Latin America Is The New Frontier For Impact Investing

Sustainable & Impact Investment is making its way around the world, and Latin America (LatAm) is following the leading trends of Europe and other regions. Although traditional investment has significantly improved in the region, it is still early days for truly sustainable investment practices that make both a difference and garner solid returns.

Investments, Growth and Economic Inequality 

In fact, private investors have long preferred LatAm over East Asian and Pacific or sub-Saharan African countries, choosing to pour US$700 billion into the region, compared to the $500 billion total to the others since 1990¹ just for infrastructure.

This level of capital injection has allowed the region to see significant economic growth since 2000, and especially since 2010. However, consistent with the root cause underlying conclusion by the Economic Commission for Latin America and the Caribbean (ECLAC), the exponential growth has been lopsided and an unintentional - or natural - consequence has been economic inequality. 

We can observe this in the financial sector inclusion challenge with the World Bank² reporting that almost 50% of the adult population are unbanked, which is around 270 million people, and ~77% without access to credit. In Mexico, only 10% of women have access to credit, which is the lowest in the region for one of the largest economies with a population of ~128 million people and a GDP of $1.1 trillion. It does not help that of the $715 billion in global impact-focused assets, LatAm represents only around 0.5% of that total.

Governments’ strategies and policies play a considerable role. This is why, in a period of growth and recessions, there may still be countries that are downgraded on MSCI ratings³. As counterintuitive as it sounds, there will be periods of volatility before stabilization, yet the markets can be profitable. When exchange rates fluctuate or rules are deployed to manage access to foreign currencies, the ripple effects can be felt across markets, but the shift eventually levels out if the right support is in place. 

Many sectors are facing major challenges, which creates a pressing need for immediate solutions, and local interest rates are at historic lows in many countries, which can make financing of businesses and investments to fund these solutions highly cost-effective. 

The Opportunity of a Better Future

It should be another obvious option, then, for strategic investments to be more focused on the current conditions and bridging those gaps to intentionally find real solutions to quality education, access to health services, gender equality, and environmental safety, which are all the things that secure the bright future we want and need.

Investors should look at this situation and be excited at the possibilities, since the region is an obvious choice for portfolio diversification and impact.

The stage is set once again with the conditions for infinite opportunities.

The Potential to Become an Impact Investment Giant

Renato Mazzola of BTG Pactual, the largest investment bank in the region, confirms that Latin American private markets are at an early stage, but have the potential to become an impact investment giant. Some well-known challenges plague the region, such as climate change mitigation and waste management. Natural resources are abundant, but managed quite poorly. 

For a region that was once looked to as a treasure trove for the Old World, widespread poverty and inequality are the primary descriptors of Latin America. The public sector has clearly struggled or lacked the innovation to cope with the demanding changes of society thus far, be it purposely or simply by a lack of vision, evolution and collaboration among stakeholders.

COVID-19 did not introduce “new” problems to the region; it merely exacerbated those that already existed. Although the ECLAC estimates that the recession caused by the coronavirus could plunge a further 35 million people into poverty³, the region was already headed in that direction. The one thing that changed was the projected time to destitution.

So how do we manage the current situation and turn the corner or marry solutions and impact required? In the case of Mazzola’s business strategies and how he lives out impact investment are entwined. His philosophy is that the values supported through investment practices must be a part of the organizational DNA. Otherwise, the overall culture will never be able to adopt good governance practices as its cultural norm. In other words, a grassroots movement that would spur a diversified and inclusive consumer base and economic development. This is one way.

A Way Forward: Good Investments = Net Positive Impact

What if Sustainable & Impact Investing (S&II) is the main (or, the only) way to move forward? Traditional investments have gone through many iterations and the results are still lacking. They have in fact financed the current solutions that have brought us to the situation we are in. What investors might call a "bad investment" is usually calculated and defined using mainly financial metrics depending on the nature of a business. What if a bad investment is redefined as when the social and environmental good is absent? 

What if a good investment is that one that only has a Net Positive Impact? 

If the financial metrics are phenomenal, but at the cost of and detrimental to society, then what is the true value of that investment? If the net impact is neutral, then it may be likely the financial metrics would also be average because it would be difficult to make big gains with no social and/or environmental positive effects. However, if the investment is the driver to significant social and climate changes, then the net impact of that investment can also naturally drive the momentum and longevity necessary to positively transform the world and consequently returns.

The New Frontier Again

So what better place to start than an established, new frontier? There is a reason why the Golden Age of Exploration lasted two centuries to fuel world capitalism, and it worked then. The one big challenge was that only the elite - and perhaps some pirates - benefited from it and it led to the Age of Imperialism, which still carries a heavy consequence and meaning in the relations and emotions of the affected regions, countries and societies. Now that we have learned from history, we can create a better future moving forward by being smarter with our decisions, actions and money, by supporting regional and local stakeholders and experts, and being wise in collaboration to effect long-term beneficial change where the needs and opportunities align. This is why Latin America is the answer: it’s primed and ready for Sustainable & Impact investment.

The New Pioneers of Impact 

The past is crystal clear. What is gone before is known to all. The future lies ahead but it is on our hands. We all have a role to play. Will you become a pioneer, a follower or simply stand by? If you want to take some action, here are some ideas:

If you are an Investor, What are you doing to expand your portfolio to include Latin America? If you have Latin American connections and presence, what are you doing to increase the impact of your assets? How are you assessing your investment managers and opportunities? And most importantly, are you a modern imperialist looking for short term returns to enjoy in a world that seems to be soon inhabitable or are you creating lasting benefits with impact beyond many generations? 

If you are a Fund Manager, you must carefully consider your strategy to include sustainable & Impact investment at the core, including the relevant frameworks to drive your investment processes to select and fund the solutions created by the established international players as well as up-and-coming companies founded locally. Keep up-to-date on region trends and major initiatives to be able to serve value-aligned investors looking for the best and most innovative impact products.

If you are in a Government/Regulatory Body/Development Bank, continue to proactively engage with the relevant stakeholders to maximise opportunities initiated by the private sector. Accelerating the transition from corporate DNA to cultural norms is the path to sustainability of industry best practices. Pay particular attention to the blended finance initiatives created to accelerate the transition of capital into S&II, such as SDG500 and Public-Private Partnerships (PPP). 

If you are a Consumer/Resident, you can vote for politicians, but can also vote with your hard earned money when you spend it. Use regional and local suppliers. Pay attention to the source of the products or services you use. “Made in China” is all too familiar; can you readily recall when you last saw “Made in …” followed by the name of your country?

If you are a Business Owners, Entrepreneur, or Corporate Manager, try to focus on creating solutions to provide people with sustainable options across the full supply chain. We must focus on every aspect of the impact we are having if we are to continue to generate profit.

Finally, if you find this article helpful, please share it to create further understanding and immediate change of our behaviours. We only need to take ONE ACTION at a time and create compounding marginal gains. We can only control our most immediate actions!

You can enjoy the full interview with Renato Mazzola on my Impact Leaders podcast here.

Important: this article is for information purposes only regarding Latin American and does not constitute a request, offer, recommendation or solicitation of any kind to buy, subscribe, sell or redeem any investment instruments or to perform other such transactions of any kind.