By Ksenija Rykina-Tameeva and Pablo Berrutti
Impact investing seeks to add value to society whilst also achieving financial returns. It is different from sustainable or ethical investing as it explicitly seeks to make a measurable positive social or environmental impact from the investment. Impact investing in recent years has begun to gain traction, with young investors most notably taking part. This article will explore impact investing, recent trends, and what the future holds for impact investing.
What is impact investing
Impact investing can be defined as actively deploying capital towards addressing specific, measurable societal and environmental goals while generating economic returns. Impact investing can be done in numerous asset classes, where investors value the social and environmental outcomes equally to financial returns.
Investors of impact investing include institutional investors such as hedge funds, private foundations, banks, pensions and other fund managers. Some notable organisations include The Bill and Melinda Gates Foundation who endeavour to “invest in organisations or projects that benefit the world’s poorest and are often overlooked by traditional investors”. Leap Frog Investments is one of the world’s best known impact investors, with a record of private equity investments in Asia and Africa. Impact Investment Group was started in 2013 by Danny Almagor and Berry Liberman when they couldn’t find the types of impact investments they wanted access to in Australia, and are now one of a growing group of Australian based impact investment managers.
While impact investing has historically been private markets focused, as it is easier to measure impact, funds with listed assets like equities and bonds are increasingly becoming available. The introduction of these products has made impact investing more accessible for a broader group on investors. These differ (or at least should differ) from sustainability or ethical funds as impact funds should have clearly defined and measurable impact goals.
Rise of impact investing
Impact investing has grown rapidly in recent years with more investors noting its importance and willingness to consider it in their own investments or portfolios. The market itself has grown exponentially where in the US in 2012 the market was estimated to be $3.74 trillion but in 2016 it was $8.72 trillion. This trend is expected to continue as a 2018 Morgan Stanley report observed that of asset owners who were surveyed 78 percent are seeking to align their investment with the United Nations Sustainable Development Goals.
In Australia, the Responsible Investment Association of Australasia’s bi-annual benchmarking impact report, found that at the end of 2019 Australia had 111 impact investment products managing $19.9bn. The report also identified more than $100bn in potential demand.
Impact investing has allowed for investors to think more systematically about risks. They are beginning to think more thoroughly about how ESG factors can hurt long-term returns. 78 percent of respondents listed risk management as an important factor driving their adoption of sustainable investing. In addition, the availability and adoption of impact investing has allowed business to accrue positive corporate reputation, reduce operating costs, find new marketing opportunities and ethical management strategies.
High net worth investors and large foundations like the Bill and Melinda Gates foundation were early adopters and drivers of growth in impact investing. More recently, young people including millennials and Gen Zers have been driving this trend as a greater diversity of products become available.
The COVID-19 pandemic has seen the shift of expectations from investors in corporations. Investors have heightened their demand for companies to be more accountable to their stakeholders, triggering organisations to work towards implementing better frameworks and guidelines.
Despite the turbulence that the COVID-19 pandemic caused in financial markets, in a report by the Global Impact Investment Network (GIIN), 57 percent of impact investors say they are unlikely to change their capital commitments and 15 percent state they are willing to commit more. Several investors in the 2020 GIIN report have indicated that they are allocating more capital to projects that are contributing solutions to the effects of the pandemic.
Leading investors have also adapted their approach during the pandemic with more responding to the crisis with flexibility and resolve. For example, investors sought to mitigate potential risks by renegotiating loan terms, investing more funds to support their investments and exercising patience so that they can realise their performance expectations over a longer-term investment horizon.
Empowering future impact investors
Biggest challenges and obstacles to impact investing is the lack of availability of quality sustainability data and lack of knowledge.
Impact investing has made great strides in progress with more investors adopting this investment strategy, however there are still some challenges that need to be overcome. Respondents in the 2018 Morgan Stanley Report cited their biggest challenges and obstacles to impact investing is the lack of availability of quality sustainability data and lack of knowledge.
In addition to this, 75 percent relied heavily on in-house research to support investments and 73 percent requiring third-party speciality research. Thus, for impact investors to expand its reach greater tools need to be made available for investors to easily identify potential impact investing opportunities. However, despite these challenges a significant number are still willing to learn more about impact investing, with 84 percent outlining their willingness to learn more about one approach to impact investing.
The Altiorem sustainable finance library includes a range of resources to support investors interested in impact investing. Including frameworks for how investors can find impact investment opportunities or ensure that their impact funds are managed well. Impact Investing Australia is an industry association which includes resources to support both those wishing to invest with impact and those wishing to access capital.
This article originally appeared in the Stockbrokers and Investment Advisers Association magazine.
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