Risk, Return AND Impact
Over recent decades ethical investing has focused attention on avoiding investments that have a negative impact on society or our environment. According to the Responsible Investment Association of Australasia, over $630 billion of assets managed in Australia now employ some type of environmental, social or governance (ESG) screen in the investment process. This is good news for people and the planet.
Impact investing seeks to go a step further. Instead of screening out the negative, impact investments are investments made into organisations, projects or funds with the intention of generating measurable social and environmental outcomes, in addition to a financial return. Impact investments are different from grants because a financial return is expected, and different from mainstream finance because measurable social and environmental benefits are expected.
The investment is designed specifically to achieve social or environmental outcomes. This intentionality distinguishes impact investments from other traditional investments that may incidentally deliver positive societal impacts.
A key feature of impact investing is the measuring and reporting of social or environmental performance and progress of investments.
Impact investments intend to generate a financial return, and will include range of return expectations.
Impact investments provide investors with greater choice and new opportunities to put their capital to use in ways that make a financial return and align with their values. For institutional investors, impact investing provides opportunities to diversify their portfolio and meet member demands. For philanthropic trusts and foundations, impact investing is a way to deepen their mission and create greater impact through the combined effect of investment and grant making activities.
What do impact investments look like?
Impact investing provides opportunities to investors across all asset classes including real assets, private equity, fixed income and emerging hybrids such as social impact bonds. From financing social housing and renewable energy to delivering positive outcomes in health and education, impact investing spans different types of organisations, sectors and locations, and delivers a broad range of financial returns and societal outcomes.
Impact investing encompasses a broad range of activity from investments in renewable energy to investments in housing, health, education and international development.
What remains consistent is the intention to achieve measurable social impact alongside a financial return.
Financial first or impact first?
The terms ‘impact first’ and ‘financial first’ have been used to describe impact investors with regards to their area of priority, with ‘impact first’ investors typically optimising the social or environmental impact of their investment with a floor for financial returns, and ‘financial first’ investors prioritising market returns, supported by social or environmental outcomes. However the line between investors is often blurred with the objectives of investors being more multifaceted and changing depending on the investment, and many impact investment opportunities seeking to optimise both financial and social returns.
Sometimes impact investment may have a ‘layered structure’, combining different types of capital with different risk-return requirements. Often in these cases, government or philanthropy may accept higher risk and a lower rate of return in order to attract private investors with different investment criteria, and to make a transaction that delivers notable societal impact possible.
Market size and potential
The impact investing market is still in the early stages of development but with strong potential. Globally, it is estimated to reach between US$600 billion and US$1 trillion within a decade. In Australia, estimates suggest a $32 billion market by 2022.
The Impact Investing Australia 2016 Investor Report shows 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.
How are impact investments made?
Impact investments can be made directly into an organisation or via a managed impact investment fund.
There are 3 main areas where impact investments are used:
- Scaling business and social enterprise
- Accessing real assets (eg. property or infrastructure)
- Financing program delivery
Impact investing provides trusts and foundations with a unique way to align their investments with their values and increase their social impact. For family offices, impact investing can unite families around common values and engage a younger generation in leadership of the office.
Impact investing provides institutional investors with new opportunities to manage risk and diversify investment portfolios across asset classes, sectors and geographies; in addition to aligning investments with members’ social and environmental values.