Impact Capital Mobilisation: Activation Pathways for the “Missing Middle East”


1. Impact investing is leading the way


1.1 Why impact investing is relevant to today’s global challenges


Today’s challenges, confronting people and the planet in nearly every market around the globe, highlight the need – and the opportunity – for an investment approach that aims to finance solutions to such challenges: impact investing. There is wide agreement – across regions and among actors alike – that today’s social and environmental issues, and the risks they represent, are immense, acute and growing. This recognition confirms that change in how capital is deployed is no longer an optional consideration but a required pursuit, particularly for any investor that expresses an interest in advancing the UN Social Development Goals (SDGs).

The estimated financing gap for achieving the SDGs in emerging markets was recently revised by the OECD to now amount to $4.3 trillion per annum (an increase by more than 50% from the previous estimate following COVID and the pandemic’s global repercussions and drop in sources of financing).2 With such a gap ‘business-as-usual’ is just not good enough.

While a lot of focus is directed to governments to step up, changes to policies and more dedicated public funding alone won’t be enough to meet the need and address the opportunity. Private actors, and the capital they control, need to step up their game and embrace the global challenges as theirs to confront and act on. Private capital is a key tool in the fight against social inequalities and climate change. As more investors signal an interest in advancing the SDGs, now is the time to narrow the gap between talk and action.

Impact investing is an important piece of the puzzle on the journey to address the SDG funding gap as its investors deploy capital to find and accelerate solutions that yield positive social and environmental results. Impact capital and the investors who put it to work seek to intentionally and measurably tackle some of the biggest challenges faced by people and planet. As the landscape of investable opportunities has expanded, so too has the universe of investors embracing impact investing. Within this growing community, investors intentionally integrate positive impact as part of their risk and return objectives, whereby return expectations vary from market returns to capital preservation (see more on the capital spectrum in the box overleaf): For some, this translates into greater risk tolerance and a willingness to accept sub-market returns within part of their portfolio (see Figure 1) in order to go deep and push the boundaries on higher impact and riskier propositions (such as investing in new markets, backing emerging managers or providing subordinated capital to de-risk investment propositions to attract additional investors). For others, this means driving the scaling and maturation of impactful strategies, providing for crucial size and breadth. To be clear, both tactics are relevant and urgently needed. Impact needs to grow and accelerate. Quickly.



Impact investing on the spectrum of private capital


Given the increasing – and increasingly obvious – challenges we face, over the years more and more investors, ranging from private individuals to large institutions, have started to rethink their investment objectives, approaches and parameters to include aspects that go beyond mere short-term financial objectives – at least for parts of their capital allocations.
Motivation to do so can be manyfold, including an increasing ethical consciousness, a growing awareness of the acute risks posed by certain behaviours (not only to people and planet but also to financial returns), pressure stemming from shareholder activism, pressure due to changing client or employee demands – or also the growing recognition of the exciting (and often lucrative) opportunities that emerge from change and innovation.
Depending on the motivation but also, importantly, the investor type (and inherent restrictions an investor may face) the degree of commitment to change and the consequential shift from singular financial targets to the integration of ESG considerations or even a commitment to intentional and measurable impact targets varies widely. One way to show the spectrum of investor capital across the financial and impact return continuum is presented in Figure 2. It shows that impact investing seeks intentional impact, whereby return expectations straddle full-market rate returns to sub-market returns, determined by what is required to achieve the intended impact.
As shown in the spectrum, impact investment goes beyond the avoidance of harm or ESG considerations within an investment process that includes explicit positive impact targets and seeks to intentionally contribute to and measure the outcome of impactful solutions. And this intentional focus is what we need much more of to tackle the many of the challenges faced today.




1.2 Institutional investors need to step up their impact game


To have a chance at achieving the SDGs, private institutional capital is needed. To illustrate the magnitude of such capital: the OECD estimates that global financial assets amounted to a staggering $469 trillion in 2020.3 If used accordingly, this can be transformative: the estimated annual $4.3 trillion SDG financing gap for emerging markets is, when looked at in isolation, an intimidating large number. However, it represents less than 1% of total financial assets in our system – or, if considering the total SDG financing gap over 7 years to 2030, less than 6%.

Similarly, when looking at the capital supply side one can also see a clear case that institutional capital can play more in impact investing without breaking into a sweat: despite impressive growth in recent years and the important cracking of the $1 trillion mark in 2022, the impact investing market is still tiny when compared to financial assets of $469 trillion or to the combined global equity and bond markets, which amounted to more than $250 trillion at the end of 2021.




