Investors have told the UK government to produce guidance for asset owners wanting to allocate more capital to emerging markets and developing economies (EMDE), and to engage with credit ratings and regulators on how they evaluate such assets.
The EMDE Investor Taskforce, set up by government ministers last May, has issued its latest reflections on how to increase sustainable finance for lower-income countries.
The group is coordinated by the Institutional Investors Group on Climate Change, and its participants include the Church of England Pensions Board, NEST, The People’s Pension, Aviva Investors and Legal & General.
Its workstream on scaling products is co-chaired by Nazmeera Moola, the chief commercial officer for private markets at asset manager Ninety One, and Anand Rajagopal, who recently stepped down as head of sustainability research at Phoenix Group.
“The workstream identifies and tackles real barriers asset managers face – such as risk perceptions, project execution challenges, and return expectations – offering practical solutions to mobilise capital for climate and sustainable development goals in EMDEs, with or without concessional and junior capital,” it explained in its latest report.
Based on interviews with investors, it recommended the development of “a practical Investor Guidance Note for Asset Owners” to help them understand how and where different EMDE assets could sit within their strategic asset allocation frameworks.
“This should also include addressing how EMDE investing/products would compare to mainstream asset classes, including data-based allocation rationales, benchmark examples, and case-based portfolio integration scenarios,” it suggested.
The report also urged the government to engage with credit rating agencies “to refine and test new methodologies for blended finance structures, deal-level transactions and other EMDE-linked vehicles”.
Ratings agencies often overestimate risk levels for products based on EMDE assets, it noted, and would benefit from more underlying data to correct this trend where appropriate.
Echoing recommendations made by the European Commission’s advisory body in 2024, the group said investors across the UK and Europe were also frustrated with the high capital charges often levied on EMDE assets.
Just like credit rating agencies, regulators often perceive EMDE assets as riskier than they actually are, the report observed, meaning they receive less favourable treatment under solvency and capital requirement rules.
In addition, diverging approaches to regulating securitisations make it difficult “to structure a vehicle that simultaneously addresses the needs of both EU and UK investors”.
The taskforce recommended the establishment of a mechanism that allowed institutional investors to share risk and return data on EMDE private assets with each other, and standardised reporting requirements for development bank disclosures.
