By: Jonathan Fletcher
As impact investors in emerging markets (EM), a fundamental element of our investment approach is the contribution companies make to society. This is how companies positively impact the people and environments in which they operate; in essence contributing to a better future for all.
One of the ways in which we aim to achieve this is by investing in sustainable infrastructure in emerging markets.
What is sustainable infrastructure?
Sustainable infrastructure provides affordable access to essential services and physical structures in a sustainable way. From design, through construction and operation to decommissioning, sustainable infrastructure either minimises negative impacts or actively drives positive economic, financial, social and environmental impacts.
How does sustainable infrastructure contribute towards the UN’s SDGs?
The United Nations’s (UN) Sustainable Development Goals (SDGs) are 17 goals that aim to promote peace, prosperity and the eradication of poverty, all while protecting the planet.
Sustainable infrastructure plays a direct role in contributing to three of the SDGs. It should be more resilient than non-sustainable infrastructure and its development would likely promote sustainable industrialisation and foster innovation (SDG 9), as well as help support the creation of sustainable cities and communities (SDG 11). It can also help enhance access to basic services like clean, affordable drinking water and hygienic sanitation (SDG 6).
Why is it needed in EM in particular?
EM is the perfect place for impact investing. More than 6.6 billion people, approximately 86% of the world’s population, live in developing countries, according to International Monetary Fund (IMF) estimates. Other IMF research forecasts that EM will account for 63% of world GDP by 2023.
However, the provision of essential services and other critical infrastructure is far from satisfactory or inclusive in many EM. This means that huge proportions of their populations don’t have access to the services that the developed world takes for granted. And while digital inclusion remains a key challenge globally, it is especially so in emerging markets.
The digital transformation is well underway in most emerging and frontier markets, but the degree of progress varies significantly by country. The share of the population which uses the internet is as high as 85% in Russia and 71% in China. In Indonesia the figure is 54%. Although the latest data is only to 2019, the figure falls to 41% for India, and is as low as 34% in Nigeria and 17% in Pakistan.
Research from the OECD underlines the gap to developed markets. It found that the level of mobile internet subscriptions in OECD countries were double that of developing countries. In fixed line broadband, the equivalent analysis showed subscriptions were three times higher in OECD countries.
Data from GSMA, which represents the interest of mobile network providers globally, shows that the mobile broadband coverage gap (defined as those living in areas without mobile broadband coverage) has fallen to 6% of the world’s population, equivalent to 450 million people. However, there are still 3.4 billion people who have access to mobile broadband but who do not use it. Indeed, as GSMA highlights, consumers in lower and middle income countries account for over 90% of global unconnected population and 98% of the uncovered population.
Internet connectivity is important for a number of reasons, not least because it’s an effective way to deliver educational and healthcare services, and can help foster economic growth.
What is the scale of the response required?
The response required is significant. Before Covid-19 hit, it was estimated that developing countries would need to invest more than $2 trillion a year in infrastructure just to keep up with the next 15 years’ projected GDP growth. It can safely be assumed that the figure is now considerably higher.
But many EM have sizeable gaps between their current levels of investment and their estimated needs. Indonesia, Mexico, Brazil, India, Saudi Arabia and South Africa are all cases in point, according to analysis by McKinsey.
Typically, EM have relied on government funding for infrastructure requirements. But government finances are under pressure, not least because the pandemic has resulted in elevated public debt. Government-debt-to-GDP across 55 developing countries reached a record 59% of GDP in 2020.
The private sector will have an increasingly important role to play in meeting the infrastructure needs in EM.
What kind of companies are doing so?
As investors, we look at a range of quantitative and fundamental factors when analysing investment opportunities. The examples below are provided as an illustration of how we analyse the companies mentioned and are not a recommendation to buy or sell any security.
As always, valuation is key. Good companies don’t always make good investments and our comments are not an opinion as to the value of that company’s shares.
Internet connectivity is one area where some companies are having a positive impact. For example, Bharti Airtel is a telecommunications company with operations in India and Africa covering 24% of the world population. With its extensive network infrastructure, Bharti services underpenetrated areas in these countries, improving access to the internet and information on a significant scale. It also offers mobile payment services which promotes financial inclusion.
It’s a similar story at Kenyan telecoms company Safaricom. It delivers connectivity and innovative products and services, including payment solution M-Pesa. It’s estimated that the company’s positive impact on society is 9.6 times the firm's profit.
Another company that is having a positive impact on the environment and societies in EM is Taiwanese bicycle manufacturer, Merida. Its products provide a more sustainable, less carbon-intensive, form of transport within cities and positively impact the health and wellbeing of individuals by promoting exercise.
Samsung SDI is a Korean electronics company and a leading provider of the batteries used in electric vehicles and energy storage systems. The company’s products are enabling a global shift to sustainable transport, greener use of energy and lowering carbon emissions. It is also committed to ensuring all stakeholders are treated fairly and to “solving the environmental and social challenges faced by mankind”.
Sustainable infrastructure - just one of five themes
Investing in companies that provide sustainable infrastructure in EM is just one way in which investors can have a positive impact on the environment and society. Other investment themes that we have identified include responsible consumption, health and wellness, inclusion and the environment.
Jonathan Fletcher is the Emerging Market Fund Manager and Head of EM Sustainability Research at Schroders
BUSINESS REPORT