22 Feb 2018
Impact investing is a relatively new approach to investing and while still in its infancy has seen significant growth in recent years.
Total assets under management (AUM) invested in impact solutions globally rose 42 per cent from the year prior to $US715 billion according to the Global Impact Investing Network (GIIN). According to the Responsible Investment Association Australasia (RIAA), the total value of impact investing products in Australia grew from $A5.7 billion in 2017 to $A19.9 billion in 2019.
"Like most things, responsible investing isn’t black and white – there is a spectrum.”
Impact investments, as defined by GIIN, are ‘investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return’.
While the traditional premise of investing means simply earning a return on capital for an appropriate level of risk, impact investing also considers the effect money has on society and the environment. Impact investors should aim for their investment to contribute positively to a social or environmental outcome and not just achieve a financial objective.
A spectrum of impact
Like most things, responsible investing isn’t black or white – there is a spectrum. At the lower end of the spectrum, responsible investing might include avoiding only investments in companies which create environmental and societal problems – such as heavy carbon emitting coal mines and tobacco companies. At the other end of the spectrum is impact investing, which proactively invests in solutions to these problems, e.g. renewable energy and healthcare.
RIAA Investment Spectrum
Until recently, impact investing was a niche opportunity set in a limited asset pool. It now extends to virtually every asset class – equities, bonds, property, infrastructure, agriculture and more.
While opportunities exist in listed markets, maximum impact is generally achieved in unlisted markets. Here, capital is deployed to fund new ventures (providing impact ‘additionally’), as opposed to listed markets (shares and bonds) where securities are purchased in businesses which already exist.
Not just aspirational
There are an untold number of social and environmental impacts achievable. Impact investors are mostly able to align investments to those impacts important to them. It could be funding disability accommodation, reducing carbon emissions by investing in rooftop solar or investing in a medical technology which may provide life-changing benefits to those in need. There are products available which focus on just one impact and others which invest in multiple impacts.
However, impact must be quantifiable, not just aspirational. Measured with metrics such as the number of specialist disability homes provided, the amount of CO2 emissions abated or the number of people given access to potentially life changing medical technology.
The United Nations created 17 Sustainable Development Goals (SDGs) in 2015 as ‘a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030’. The SDGs are now a globally accepted framework for categorising investment impacts. Many impact fund managers align their products with one or more SDGs.
This of course doesn’t necessarily mean they will be ‘true to label’ and thorough due diligence is necessary to uncover which managers are ‘greenwashing’ and which are genuine.
United Nations 17 Sustainable Development Goals
Comparability of impacts from one investment to another is pretty much impossible though, given there are so many different impacts and there is an inevitable degree of subjectivity involved in assessing them. The metrics mentioned above aren’t directly comparable, and while you can quantify the number of lives which have been enhanced from disability accommodation or a particular medical device for instance, there is still a subjective element regarding the degree of enhancement or in comparing them to each other.
Like traditional investing, impact investments have a range of return expectations, depending on the asset class (e.g. equities, bonds, infrastructure), liquidity constraints, the risk level and the quality of the investment.
A popular misconception is impact investment returns must be lower than those of non-impact investments. That is, you must give up something in order to do something good. The reality many have observed is otherwise – in other words, you can potentially have your cake and eat it too. Often the investment thesis is driven by consumer demand for impact and sustainability. An example is demand for sustainably produced organic vegetables driving the investment returns for regenerative agriculture.
According to a 2020 RIAA survey, 92 per cent of respondents reported their impact investments met or exceeded their financial return expectations, while 93 per cent of respondents reported the impact of the investments met or exceeded their impact expectations.
Like any investment, impact investments carry risks, some of which may be specific to the particular product being considered. Investors need to be aware of the general and specific risks before investing and investors should read the applicable offer documents for each investment and consider whether it is appropriate for them.
Impact investments tend to carry different sorts of risks than traditional investments, offering investors very attractive diversification benefits at a total portfolio level. Regulatory risk is one such risk commonly associated with Social Impact Bonds and unique impact opportunities like disability accommodation. This is because their returns typically come from Government payments linked to regulation (policies), which could change.
A traditional office real estate asset doesn’t carry this risk for instance, but instead is exposed to the risk of poor economic growth and working-from-home trends reducing demand for office space.
By their nature, unlisted assets typically require capital to be tied up for varying periods in order to finance construction of an asset or a project (such as a solar farm or a community program). This brings illiquidity risk, for which investors should earn a premium given they can’t liquidate these assets as quickly or easily as listed assets. Impact products in listed equities and bonds on the other hand, will tend to have daily liquidity, as you would expect from traditional equity and bonds funds.
Dan Simpson is Head of Impact Investing for ANZ Private Banking
This article was originally published on ANZ’s Private Banking Insights website
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
22 Feb 2018