What is impact investing?
While investing has traditionally been about getting a sufficient return on your money (with commensurate risk), impact investing also considers the impact your money has on society and the environment. Impact investors expect their investment to contribute to a positive social or environmental impact, not just achieve a return objective.
What can I invest in and how are others investing?
Impact Investing can be done in most asset classes, but according to RIAA1, to date, the vast majority of impact investing in Australia has been in green bonds, as can be seen in the chart below.
The dollar amount invested in impact in Australia ($5.8bn, as at 31 December 20172) is extremely low relative to the total investment market, but it has been increasing exponentially. It doubled in the year to December 2017 and is 47 times higher than four years previous. Globally, according to the UNPRI 2018 Impact Investing Market Map report, 450 investors allocated US$1.3 trillion to impact investments worldwide in 2016.
What sorts of impacts can investors expect?
There are an infinite number of social and environmental impacts that can be targeted (and some debate about what should be constituted as “impact”). The main outcomes in Australia have been environmental conservation, housing, employment, mental and physical health. Many outcomes have been linked to the 17 UNPRI Sustainable Development Goals (SDGs).
A specific example of an impact investment is the Newpin Social Impact bond, which sought to fund a program to restore children in out-of-home care to their families, or prevent children entering care at all. After four years of operation, the impact was 203 children were successfully returned to their families and 55 families had been supported to prevent the need for children to enter care. Another quite different example is the Queensland Treasury Corporation green bond which financed renewable infrastructure, low-carbon transport and other projects to support Queensland’s transition to a climate resilient and environmentally sustainable economy.
How is impact measured?
Impact can be measured in many different ways. Environmental impacts tend to be easier to measure than social impacts because there is more common quantifiable data, such as the number of CO2 emissions avoided, or the number of gigawatts of renewable energy produced. Social impacts include the number of affordable homes provided, dollar savings the Government achieves, or the number of people supported in various ways as a result of an initiative.
It is difficult to attain consistency of measurement across different investments because of the plethora of different types of impacts, a lack of commonality and difficulty in quantifying and comparing impact. The Sustainable Development Goals (SDGs) framework is the most commonly used impact performance measurement tool. That is, investors assign impact to one or more of the 17 SDGs. The Sustainable cities and communities and climate action SDGs have enjoyed the most impact in Australia.
While there are a number of other measurement tools available, such as the IRIS metrics and the Climate Bond Standards, they have not yet had much take-up in Australia.
Overall, impact measurement is still a nascent practice and one that the industry is debating how best to do.
Can I still earn a competitive return (for commensurate risk)?
The short answer is yes. It’s difficult to benchmark performance and draw meaningful conclusions about impact investment performance though, given a lack of available data over the short history of the industry. RIAA research has found that investor experience in Australia has largely been in line with their expectation for market returns.
From a RIAA study spanning 2010-2018, Social Impact bonds have in aggregate delivered 4.6% pa, whilst private debt has returned 8.0% pa and real assets have returned 5.8% pa. Private debt investors have on average exceeded their expectations and unlisted asset returns have been slightly below expectations.
Globally, The GIIN3 2018 Annual Investor Survey found that the majority of respondents reported performance in line with both impact (82%) and financial (76%) expectations (where financial targets were mostly risk-adjusted, market-rate returns).
What about liquidity?
Most impact investments tend to require capital to be tied up for some defined period and there are few investors competing for the assets, therefore there is a limited secondary market. For investors with a limited illiquidity budget, private debt impact investments may offer too low an illiquidity risk premium, relative to what they could get from non-impact investments in private equity, unlisted infrastructure or unlisted property (where mid-teen returns for core assets and higher returns still for opportunistic assets are available).
Investing into listed companies that have demonstrable social and/or environmental impact has been seen by some as a means of addressing illiquidity. The question then arises around the importance or otherwise of additionality. That is, is it more impactful buying something that is already in place (the listed market) as opposed to financing a venture which might not otherwise have happened?
1 RIAA is the Responsible Investment Association of Australia, the peak body for impact investing advocacy in Australia, see https://responsibleinvestment.org/about-us/ for further information. Impact Investing is a relatively immature but rapidly growing industry, so there is limited information available on actual investments and their financial and impact performance outside of RIAA’s work. In this article, unless otherwise stated, we have sourced all data from the RIAA Benchmarking Impact - Australian Impact Investment Activity and Performance Report 2018.
2 Criteria for inclusion of products in the RIAA study were: intentionally seeking to create positive social and/or environmental benefits; measuring both the social/environmental and financial performance of these investments; and deliberately seeking financial returns (i.e. not grant-making).
3 Global Impact Investing Network. See https://thegiin.org/assets/2018_GIIN_Annual_Impact_Investor_Survey_webfile.pdf
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