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