Why impact investing?
From insurance companies to superannuation funds, institutional investors are experiencing increasing demand for their investments to align with their clients’ and members’ social and environmental values. At the same time, they are looking for opportunities to manage risk and diversify their investment portfolios across asset classes, sectors and geographies.
Impact investing provides a new approach to investing, with significant potential to help deliver positive societal impact alongside financial returns. It goes beyond ESG integration and other responsible investment approaches in that impact investments intentionally set out to achieve positive social and environmental outcomes, and the achievement of these outcomes is measured.
With significant funds under management, institutional investors have an opportunity to help deliver large-scale solutions to local and global issues. In doing so, they also have the potential to carve out a distinct competitive advantage.
How can impact investing benefit an investment portfolio?
Impact investments are being made in a wide range of sectors including agriculture, health, housing, education and microfinance. They span a variety of asset classes and investment structures including private equity, private debt, property, shares and alternative assets. Some impact investment structures (for example, social impact bonds and development impact bonds) are becoming attractive to investors because of their low correlation profile to the rest of the market.
Social Impact Investment Taskforce ‘Allocating for Impact’
How is the market for impact investments developing?
Globally and locally there is growing interest in impact investment and investment activity. The GIIN Annual Impact Investor Survey 2016 revealed more than US$15 billion was committed to impact investments in 2015 with intentions to commit 16% more capital in 2016, and increase the number of deals by 55% to 11,722 in 2016.
The Impact Investing Australia 2016 Investor Report found that in Australia, active impact investors aim to triple the size of their impact investment portfolios over the next 5 years and those currently not active in impact investing expect to consider social and environmental impact in investment decision making over the next 5 years.
In Australia there are a number of asset managers playing a leadership role in impact investing. In 2014, QBE Insurance announced $100 million allocation to social impact bonds, while in 2015 HESTA launched a Social Impact Investment Trust and committed an initial $30 million to invest in housing, employment, health and education. Christian Super has been engaged in impact investing for the past decade and now has over 10% of its funds under management invested for impact.
Examples of impact investing
There are many different examples of impact investments which institutional investors have invested in, including direct investments and investments in funds:
- Accessing a real asset that an organisations needs to deliver upon its mission such as housing or a renewable energy asset;
- Establishing or scaling up for-purpose businesses or social enterprises that generate income;
- Financing program delivery to cover a not for profit organisation’s overheads when it has entered into a ‘payment by outcomes’ agreement (such as through a social impact bond or development impact bond).
How can I find impact investment opportunities?
Impact investments can be made directly into an organisation or via a managed impact investment fund. There are a number of impact investment funds and impact investment advisory firms in Australia; some are listed here.
- Impact Investments: Perspectives for Australian Superannuation Funds (Charlton et al, 2013)
- Evolution of an Impact Portfolio: From Implementation to Results (Sonen Capital, 2013)
- Allocating for Impact: Subject Paper of the Asset Allocation Working Group (Social Impact Investment Taskforce, 2014)
- From the Margins to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors (World Economic Forum, 2013)
- A Portfolio Approach to Impact Investment: A Practical Guide to Building, Analyzing and Managing a Portfolio of Impact Investments (JP Morgan, 2012)