Future trends in impact investing
It’s very early days for impact investing, especially as it relates to public market investments. There are many issues for investors to consider as this part of the market scales up.
This was the theme of Hong Kong-based Emily Woodland’s presentation at the recent Philanthropy Summit NZ 2019. Emily is AMP Capital’s Co-head of Sustainable Investment.
As she noted, participating in private market impact investments can be challenging for some investors. This is due to the small size of the investment opportunity, as well as the intensive due diligence that’s required, which raises transaction costs relative to the size of the investment. The typically illiquid nature of many impact investments and their particular risk profile will also sometimes not match an investor’s mandate.
“This makes it difficult from an asset allocation perspective,” said Emily. “Additionally, some investors are still working out their impact investing journey,” she added.
As a result, this is causing issues when it comes to scaling the impact investing market and addressing some of the most pressing global challenges.
“This is a concern for mainstream investors who want to enhance their impact investment options without compromising returns, which means we need to explore what more can be done to achieve positive impact investments in public markets,” Emily says.
According to an April 2019 report by the Global Impacting Investment Network (GIIN), the value of the impact investment market has already reached US$500 billion. The upper end of market estimates predicts impact investing to reach as much as $1 trillion by 2020.
The 2018 GIIN survey found the majority of impact investments were in private equity or private debt, with public market investments the third largest, and fastest growing, part of this market at 14% of assets. If the entire market reaches US$1 trillion, this would equate to a US$140 billion public market opportunity by 2020 – although the market is not there yet.
Evaluating impact investments
One of the main concerns for impact investors is how to evaluate investments in this space. As Emily noted in her session, the biggest question is the notion of ‘additionality’.
“Purists argue an opportunity is not an impact investment unless the capital that’s deployed makes an incremental difference; that is, would that positive impact have happened if the capital had not been put to work in that investment?” she explains.
This can be a particular issue in public markets because the company already has capital in place and investors are merely trading in the secondary market. So is capital allocated by impact investors to public market assets really making a difference?
As Emily explained during the conference, there are two ways to achieve additionality in public markets. First, investors can invest in companies with enterprise additionality. This means its business model and mission statement are structured to make a deliberate and positive difference to global challenges. Second, investors can engage with the business and make a real difference to improve corporate practices to achieve additionality.
It is, however, challenging to find investments in public markets that have high integrity and are truly impact investments.
“To be discerning, investors need to look for two factors. There needs to be strong evidence of intentionality; that is the investment opportunity must be created with the intent to make positive change,” she says. It’s not good enough for an opportunity to be a tweaked or remarketed version of an existing offering. To figure this out, it’s essential to look at the detail of the investment.
Also, the investee’s business model and mission statement should be centred around solving global challenges, rather than merely being a side effect of operations. This is more difficult than it sounds.
“In public markets, it’s very rare to find pure-play companies in impact investing,” says Emily. “So investors have to work out their hard lines in terms of exposures given the chance of finding pure play impact investments is smaller in public markets versus private markets.”
It’s also important for investors to assess whether the investment has a credible way of measuring its impact. “This is a work-in-progress for many investments,” Emily explains. “So we’re talking about ways to standardise the language and approach around this, which would help the sector to achieve the scale it needs.”
Emily has some advice for impact investors searching for appropriate opportunities. “Find thematics that resonate with your values. For some people it will be climate change, for others it will be social impact. There are opportunities across the board but the idea is to identify a thematic that resonates.’
Additionally, the more pure play an impact investment fund in public markets, the more questions that need to be asked about portfolio concentration in terms of the number of investments the fund is making.
“The higher the impact, the higher the portfolio concentration and the broader the geography investors need to consider. This is challenging for investors that wish to make a more local impact.”
While these issues should find a resolution as the sector matures, it’s important for impact investors to fully consider them before taking a decision to invest.
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