Long-run Returns to Impact Investing in Emerging Markets and Developing Economies
There is interest in impact investing, the idea of deploying capital to obtain both financial and social returns. But private financial returns are only possible if capital markets are not perfectly integrated, so profit opportunities still exist in certain markets. This proposition is put to the test by examining every equity investment made by one of the largest and longest-operating impact investors across 130 emerging market and developing economies. Since 1961 this portfolio has performed comparably to public and private equity in the United States, though it has underperformed since 2010. Investments in larger economies have higher returns, and returns decline as banking systems deepen and countries relax capital controls. These results are consistent with a core thesis of impact investing that some eligible markets do not receive sufficient investment capital.
We thank Mohan Manem especially for providing an understanding of the data. Seminar participants at the Harvard Business School Finance Unit, the International Finance Corporation, the World Bank Development Economics Research Group, and the IMF African Department provided helpful comments and questions, along with Adam Fegan, Paddy Carter, Penny Goldberg, Neil Gregory, Victoria Ivashina, Kostas Kollias, Jessica Jeffers, Josh Lerner, Ita Mary
Mannathoko, Fanele Mashwama, Camilo Mondragón-Vélez, Jacob L. Otto, Tommaso Porzio, Thomas Rehermann, Antoinette Schoar and Jesse Schreger. Anshul Maudar provided excellent research assistance. Cole gratefully acknowledges support from the Division of Research and Faculty Development at Harvard Business School. The views expressed in this paper are those of the authors and do not necessarily represent those of the World Bank Group or the National Bureau of Economic Research. All results have been reviewed to ensure that no confidential information is disclosed. Correspondence may be addressed to Tristan Reed, The World Bank, 1818 H Street NW, MC3-317, Washington DC 20433. Email: firstname.lastname@example.org
Tristan Reed was an employee of the IFC from 2018-19.
- Over six decades, the International Finance Corporation has earned higher returns than the S&P 500 on its equity portfolio....