“We need governments to help unlock sustainable investments in emerging markets”

Governments increasingly call on investors to contribute to the financing of sustainable development in emerging markets. APG’s pension fund clients want to contribute and have set targets for investments in the Sustainable Development Goals. To help them fulfil their ambitions, APG actively looks for Sustainable Development Investments (SDIs) and has launched the SDI Asset Owner Platform. In emerging markets, however, it can be challenging to find sustainable investment opportunities. Ronald Wuijster, CEO Asset Management at APG, calls on governments for help.

One of the challenges for investors is that there is often insufficient accurate and reliable information to assess whether companies are contributing to the SDGs. That is why APG joined forces with PGGM, AustralianSuper, and British Colombia Investment Management Corporation to establish the SDI Asset Owner Platform (SDI AOP) in 2020. The platform uses artificial intelligence to determine whether and how much companies contribute to the SDGs with their products and services.

In 2021, BlackRock – the world's largest asset manager – decided to use the platform’s data. The platform now represents over USD 10 trillion in assets under management. The SDI AOP is encouraging international investors to join the platform with the aim of making it a global standard for investing in the SDGs.

Finding investable SDI opportunities in emerging markets is challenging

Even with the data challenge being tackled, it can still be difficult to find investment opportunities in emerging markets which, ironically, offer most growth potential for sustainable development. Still, although availability is limited, we do see a trend of growing issuance of green bonds by different emerging market debt agencies. These bonds are earmarked to specific sustainable projects and/or have made their revenues conditional to achieving specific sustainable targets. We welcome this development, which is certainly of interest to us.

Another way of financing sustainable development is through private debt originated by Development Finance Institutions. We like this instrument, because it allows us to finance specific individual projects on the ground or to target specific regions, sectors or SDGs on behalf of our clients. However, the scalability we need is not always available. Also, these loans are buy-and-hold. That is not necessarily a problem as we are in it for the long term, but our clients may change their preferences over time and may ask for a change in the investment portfolio. More flexibility would help to allocate more capital to this investment category.

A flexible and scalable solution: ILX Management’s SDG-focused private credit fund

We need innovative solutions to attract private capital. This year, APG invested in a platform for loan participations in emerging markets, ILX Management’s new SDG-focused emerging market private loan fund. APG is the first investor in the fund, allocating USD 750 million on behalf of Dutch pension funds ABP and bpfBOUW.

The fund will pool loans from various DFIs, building a broad and diversified portfolio of medium and long-term finance to projects and companies with a focus on clean and renewable energy, sustainable industry and infrastructure, inclusive finance and food security. Potential investment examples include the development of port facilities, solar power farms, sustainable agriculture and loans to local businesses.

Investing in the fund allows us to invest in individual projects and to decide what we do and do not want to invest in, in line with our clients’ sustainability requirements. At the same time, we still benefit from the underlying DFIs’ long-standing track records in originating and managing private sector projects in emerging markets.

Equally important, the investment helps us to diversify and improve the risk profile of the emerging market debt portfolio. This is because private loan investments tend to have low volatility and a weak correlation with the more liquid credit investments that trade on public markets.

Hurdles: risk aversion and protection constructions

We depend on DFIs to make the loans available. However, there are a couple of hurdles to take. First of all, DFIs tend to find climate-related projects more risky. With our long-term approach we can play a role by taking over or sharing some of the risk. Governments in developed countries can also help stimulate this type of investments, for example by providing investors with a first-loss guarantee.

Second, some countries 0ffer quite a lot of sustainable investment opportunities, but these are not always accessible to DFIs as local banks want to keep these opportunities for themselves. The governments of such countries can help by opening up the market, unlocking private capital from foreign investors and speeding up the realization of climate ambitions.

We call on governments to help boost SDG investments in emerging markets

It is possible to scale up private investment in sustainable development opportunities in emerging markets. There are hurdles, but if institutional investors, Development Finance Institutions and governments work together, we can overcome them.