Western governments have a “critical” role to play in persuading European institutional investors to invest in emerging and developing markets, according to ODI.
A working paper from the thinktank has estimated that an increased ambition from insurance companies and pension funds leading to a doubling of combined investment flows would yield an annual flow of around $120bn (€111bn) into emerging and developing economies (EMDE) within half a decade. What is more, it argues, the barrier to increased investment in this area is more behavioural in nature than to do with regulation.
“Insurance and pension markets are diverse between countries, reflecting different approaches to the provision of social insurance, and different ways of thinking about the role of the financial sector and regulatory approaches,” wrote the authors of the paper.
“Efforts to mobilise [insurance companies and pension funds] and address investment behaviours to incentivise more EMDE investment will be difficult to disentangle from a broader domestic imperative to balance issues of risk and the need for long-term investment, as well as social attitudes to finance and the provision of social insurance.”
They added: “Notwithstanding this, efforts to address the operational environment of [insurance companies and pension funds] in order to enhance their capacity and willingness to invest in EMDE assets can have an impact, but only if tailored to the specific circumstances of each country and institution.”
‘Pinch points’
According to ODI, there are a number of “pinch points” preventing the unlocking of insurance and pension fund capital capital – to which end it has recommended governments, MDBs [multilateral development banks] and the development finance institutions (DFIs) they own take a “critical” role to help these institutions allocate more assets to emerging and developing economies.
“Specifically, access to large-ticket, low-cost, long-term investment opportunities in risk-diversified portfolios of assets of moderate risk with good ESG and climate management and impact reporting can be attractive to institutions, as shown by the success of pioneering pooled funding models like the Managed Co-Lending Portfolio Program, ILX Fund and the Allianz/FMO SDG Fund,” the paper elaborated.
“Where needed, governments, MDBs and DFIs can de-risk asset pools by taking junior, high-risk tranches, and/or by blending commercial capital with concessional capital able to accept certain risks with low or no compensation.”
It added: “They can offer structures that protect against political and currency risks. They can also help by generating and sharing risk information from the performance of MDB and DFI investments, which would help increase confidence in EMDE investment as private investors could better understand and assess the risk.”
