Who invests and how?

Scaling from billions to trillions of dollars to close the financing gap to emerging markets and developing economies (EMDEs) means reaching beyond public finance and philanthropic support to mainstream financial markets. Raising private finance to the levels required in the countries where it is needed will require a step-change in targeted, coordinated efforts from policy makers, public finance institutions and investors.

It is critical to understand different institutional investor profiles, where and how they invest, and build dialogue and co-design accordingly to develop and scale more effective models and solutions.

Scaling private finance is possible but will take time. Stimulating the right action from the right investors is vital.

Five institutional investor archetypes 

Institutional investors are not a homogenous group. The report introduces five investor archetypes based on their characteristics, investment style and barriers:

1. Domestically focused
2. Commercially global
3. State-aligned large-scale
4. Highly regulated retail-focused
5. Nimble entrepreneurial

Whilst not capturing all the nuance and complexity of legal structures, investment mandates or asset allocation strategies, the five archetypes help to simplify the diverse investor landscape for those working to improve the system. It can also support those working in different silos of finance to piece together the motives and actions of different pools of capital, as well as their interdependencies.

The PRI will continue to work with signatories, public finance institutions and policy makers to develop understanding of the needs and approaches of institutional investors to sustainable EMDE finance.

In this report: five solution areas

1. Better map and match institutional investors with EMDE capital needs
2. Clearly signal and support EMDE domestic financial market development
3. Champion the innovation and use of new instruments and asset classes globally
4. Prioritise economic and investment incentives within a whole-of-government approach to attract investors
5. Improve access of EMDE-operated companies to the global financial system.

The report suggests specific actions which are summarised by actor below.

Key action for governments and regulators

Addressing the system-level needs of EMDE capital mobilisation requires a strong enabling environment domestically and internationally, supported by a whole-of-government approach, robust governance, financial regulation and clear economic and sectoral policy. Governments should expand the use of concessionary capital but ensure it is used effectively by mobilising and increasing private capital allocation. Collaboration and co-design with investors can ensure this is channelled most effectively to achieve transformational scale and quality of finance for the transition.

Governments and regulators can:

• map the right types of institutional investor to each economy and financial system and build out investable pathways to attract them;
• engage with domestic and state-backed institutions – and make sure EMDE investment is on everyone’s radar. Identify, align and signal where portfolios can invest;
• review market practices and create conditions for domestic and international businesses and investors to collaborate and thrive to expand investment in EMDE markets. Work regionally to create scale;
• understand the incentive mechanisms that inform businesses, markets, companies, investors and clients to invest in EMDEs. Collaborate with peers and stakeholders to find the right incentives to crowd in private finance;
• support global initiatives, frameworks and standards to smooth EMDE pathways to international financial markets and institutions, avoiding unintentional exclusion.

Developed market policy makers have a responsibility to:

• provide technical assistance, capacitybuilding and financial support to EMDE governments;
• show policy leadership and signal support to EMDEs to financial markets and practitioners;
• accelerate progress on developed market policy barriers and financial architecture reform.

Key actions for multilateral organisations and multilateral development banks (MDBs)

MDB shareholders need to renew their efforts to ensure clarity of MDB mandates on attracting private finance. MDBs need to increase the amount and effectiveness of concessionary capital for blended finance, with more shared learning and improved efficiency of time and costs to help attract investors. Their focus needs to sharpen on project origination whilst moving assets off balance sheet to private finance. 

Multilateral organisations and MDBs can:

• increase technical support and convening for domestic economic and financial market development and international market access;
• optimise crowding in private finance by mapping investors to EMDE needs, matching not just risk/return but also structure, complexity, cost allocation and investor regulatory environment at the earliest point by engaging in co-design;
• actively support the standardisation of blended finance structures. Work closely with domestic banks to repackage assets for international investors and stimulate domestic pipelines;
• ensure reporting frameworks are sensitive to domestic development priorities and are not adding extra complexity compared to international frameworks.

Key actions for institutional investors

Institutional investors need to offer their intellectual as well as financial capital to overcome barriers and co-design solutions. Whilst different types of investors have different contributions to bring, which are explained in this report, there are overarching themes.

Institutional investors can:

• actively engage with underlying investors, members and clients to review the long-term fiduciary case within portfolios and co-design mandates accordingly to invest in EMDEs;
• actively engage in the design and adoption of innovative instruments and asset classes;
• build out investment teams, local knowledge and relationships. All investors can engage on industry education and capacity-building in terms of EMDEs;
• address the lack of EMDE representation in indices and benchmarks by actively adopting, creating or championing alternatives to boost EMDE allocations;
• recognise their role in incentivising EMDE investment, both externally and internally, be it crowding-in international investors, new market development or internal policies.