Increasing private financial flows to emerging and developing markets is a must for reinvigorating inclusive and sustainable growth. This is one of the main messages coming from the 2023 annual meetings of the World Bank and International Monetary Fund which just wrapped up in Marrakech.

As multilateral development banks and development finance institutions, we play an increasingly critical role in channeling investors towards opportunities for social and environmental impact in places they might otherwise overlook. While there are many factors at play here, an important one is credibility in how we measure and manage impact.

This means having robust tools and practices in place to select high-impact investments and measure and manage portfolio impact. It also means being open about impact performance and learning from experience on-the-ground. Are the operations we finance reaching their intended development impact objectives and if not, why? What’s working well and what can we do better? We do this each year through our Development Effectiveness Overview (DEO), the IDB Group’s main report on results and impact.

What are the 5 key takeaways from the 2023 DEO for IDB Invest?

1. Our portfolio shows signs of recovery from the pandemic, with mixed progress across segments. While the COVID pandemic affected the impact performance of operations across the board, some segments have rebounded more quickly than others. For instance, the effects on our infrastructure and energy operations were mostly transitory, and our corporate portfolio (which includes sectors such as agriculture, industry, and science and technology) improved significantly in 2022, with over 70% of operations performing well. On the other hand, the impact performance of the financial institutions portfolio was greatly affected by the pandemic. This disproportionately affected the beneficiary groups that IDB Invest aims to reach, such as micro, small and medium-sized enterprises (MSMEs). Although this segment’s performance improved in 2022, challenges remain.

 

2. Even projects that fall short of expectations can have a positive impact. Once an operation is completed, we do a final evaluation to compare its end results against original impact targets. These evaluations are independently validated by the IDB Group’s Office of Evaluation and Oversight. Among projects evaluated in 2022 that did not reach all of their impact objectives, the average economic rate of return was 11%, just over the benchmark of 10% set by the Good Practice Standards for the Evaluation of Private Sector Investment Operations. In other words, these projects did generate net benefits for society even if they fell short of some targets. For example, an agriculture project in Brazil achieved excellent results in terms of increased sugarcane production and reduced GHG emissions but fell short of its yield targets mainly due to severe droughts.

 

3. A strong strategic focus can help deliver results even in the face of adversity. Overall, our analysis shows that we have greatly increased our focus on reaching vulnerable groups through our work with financial institutions. It also shows that operations with financial institutions are more sensitive to adverse external conditions and more likely to deviate from expected development targets during crises– economic, political or pandemic-related. This is largely due to the dynamic nature of their business; banks have more flexibility to adapt plans as needed when faced with crises and may shift their risk allocation away from portfolios perceived as riskier. However, financial institutions that have a strategic focus on and strong value proposition for underserved segments generally fared better. For example, BAC El Salvador met its growth targets despite the pandemic: the share of women-owned/led SME loans in the SME portfolio increased from 26% in 2019 to 35% in 2022.

 

4. Since financial institutions play a key role in expanding our ability to reach excluded groups, strengthening the impact performance of this portfolio is a priority. To better support our clients to improve results, IDB Invest is working on providing a combined value proposition, including different financial structures or risk sharing instruments that could help clients navigate adverse contexts while supporting underserved segments in riskier environments. We can also offer advisory services to build capacity in impact management, as well as foster knowledge sharing on innovative business models and approaches to strengthen project implementation.  

 

5. The region’s private sector wants to build impact management capabilities. We’re increasingly seeing demand from our clients for support in this area. For example, in Peru we’re working with agribusiness leader Danper to assess the impact of the company’s social programs and measure multidimensional poverty –which goes beyond monetary poverty– among its workers. This information will help the company track employee welfare and enhance the impact of its social programs to improve their quality of life. In the financial sector, we’re working with the Bolivian Private Banking Association (ASOBAN) to implement an impact monitoring system for its 11 member banks, the first-of-its-kind in Latin America and the Caribbean. We have also been working with BRK Ambiental, one of the largest private providers of water and sanitation services in Brazil, to estimate the health impacts of increasing water and sewerage coverage.

These are just some of the topics discussed in this year’s DEO. This stock-taking not only helps us to communicate the results of our impact management efforts, but also to identify areas for improvement. After all, learning from what we do and applying these lessons to do better is at the heart of both impact management practice and performance.