Socio-economy & New Tech


Joint Research Initiative

United States

Impact investing in emerging markets: shedding light on the benefits of patient capital

The long-held view that social and environmental issues should only be addressed by philanthropic donations, and that market investments should solely be about making money are long gone. Investors are increasingly interested in adopting responsible practices, as evidenced by the assets under management (AUM) in responsible investments, the increase in the number of signatories to the Principles for Responsible Investment (PRI) and new strategies being launched. Accordingly, a significant proportion of ‘responsible’ investors are turning their attention to the problems of the developing world, and specifically to the United Nations Sustainable Development Goals (SDGs). At the same time, and quite paradoxically, many investors are losing touch with the notion of emerging markets. “People have not yet made the connection between this old term and the new concept of ‘impact investing’. We need to show them there’s a close correlation”, explains Prof. Satyajit Bose. With this interest at heart, the researcher from Columbia University is leading an AXA Joint Research Initiative (JRI) with AllianceBernstein, an investment management firm partnering with AXA on this initiative. Their aim is to demonstrate clear and measurable links between investing in emerging markets and reaching the SDGs. Specifically, the objective of this collaboration is to put the spotlight on the potential of ‘patient’ portfolio flows into publicly-traded emerging markets equities, – or to put it more simply, ‘long-term’ investments in stocks traded on a public stock exchange. “‘Patient’ means investments with lower than average turnover in portfolio holdings or higher than average holding periods”, the researcher specifies. The overall objective is to draw the attention of responsible investors towards this particular type of capital and investment behaviour, by providing them with obvious and measurable causal links between them and positive impact on country-wide SDG progress.
“We are hoping to show that this type of investment in emerging countries has a beneficial social and environmental impact in these markets, specifically when it comes to SDGs, summarizes Prof. Satyajit Bose. We believe that if responsible investors are given the appropriate guidelines on how to invest long-term in emerging market stocks, then the beneficial impact to these countries would be much greater than average”. Historically, as he reminds us, portfolio investments (or transactions in equities) in emerging markets have the reputation of being quite volatile, with investors buying and selling capital over short periods of times. Because broad market investors tend to invest in and take their money out all at the same time, this type of behavior can have a dislocating effect on local economies, which has been severely critiqued in the past.



Columbia University


United States


So why the focus on equities, rather than direct investments (which are, by nature, longer term investments)? To answer the question, Prof. Bose invokes ‘the wisdom of crowds’: “In the stock exchange, there are many more market participants, and the capital flows are much more transparent. Everyone helps everyone determine what the good and the bad investments are. Many small decisions by small players will often add up to a more resilient, more sustainable set of decisions. In other words, you could say that stock exchanges are more democratic than foreign direct investments. This is an important underlying philosophy of our research.” The question this JRI is asking is what happens if the investors hold on to their equity investments over a longer period of time? This is usually what happens with direct investments, investors invest for the long run. So, what would happen if they did the same with equities? Would it have a beneficial impact on the economy of the country, and more specifically, would it impact SDGs?

Testing the potential of patient portfolio flows in a developing context

This question has not been considered in the literature so far because the notion of patient capital is primarily used in developed markets, and even there the concept is quite new, as high frequency trading capital represents the overwhelming majority of trades. In emerging markets, trading activity is feeble, “so foreign portfolio flows have no foil against which they may reveal their potentially patient nature and longer horizons”, he points out. To help shed light on this potential, the academic and non-academic teams working on the project aim to look at the statistical relationship between portfolio investments, their average turn-over, and the return on economic growth. Going even further, they will also try and determine which specific industries offer the most potential when it comes to a specific set of SDGs, namely number 3 to 9, which includes ensuring healthy lives for all at all ages, quality education, gender equality, etc. “The listed equity markets in emerging economies are not as deep as in developed countries. For instance, in emerging markets generally there is less competition within sectors and more government owned and family-controlled companies”, Bose explains. This means that demonstrating the link between stock market investments and beneficial impact on SDGs necessitates digging a little further. To put in simple terms, this second work package will consist in comparing the target countries’ performance in terms of SDG indicators and their proportion of patient capital inflows in specific industry sectors.

“Part of the motivation behind this research initiative is personal. I am fond of emerging markets; they are the reason I started studying economics in the first place. I was born in India, I lived in southern Africa, and when I came to university in the United-States, I wanted to figure out how to make the economies of these countries as vibrant and solid as the one in the US. However, in the nearly 30 years that have passed since, the gap has hardly reduced, if at all. At the same time, I see many investors who are interested in figuring out how to contribute to development globally. It really feels that there are two groups of people that need to be brought together. This is what this project is about”.