Financial returns do not have to be sacrificed to make a difference.
Impact investing: How to enjoy financial returns while making positive change (afr.com)
Impact investing is on the rise, with the Global Impact Investing Network (GIIN) estimating that impact investments in 2022 topped $US1 trillion ($1.41 trillion) for the first time.
Impact investing refers to the practice of investing in companies, organisations and funds with the goal of generating both financial return and positive social or environmental impact.
The commitment to frameworks such as the UN’s Sustainable Development Goals are raising awareness and lifting creativity in global financing options. Impact has evolved from climate and clean energy to managing land and sea resources, creating sustainable cities and improving society by solving social issues and challenges.
Most of the growth has been focused on renewable energy as environmental impacts – such as the amount of CO2 emissions avoided, or gigawatts of renewable energy produced – tend to be easier to measure. Improvements in social outcomes, on the other hand, are often more difficult to judge. While the number of dollars saved by government or the number of affordable homes provided might be straightforward to tally, the measurement of the impact on people’s lives and the improvement in social outcomes is more challenging.
One reason for the rise of impact investing in private portfolios is the increasing awareness of the role that investors can play in driving positive change. With the rise of social media and other forms of communication, it has become easier for individuals to learn about the social and environmental impacts of their investments and to make more informed choices. As a result, many more investors are seeking out opportunities to use their financial resources to make a positive difference in the world.
Financial returns do not have to be sacrificed to make an impact.
The misconception that there is a necessary tradeoff between financial returns and social and environmental impacts is being overcome. Recent research has shown that this is not necessarily the case. Many impact investments have generated strong financial returns, and there is increasing evidence to suggest that companies with a strong focus on social and environmental issues may be better long-term investments.
The GIIN 2020 Annual Investor Survey found that most global respondents reported performance in line with both impact (99 per cent) and financial (88 per cent) expectations – where financial targets were mostly risk-adjusted market-based returns. Locally, the Responsible Investment Association Australasia recently found that 92 per cent of investors’ experience in Australia has largely been in line or exceeded their expectation for market returns.
While this may be the case over longer periods, investors should be aware that there can be material differences (or tracking error) between impact returns and standard market indices over shorter time frames. A case in point is 2022 when the fossil fuel energy sectors linked to oil and gas held up many markets while many impact investments’ valuations were dragged down with underperforming sectors.
In the past, it was often difficult for individual investors to find opportunities to invest in companies or funds with a social or environmental focus. There is now, however, a wider range of options available to gain exposure. Many traditional asset managers offer impact investing options while there are also new specialist investment firms, exchange-traded funds and individual companies dedicated to impact. In Australia, specialist managers such as Affirmative, Altius Asset Management, Inspire Impact, Kilara Capital, Melior Investment Management, Regnan, Sentient Impact Group and Sefa, are offering locally-based impact funds from bonds to private equity.
Although impact investing is asset-class agnostic, a recent GIIN survey found that private markets still dominate in impact opportunities with on average 35 per cent of impact investors’ capital being invested in private debt and a further 17 per cent in private equity. However, pure-play impact in public equity markets and real assets are the fastest-growing impact segments.
Overall, the rise of impact investing as a theme in private portfolios is a positive development in driving meaningful change along with financial gain. With the increasing availability of impact investing opportunities, an increasing number of investors are asking what difference they can make to the world that truly aligns with their own personal values. And the power of financial investments driving improved social outcomes can only be a good thing for all of us.