1.3 Impact investing is viable for institutional investors


There are investable opportunities
As shown above, impact investing is still relatively small. But it is vibrant and diverse, including with respect to thematic areas it covers, geographies it targets and asset classes that are used in transactions, just to name a few:

Firstly, impact investing spans a large variety of themes, including, amongst other, financial inclusion, climate action, access to clean energy, access to quality education and healthcare or affordable housing. One often used framework to describe the key impact themes with a focus on emerging markets are the UN SDGs. Although the SDGs were not designed as investment strategies, they have proven useful in orienting investors as they consider how specific strategies may contribute to one or more of the SDGs.

Secondly, geographically, discussion of impact investing differentiates between developed and emerging markets (see Figure 3). That said, in particular within the context of emerging markets there is again a wide variety of considerations and tactics. This variety can be seen with respect to investor focus and destination of monies flowing, often driven by actual or perceived risks of certain markets, including macro risks relating to political stability, the quality and enforceability of the local legal framework or currency risks, but also the maturity of local investment markets and the mere existence of suitable investment opportunities (i.e., with the necessary size or risk profile).

And thirdly, impact deals span most asset classes, ranging from debt to equity and public to private (see Figure 4). To date, due to, amongst other, the immaturity of capital markets in most emerging market regions where impact capital flows and the relative nascence of many impactful sectors, the majority of impact deals are on the private side. That said, there is momentum in the field in creating suitable product for institutional investors, with leading players recognising the importance of attracting institutional capital.



While one needs to acknowledge that impact investing transactions, in particular in emerging markets, are still often relatively small and bespoke and clearly not as straightforward as investing in listed equities or bonds (and also mostly not as straightforward as investing into ‘mainstream’ private asset classes), there are viable (and exciting) deals for institutional investors – and increasingly so. The investment landscape in emerging markets is growing with (at least certain) markets and sectors scaling and maturing, accumulating necessary track record that allows institutional investors to assess performance risk and to engage. Also, importantly, an increasing number of active asset managers intentionally seeks to create investable ‘institutional-grade’ products across asset themes, geographies and asset classes.

No longer the domain of pioneer players
Impact investors are a diverse and growing bunch, ranging from private individuals to large institutions, and include an array of public and private investor types. Each comes with its own particularities, preferences and limitations regarding, for example, return expectations, risk appetite, geographic preferences and regulatory requirements. Some of the most active asset owners in the impact arena are bilateral development finance institutions (DFIs), multilateral development banks (MDBs), private foundations, family offices and high net worth individuals. But also institutional investors (including pension funds, insurance companies, sovereign wealth funds, banks, faith-based investors and others) are becoming increasingly involved, with a number of mostly European and US insurance companies and pension funds leading the institutional allocation league tables. These institutional actors are thus paving the way for others, demonstrating the viability for such investor types to deploy capital in pursuit for not only positive returns but also positive impact.



1.4 The Middle Eastern current reality


The importance of regional investors
As noted previously, based on the GIIN’s research, the impact investing market has grown to an impressive $1,146 billion in 2022.
That’s the good news. What’s still concerning though is that much of the capital, more than 90%, comes from Europe and the US and Canada – with only fragments coming from outside these Global North markets (see Figure 5).

Of course, impact capital from the Global North is acutely needed and actually needs to increase significantly – but it is also crucial for institutional investors located in emerging market regions to step up their game and engage in impact investing in order to close the impact funding gap and achieve the SDGs.
This is not just about the numbers: institutional investors located in emerging markets typically have a greater understanding and knowledge of their regional investment landscape and associated risks. They are usually better positioned to make informed investment decisions about local assets. And they directly benefit from a regional increase in prosperity and a healthy environment.

