I don’t know for sure. I don’t even know whether my flight will take place in a couple of hours, as I have been trying to go back to Europe for the past week.
The situation is complex and uncertain, and outbreaks are still popping up across the globe. It is challenging to estimate the second- and third-order effects of this crisis on broader economies, industries and households, let alone impact investment assets. I will try, however, to list some thoughts based on my interactions with the players in the sector and my observations.
For the sake of clarity – as impact investing is even including Facebook in some of the definitions out there – I am keeping it old-school here, and I am focusing my (quick) analysis on investments in microfinance and energy access in low-income and fragile countries. I am assuming that outbreaks will follow this pattern, and that lockdowns will last weeks across Latin America, Africa and South Asia.
In the Coming Weeks
Poor collection and financial performance across the spectrum: The “impact investment asset class” is not counter-cyclical or a hedge this time. Practitioners used to repeat that “people will always need energy and access to micro-loans.” If there is a market collapse on Wall Street, the small household in Jaipur will still need to finance its grocery business. This time, however, that household will be locked down for weeks, they won’t be able to collect payments and their sales staff won’t be even be allowed to approach new customers (literally). Collection rates will go to zero for many months. We don’t know how many companies will be able to weather this significant liquidity shock, both in the financial inclusion and the energy access space. Those that are well-capitalized and that have focused time and resources toward moving online and cashless will obviously be more resilient. There is also hope that countries with experience dealing with the Ebola outbreak will be less affected. However, the exposure to such countries in the sector is quite limited.
Substantial increase of the currency risk: Whether caused directly by the global recession, the fall of oil prices or the closure of borders, most emerging-market currencies are collapsing. This phenomenon will dramatically increase the risk of our clients and partners in Africa, Asia and Latin America. Also, this time, the “natural hedge” through currency and geographical diversification won’t work as well, as this crisis is global.
Many investments to be delayed and on hold (depending on how impact-oriented you are): As the world is trying to understand what is happening, many investors will step back and wait. Most of the private-sector players in the concerned countries are already reviewing their growth plans and will eventually switch to crisis and survival mode. It might require billions in investments to achieve the SDG, but in times of panic, the only sustainable goal is to stay alive another quarter (unfortunately, also literally). Perhaps it is an opportunity for some of the impact and socially conscious investors to shine and deliver on their social mission in times of crisis. There will be some challenging credit discussions in the coming months, and I suspect the “no-trade-off” impact investors will be quite discreet.
No one can tell whether this crisis will be short-term, or if we will be muddling through a recession for many years. I suppose it depends on how rapidly the domino effect takes place.
Here some of the changes we can expect to see:
- Certainly, most economies will emerge with dreadful balance sheets, and with different priorities than those of 2019. This will very likely imply a reduction in budgets dedicated to international aid and blended finance vehicles.
- There will be less emphasis put on “market solutions,” as the Covid-19 crisis has shown that strong public health infrastructure capable of dealing with emergencies is vital. Period. No private clinics or health apps are of valuable use now.
- SDG number 3 will take the lead. I expect many “health and prevention” specialized funds and vehicles to pop up.
- Renewable energy will be less attractive, with oil prices reaching record-low levels. That represents bad news for the progress of combating climate change.
- Corporate investments in the target markets will focus on diversifying/improving the supply chains and getting serious about going cashless and switching to online.
- New socially conscious models will emerge to accelerate distance learning, e-commerce and any other change of behavior resulting from this health crisis.
- New opportunities could emerge in the prevention and hygiene space (affordable health kits, etc.).
I hope I am wrong, and I am happy to have these expectations challenged. A shorter shock with minor effects will be better for all players involved, and above all, the fragile communities we try to serve.