Over a million species of plants, mammals, birds, reptiles, amphibians, fish and invertebrates are at risk – many within decades.” The problem is no less acute in Australia as it is overseas, according to the 2000-page 2021 State of the Environment report which was recently released for Parliamentary review.
It found that Australia has one of the highest rates of species decline among nations in the Organisation for Economic Co-operation and Development (OECD). Worse still, we are losing more mammal species than any other continent.
Just as net zero pledges have created climate change investment opportunities, commitments to end deforestation by 2030 from more than 120 countries (covering 95 per cent of the planet’s forests) will necessitate a drive for ‘natural capital’ investments.
Investing in regenerative agriculture is one avenue for impact investors wanting to address climate change and protect biodiversity. This entails funding farming practices that rejuvenate the soil where crops are farmed, potentially resulting in both positive environmental and financial outcomes.
These come in the form of ecological restoration, potentially valuable carbon credits and premium priced vegetables. The produce is so sought after, farmers can lock in valuable off-take agreements for it. That is, the produce is already sold before it has even been grown.
Whilst still a small and immature investment area, we expect many more such investible natural asset strategies to become available in the coming years – watch this space.
Social housing’s attractive features
Social housing targets underserved and vulnerable people in society. Many lives have been changed immeasurably by safe and secure housing, enabling escape from domestic violence and homelessness or provided facilities to meet physical and mental wellbeing needs.
But there is a massive under-supply of social housing in Australia, which includes aged care, affordable housing and specialist disability accommodation. These are all relatively new sectors of the property and infrastructure market in Australia – particularly specialist disability accommodation which has only been investible for a few years.
Aside from investing in a meaningful cause, specialist disability accommodation can offer investors inflation-linked, government-backed revenues that help to significantly reduce credit risk. Even investors who aren’t explicitly seeking social or environmental benefits from their investments may be attracted to the high single-digit yield and low correlation to mainstream assets which specialist disability accommodation can offer.
We delved further into this sector last year in an article we published on specialist disability accommodation.
Another common theme in impact investing is focused on empowering women and girls under the banner of ‘gender-lens’ investing. More than a billion women globally lack access to credit or a standard bank account. Micro-finance lending has aided in the rise of some successful female-run businesses. These businesses are often as basic as selling vegetables at a small market.
Another strategy has been the use of social impact bonds to finance programs that reunify families (in particular mothers and children). Again, this isn’t philanthropy; investments have been structured to fund these causes which can offer market rate returns.
Investors fund such programs up front, with State Governments only paying for successful outcomes. This represents a saving for them compared with otherwise funding foster care. So, it can be a win/win/win for Government, investors and reunited families.
The chart above summarises the four key impact investing themes mentioned above, which we have lined up with the investment strategies that are currently the most prevalent vehicles for achieving these impacts in private markets.