With a difficult and unpredictable year for finances and economies behind us, many are left wondering what 2024 will bring for financial inclusion and impact investing. “The market has been very volatile,” agrees Florian Kemmerich, Palladium Managing Director of Private Capital Mobilisation. “It’s been extremely difficult to raise funds because many investors are sitting on their money and waiting it out.”

In volatile economies and for seasoned investors like Kemmerich, this isn’t anything new. But for impact investors or funds focused on financial inclusion in emerging markets, this could be the beginning of a painful few years.

The Money and Needs are There

“Inflation peaked and is starting to ease up, but we’re seeing the stress on the construction industry which is usually the precursor for an economic turndown,” Kemmerich explains. “And while some people are seeing a risk for global recession, others say it’s a feathering out post-COVID-19 and that we and the markets are going to be fine.”

But he points out one major difference between now and the recession of 2009: Extreme poverty and food insecurity is on the rise. As of reports from late 2023, nearly 30% of the global population were moderately or severely food-insecure and about 670 million people around the world were estimated to be living in extreme poverty, an increase of 70 million people compared with pre-pandemic levels. “Impact investing is needed now more than ever before.”

The Global Impact Investing Network recently estimated that the private impact market was worth about US$1.2 trillion. The money, the funds, and the mechanisms are there but there’s a need for patient investors who are willing to take on some risk to keep the market moving. “A few years ago, the returns we got in emerging markets were much closer to what we see in the U.S. or Europe,” says Kemmerich, “but that’s shifted and there’s a lag time of about 2 years until the emerging markets are able to cope with changing fiscal policies. This is understandably causing many investors to hold on to their money.”

Nonetheless, Kemmerich is hopeful. “We expect interest rates to go down as the inflation wave is over and it should indicate that things ease up this year.

There are plenty of funds and fin-tech and ag-tech companies across emerging markets that are working to solve some of the problems exacerbated by the downturn in the economy, and at the same time provide patient money with reasonable returns.”

He expects that as interest rates go down and inflation decreases, investor risk tolerance will increase, which will prove critical as impact investing funds are needed most right now for micro, small, and medium-sized businesses in emerging markets.

The Role of Technology and Policy

For Amanda Fernandez, Palladium’s Chief of Party/Executive Director of CATALYZE, which designs blended finance solutions for USAID in 37 countries, leveraging technology and digital tools will be critical to offset any uncertainty across global markets.

“At the country level, I’m seeing the power of AI and digital products and tools make significant dents in lending to women-owned or led businesses and underserved sectors such as private education and early childcare, which is very promising for achieving greater financing scale,” Fernandez says.

“When the inherent biases are removed from financing decisions, it’s amazing how quickly financing to non-traditional sectors can be increased.” Where financial sector policy allows, she adds that the emerging digital and AI innovations like crowd sourcing, algorithms for risk management, and matching supply and demand are seeing a global uptake and are being quickly adopted.

But she stipulates that though political will to make significant changes for green finance in agriculture or climate adaptation and mitigation is at an all time high, capital deployment is not at the same level. “The investors sitting on capital by and large keep searching for ‘comfortable’ or familiar instruments and mechanisms like funds and guarantee instruments for unconventional purposes and new ways of doing business, expecting double and triple the scale and impact.”

“It is no wonder we are far from making a dent in the global gap between supply and demand for climate financing,” says Fernandez.

For both Kemmerich and Fernandez, it comes down to risk and investor tolerance. While volatile economies come and go, the problems we’re facing globally aren’t going away—and may even be getting worse—but they can be solved with the proper funding.

“In 2024, we all need to collectively start thinking about risk differently in light of the costs of inaction,” Fernandez adds, “especially when it comes to climate adaptation and prioritising actions that will support global food supply.”

For more, read 'We Can't Solve Climate Change without Smallholder Farmers' or contact info@thepalladiumgroup.com.