Today you’d be hard pressed to find a manager who doesn’t boast their ‘ESG integration’ credentials – terms now widely used to simply describe ‘consideration of Environmental, Social and Governance factors’.
“A big driver of growth in impact investing has been a shift in mindset for many investors in recent years. Just as consumers are becoming socially and environmentally conscious, investors are too.”
While impact investing is a much smaller component of responsible investing than ESG integration, the impact investment opportunity is evolving rapidly, emerging as the latest wave of growth within sustainable investment.
Without wanting to get caught up in the nomenclature, we use the term “responsible” investing, interchangeably with “Sustainable”, “Ethical” and “ESG” investing. “Impact” is a subset of these generic terms.
In Australia there was $29 billion invested in impact investments at the end of 2020 – almost five times what it was in 2017 and we expect further growth when 2021 data are released.
In a survey of 770 global institutional investors (collectively managing US$27.2 trillion) undertaken by Schroders in March this year, 48 per cent of respondents cited impact as a preferred approach to implementing sustainability. This is up from 34 per cent in 2020.
The rise of the conscious investor
A big driver of growth in impact investing has been a shift in mindset for many investors in recent years. Just as consumers are becoming socially and environmentally conscious, investors are too. In particular, studies have found millennials tend to align both their spending and investing habits with their values.
They still expect a market rate of return and research has now shown this is achievable. A study undertaken by the Global Impact Investing Network (GIIN) in 2020 showed most impact investors surveyed target market rate returns and the majority of them reported their investment’s financial performance met or exceeded expectations.
If you have the choice to invest in two products which have exactly the same return expectation but one of them also funds climate mitigation or a life-changing healthcare technology, the question becomes “why wouldn’t you choose impact?” Impact investments can potentially do well and do good.
A number of endowment and foundation trustees have experienced a penny-dropping moment when they discover they can make a significant contribution to the causes they support through how they invest - in addition to their donations. In some cases they have found their investment portfolio has been funding the very problems their fund has been set up to solve!
Heading for net zero
Another key driver of demand and a prominent theme for impact investment is meeting net zero emissions commitments. The most recent United Nations Climate Change Conference (COP26) held in November 2021 played an important part in upping the stakes on addressing climate change and putting pressure on governments to reach net zero.
Recent disruption in the energy sector in Australia and abroad will no doubt accelerate this pressure. Most countries have now made commitments – 136 in total, double where we were in 2019 – speaking for 88 per cent of current global emissions.
A growing number of companies have made their own commitments too. As you can imagine there is a lot of investment required to get us there. The UN has estimated more than US$125 trillion will need to be invested by 2030 to meet net zero commitments.
What does this mean for impact investing? For starters, it means a heap of new infrastructure and clean technology is required. Brookfield, a big player globally in energy infrastructure, raised over US$15 bilion for their Global Transition Fund recently which they claim is the largest private fund raised to support the transition to net zero.
Venture capital (VC) is the early-stage funding vehicle for most start-up businesses and this asset class is seeing a resurgence in Australia and abroad with many focussed on climate technology.
There have been some impressive developments in technology. Wind turbines for instance have been around for over a thousand years. So while they aren’t new, recent developments in their efficiency in generating power have led many scientists to believe that within a decade wind will be the least expensive source of installed electricity capacity.
To give you a sense of their size and scale, wind turbine blades can measure more than 100 metres with a sweep diameter about the length of two football fields. One rotation can power a house for a day. The Australian Government recently announced plans to construct offshore turbines of this scale.
The government is relying on technology to help reach its net zero commitment. In funding the Clean Energy Finance Corporation with $10 billion they created the world’s biggest green bank. There are various other levels of Government support too.
Climate tech hubs
For instance, the City of Sydney has provided a grant for a new shared workplace innovation hub for climate tech start-ups, opening early next year in Circular Quay. The Greenhouse Tech Hub aims to support 100 businesses in the next decade and joins various other shared workplace hubs for start-ups in Sydney and Melbourne.
According to research by Giant Leap, an Australian venture capital firm, over the last five years the number of start-ups with impact objectives has increased by 50 per cent in Australia and now account for almost a quarter of all funded Australian start-ups. De-carbonisation accounts for a lot of the impact objectives.
Climate Salad, a climate tech network in Australia, has estimated 20,000 climate tech jobs have been created in Australia alone in the last three years. They expect it’s likely to rise to 30,000 jobs next year and 100,000 by 2030.
A slump in venture capital funding and devaluations in unlisted tech start-ups in June resulting from inflation and recessionary fears may see those estimates fall. Still, climate and green tech companies dominated the VC investment volumes that month.
Matthew Rennie from Rennie Partners (a net-zero investment advisory firm) attributes climate tech’s resilience to the access it has to multiple “value pools”.
For instance, de-carbonisation solutions which make transportation more energy efficient also have synergies for other sectors such as mining and food. Traditional tech companies typically can only solve problems for one set of customers.
A healthy climate is only one ingredient (albeit a critical one) for a resilient environment. Impact investment managers are creating investible solutions to solve other environmental problems such as the planet’s diminishing biodiversity.
- In our next article we further explore the opportunity for impact investing as well as themes in life-enhancing (social) impact investments. We also tackle the prickly subject of greenwashing which is getting a lot of attention from investors and regulators.
This article was originally published by ANZ Private Bank’s Insights.
Dan Simpson is head of portfolio management and impact investing at ANZ Private Bank