Environmental Social Governance (ESG)

Will fund managers accept lower returns in an effort to make a difference?

By AMP Capital

Impact investing across the globe totalled around $228 billion last year, five times the level of 2013.1 But do fund managers accept lower returns in an effort to make a positive - non-financial - contribution?

The answer is yes, according to Kristen Le Mesurier, portfolio manager in the multi asset group at AMP Capital. But, she says, the returns can’t be too much lower.  

“Impact investing is investing with an intention to create a positive social impact and get a return, in that order,” Ms Le Mesurier said.

“The primary motive is to achieve a positive social impact. It’s then up to fund managers to decide whether to invest in an asset with slightly lower returns than the standard equivalent. That decision depends on the risk and return objectives of the fund.”

“The biggest challenge for a fund manager right now is finding an asset that is genuinely going to have a positive impact on society and still deliver a financial return,” she said.

Impact investing in focus Impact investing has traditionally been the domain of development institutions and specialist funds, according to the World Economic Forum (WEF).2

But it is growing rapidly as investors look for ways to generate societal and financial returns.

Last October the WEF unveiled a set of draft principles to govern impact investing and hopes to finalise them this year.

“These principles will be comprehensive,” said Philippe Le Houerou, Chief Executive Officer of the International Finance Corporation. “They integrate impact considerations into investment decisions throughout the investment lifecycle: from setting investment strategy, through asset origination and structuring, portfolio management, all the way to portfolio exit.”

Where do impact investors invest?

A survey by the Global Impact Investing Network found that food and agriculture, financial services and energy were the top sectors for impact investors, followed closely by housing, micro-finance, education and healthcare.

Top three sectors to which respondents deployed impact investing capital in 2017

Source: Global Impact Investing Network, Annual Impact Investor Survey 2018.

Measuring impact

Ms Le Mesurier says being able to measure the societal impact of an asset is crucial when considering whether to invest in the asset.

She cites an example in the United Kingdom, where a social impact bond funded support for male, short-sentence offenders when they were in jail and after they were released.

The offenders received help with housing, employment, mental health support and financial advice. Two thousand prisoners were helped and recidivism fell by 9 per cent, better than the target of 7.5 per cent. Investors got a three per cent return per annum.

1,2 World Economic Forum, Here’s how impact investing can change the world, October 2018.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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