Written By: Pádraig Floyd
Pádraig Floyd considers the recent growth of impact investing and shows how impact itself is taking a place alongside the standard investment criteria of risk and return
Impact investing has experienced considerable growth in popularity during the Covid-19 pandemic. Many investors have agreed with the old adage that life’s too short and want the money they invest to deliver benefits to society as well as returns to finance their own objectives.
Just as environmental, social and governance (ESG) matters have moved from a worthy, “misguided” pursuit to a central tenet of asset management in the 21st century, so impact investing has a growing band of supporters and proponents. A report by the International Finance Corporation (IFC) identified a total of $2.3 trillion being invested for impact in 2020, the equivalent of about 2% of global assets under management.
As local government pension schemes look to expand the influence their investments have within the bounds of an ESG mindset, so we are seeing more schemes seeking to place funds into impact investing.
Growing, but of unknown size and capacity
Just how big is impact investing? Comparisons to string measurement are totally appropriate, because we simply don’t know. Impact has only recently become more “institutional” and under much closer scrutiny.
The Impact Investing Institute is due to launch a new report with EY early in 2022, but early signs are that this is an area that is about to expand rapidly. “A century ago, the concept of reporting on the risks as well as the returns of investments was a revolutionary one,” says Sarah Gordon, chief executive of the Impact Investing Institute. “Now we believe, for the sake of the planet, and the people on it, that all investment should be considered through the lens of risk, return and impact.”
All investment has an impact, whether positive or negative, says Gordon. There needs to be transparency about what those impacts are, action taken to maximise the positive benefits, and for investors to be accountable for the negative ones. “Impact investment, which delivers a positive social and environmental benefit alongside a financial return, does not just make financial sense, but is the most important trend in capital markets going forward,” says Gordon.
Breadth and depth
The range of impact investment opportunities is broad and expanding rapidly. Schemes are investing in everything from renewable energy through to social and affordable housing. Gordon says that social outcomes are an important part of the transition to net zero. Unless we maximise the opportunities around jobs and skills that this offers, the transition to net zero is not going to happen, she says.
It is not only the ranger of investment opportunities that is diverse. So, too, is the potential impact these investments could have. Just as people have come to understand that there is more to ESG than planting trees and recycling wine bottles, impact investing is just as broad in scope. It’s part of a spectrum of capital, says Sally Bridgeland, chair of the Local Pensions Partnerships Investments, a spectrum which has pure capitalism on one side and pure philanthropy at the other. This may seem obvious, but it is important, as an institutional investor, to understand where you are – and hope to be – on that spectrum now and in the future.
People tend to move away from one extreme in order to avoid the “bad stuff” until you get to the point where you’re deliberately trying to make an impact rather than just generally “raising the bar”.
Raising the bar can be done by avoiding what you consider to be bad and pursuing positive things. But you can raise the bar even further, says Bridgeland, and still fulfil the fund’s requirements. Because let’s face it, philanthropy is all well and good, but it won’t pay the members’ pensions.
“You may be focusing on opportunities in a particular way, but you’re still able to make the same amount of financial return because you’re operating in an environment that few other people are,” says Bridgeland. “You can still get good returns because you’re not picking necessarily from the same universe as others and these are going to be assets you can hold for a long time.”
Bridgeland’s work on some of the innovative London funds designed to have a social impact and help to regenerate parts of London is attracting attention. They’re being scrutinised by awards programmes as being worthy of recognition as the leading edge of institutional impact investing and the shape of things to come. In the future, she hopes that this will be expand into areas of old age care, a sector crying out for development.
“It’s important to measure the financial return,” says Bridgeland, “but you’re also thinking about the purpose of the investment as well.”
Should impact begin at home?
The potential danger with impact investing is that pension funds – particularly those of local authorities – will want to see their fund invested in their own area, so the social impact can be felt closer to home. But might that raise concerns about diversification?
“It’s fair to say for the local authority funds in particular, it is only natural that they start to wonder if their capital be deployed in their own area,” says Karen Shackleton, investment adviser and founder of Pensions for Purpose.
The more innovative impact fund managers are designing funds that have that capability, says Shackleton, where they talk to the local authority about growing their capital in their specific area while taking a diversified return on the whole fund, invested nationally.
“Others have a side fund to the general fund that is solely focused on investing in their area. So there’s different ways of doing that and the university fund managers are really thinking hard about how to do that.”
“In the future, I expect an investor’s impact will be reported differently to their financials at a local level, with the return on the diversified funds across all the assets they are invested in, with the impact applied to their capital in their area,” says Shackleton.
Housing is an asset that lends itself to impact investment and is understood by most, as they’ll already have some exposure to commercial property.
However, residential property is a growing area of not only interest, but investment. And Shackleton expects the pools to come up with their own take on this once they have all the existing assets onto their platforms.
“These sorts of investments can be very attractive for the financials,” says Shackleton, “but it’s a great story for members, too. And there will be growing interest from defined contribution (DC) funds where the younger generations are invested and likely to be more tuned in to wanting purpose in their investments.”
What’s next for impact?
One of the big challenges that faces investors looking at getting involved in impact investments is the same that is vexing funds with ESG. There is a lack of standardised taxonomy, disclosure measures and metrics.
“Aspiration and intention to support positive impact is all well and good – but without accurate reporting of how the investment is being used, these intentions may not translate into concrete benefits,” says Gordon.
There are good questions to ask and Gordon points to the III’s 2020 briefing paper on impact reporting as a place for the uninitiated to start.
Of course, those with the biggest marketing budgets will have the biggest profile and it will be hard to make out the earnest voice of those boutique funds that may have been doing impact for years and have a decent track record. She hopes the B Corp¹ movement will continue to develop and that the certification will be used by businesses in this sector to show real alignment with the goals of impact Investing.
“Certification will show that you’re genuinely committed to impact,” says Shackleton. “There’s a high bar. You have to do things like commit to reinvesting 40% of profits so you continue to achieve more impact. Some parts of the asset management community are working towards that now and I’d like to see the growth of that certification as evidence of authenticity.”
A bright future
The future for impact investment is bright, not least because it presents one of the most compelling solutions to the crises concerning both climate and biodiversity, but it has been recognised across both public and private sectors.
The success of investment is still judged on two criteria – risk and return. But this is changing. Soon, it will be impact – and whether positive or negative – will be considered as important as risk and return.
“More people are going to be looking at more than just financial return,” says Bridgeland. “Once you’ve got people looking at it, then it suddenly becomes part of the value of investments.”
1. B Corp Certification is a designation that a business is meeting high standards of verified performance, accountability, and transparency on factors from employee benefits and charitable giving to supply chain practices and input materials.