Middle Eastern institutional investors remain largely on the sidelines
The Middle Eastern institutional investors financial assets are estimated to amount to about $6 trillion.8 However, the region’s institutional investor engagement in impact investing is sporadic at best. According to GIIN’s analysis (see Figure 5), only 1% of impact capital is headquartered in the Middle East and Northern Africa.
Reviewing Pitchbook’s fund transaction database paints a similar (indicative) picture: over the last 10 years,9 only 16 impact funds benefited from Middle Eastern investor participation. On the investment side, most of the funds were either large infrastructure funds or (mostly regionally-focused) VC funds, plus some private equity funds.10 On the investor side, 20 different investors from the region participated, however, no investor invested in more than two impact vehicles (and only less than a handful twice), underlining the regional investors’ limited focus on impact investing.
Given the fact that Pitchbook’s data base used for this analysis includes more than 1,000 distinct funds, the participation in a mere 16 by Middle Eastern investors is miniscule. In comparison, looking at investor participation in impact funds from The Netherlands, to pick just one country in Europe, Dutch investors invested in around 60 different relevant funds during the same time period, including about 50 different actual investors.



2. Pathways to participation in impact investing


No one expects institutional investors – international or local – to switch their entire portfolio into impact overnight. There are real barriers and limitations, that make a radical change challenging, if not impossible, for most institutional investors (for an overview discussion on barriers, see for example the itf impact taskforce’s Workstream B report11). That said, a gradual yet demonstrable move is possible – and has been proven by a number of dedicated institutions and their courageous leaders. These institutions and their leaders have shown pathways into impact investing, contributing capital to impact transactions. Below we showcase three possible routes that allow for the integration of impact – and the investment opportunity it represents – into an institutional investor’s portfolio.


2.1 Starting small and growing from there – building capacity over time


One route towards institutional investor participation in impact investing is the gradual building of internal capacity. Starting with a modest allocation (even tiny relative to the institution’s overall assets under management), an investor can start small, gradually growing expertise and eventually staff without putting significant money at risk at the outset.
One investor, who proceeded this way is the insurer AXA. Through its asset management arm AXA Investment Managers (AXA IM) the company started – step by step – building a dedicated impact team in 2013, starting with a capital allocation of $200 million, just 0.37% of AXA IM’s assets under management (AUM) at the time (see box below for a summary of the institution’s journey into and in impact investing).


AXA’s gradual build-up of a dedicated and specialised impact investment management arm


The insurer AXA was one of the first institutional investors venturing into the impact field, approaching impact investing through its asset management arm AXA Investment Managers for alternative investments (AXA IM Alts). Starting 10 years ago with a base of $200 million (a mere 0.037% of AXA IM’s $547 billion of total AUM at the time), AXA IM Alts managed to gradually build its impact capacity and portfolio over the years, accumulating a sizeable $900 million of impact AUM by 2021 – evidencing their internal capabilities and also that their clients are following their call to action. To be clear though, impact investments still only accounted for 0.1% of AXA IM’s total AUM.
AXA IM Alts today has a dedicated impact team and as of 2021 had established multiple impact funds, spanning 13 SDGs, 600+ investments and 80+ countries across the globe, including developed and emerging markets. The team uses a diversified range of asset classes, from private equity to venture capital to private debt and project finance, supported by a stringent risk framework, allowing them to pursue impact with an aligned risk/return profile of institutional investors focusing solely on financial returns.
Further, AXA IM Alts’s impact team has developed its own rigorous and transparent impact measurement and management system, evidencing the social and environmental impact of their dedicated funds.

2.2 Finding the right partner to accelerate participation


An alternative approach is the partnership route. Partnership models and structures can be manifold, with different types of partners and roles taken by the partner and the institutional investor in the structure. One example showcased in the box below is Allianz’ multiple partnerships with IFC’s MCPP platform. Starting with an initial commitment in 2016, the two entities now jointly operate three partnerships. A different example would be the strategic partnership Temasek entered into with LeapFrog Investments in 2021, providing the manager with pre-committed anchor funding for future funds and growth capital for the manager itself, taking a minority stake in the company (see box overleaf).


Insurer Allianz’ multiple partnership initiatives with IFC’s MCPP platform


The IFC launched its Managed Co-Lending Portfolio Program (MCPP) in 2013 and has since developed several syndication sub-platforms, effectively building partnerships with select institutional investors. Since 2016, Allianz has entered into three partnership structures with the IFC under the bank’s MCPP platform:

