights reserved.

James V. Hayes