1. Initially, Allianz entered into a tailored partnership under MCPP’s Infrastructure initiative with an intended investment of $500 million, which would be co-invested alongside IFC senior loans, selected in accordance with pre-agreed eligibility criteria, for infrastructure projects in emerging markets. To facilitate the investment, a dedicated vehicle was created by Allianz’s investment management arm Allianz Global Investors (Allianz GI). The partnership allowed the vehicle’s investors to benefit from IFC’s sourcing, portfolio diversification, expertise and network. Further, the IFC provided a 10% subordinated capital layer, allowing Allianz GI to achieve an investment-grade profile for the loan portfolio.
2. In 2021, Allianz entered into a similar partnership under MCPP’s One Planet initiative, announced at COP26. Again, Allianz GI manages a vehicle, whereby the IFC originates and administrates senior loans and provides first-loss protection, this time with respect to climate-relevant cross-sectoral loans across emerging markets.
3. Thirdly, Allianz entered a slightly different partnership in 2018 under MCPP’s Financial Institutions Group platform. Here the participating insurance provider provides partial insurance cover to select IFC’s senior loans. By transferring the risk on part of the eligible loans, the insurance coverage allows the IFC to effectively take larger loans, increasing reach and impact.

Temasek’s partnership with LeapFrog Investments

Temasek, an investment company headquartered in Singapore, announced in March 2021 a $500 million strategic partnership with LeapFrog Investments, an impact-focused asset management company with to date four private equity funds investing in financial services and healthcare solutions across Africa and Asia. Temasek’s commitment took the manager’s total capital raised to more than $2 billion since its foundation in 2007.
The funds committed under the partnership were to be used mainly to anchor multiple future funds of LeapFrog but also to take a minority stake in the management company itself, providing it with growth capital to expand.



2.3 Buying your way in


M&A is yet another way for an institutional investor to add impact investing into its offerings. Transaction activity has been ramping up in recent years with BlueOrchard being acquired by Schroders Group in July 2019 and responsAbility being acquired by M&G in 2022 (see box below), just to name a few.


M&G’s acquisition of responsAbility

In May 2022, M&G, an international investment and savings business with $370 billion
of AUM at the end of 2021, announced the acquisition of responsAbility Investments, a leading dedicated impact investment manager with $3.7 billion of AUM at the time of the acquisition.
The transaction was explicitly pursued by M&G to enhance the investor’s capability in impact investing and expand its international footprint.
M&G is acting as an important investor in funds managed by responsAbility, accelerating capital raising by attracting more institutional investors to the manager’s strategies.

Source: See press release under;


3. Conclusion


Investors invest because they see opportunities that align with their strategic objectives and priorities while satisfying their investment constraints, including, importantly, return expectations and limitations on risk. In today’s investment landscape, that approach can translate into a robust and often exciting impact investing portfolio across asset classes, themes and geographies.
Once the domain of pioneer players exploring what was seen by many as a frontier investment landscape, impact investing is now squarely in the mainstream. The traditional investment approach of building portfolios using two dimensions of risk and return has been replaced for many, at least for part of an investor’s portfolio, with the three-dimensions of risk, return and impact.
An increasing number of institutional investors have developed exciting impact investing portfolios. To date, the most active and dynamic actors are domiciled in North America and Europe. While Middle Eastern investors represent a significant amount of AUM, these investors have yet to move significantly into the impact investing arena. This is important not only because there is a financing gap but also because Middle Eastern investors are advantaged by being proximate to emerging markets – markets that others perceive as remote, unfamiliar and risky.
The momentum fuelling the expansion of the impact investing market – and the often lucrative investment opportunities this market offers – combined with the current underweight position of Middle Eastern investors, creates a near-term chance for regional investors to step in and step up. As they do so, Middle Eastern investors can select from one or more proven pathways to activate their intent and build solid impact investment portfolios. Simply put, they can ‘build’, ‘buy’ or ‘partner’. These pathways are not mutually exclusive and combinations can be pursued in tandem, offering ways to accelerate deployment. We acknowledge that institutional investors face barriers to engage in impact investing, depending on many factors including, importantly, their local regulatory environment but also their leadership’s motivation and engagement. Moving into impact is not effortless and requires an internal champion pushing for change. That said, it is important and, as shown by the few examples in this article, doable.
As Middle Eastern investors consider ways in which to activate impact investing portfolios, we anticipate constructive support coming from the broader ecosystem, including the Transition Investment Lab. Investors can benefit from deeper data analysis, both about the capital demand side of impact investing that will highlight the range of investable opportunities, and about the supply side that will showcase the institutional investors and asset managers deploying impact capital at scale.
We hope the readers of this article will consider taking (at least) one step over the coming year to embrace impact investing as part of their investment activity. The urgency of the needs confronting people and planet, but also the attractive investment opportunities that exist in the field, make investing for positive impact a timely, relevant and smart investment approach.