Investing as a force for good is gaining momentum amongst domestic and international investors. At ANZ Private we understand that growing and protecting our clients' wealth isn’t enough - our clients want to invest to contribute to a more sustainable future for themselves and generations to come.
Impact investing is a relatively new approach to investing and whilst still in its infancy has seen significant growth in recent years. According to the Global Impact Investing Network (GIIN) 2020 annual impact Investor Survey, total AUM invested in impact solutions globally rose 42% from the year prior to USD 715 billion.
According to the Responsible Investment Association Australasia (RIAA), the total value of impact investing products in Australia grew from $5.7b as at 31 December 2017 to $19.9b as at 31 December 2019.
So what is Impact investing all about and could it be appropriate for you? Dan Simpson, Head of Impact Investing at ANZ Private, provides his insights below.
What is impact investing?
Impact investments, as defined by GIIN, are “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.
While the traditional premise of investing means just earning a return on your capital for an appropriate level of risk, impact investing also considers the effect your money has on society and the environment. Impact investors should aim for their investment to contribute positively to a social or environmental outcome and not just achieve a financial objective.
How does Impact differ from ESG or responsible investing?
Like most things, responsible investing isn’t black and white – there is a spectrum. The chart below constructed by RIAA captures this spectrum well. At the lower end of the spectrum, responsible investing might include only avoiding investments in companies which create poor environmental and societal problems – think heavy carbon emitting coal mines and tobacco companies. At the other end of the spectrum is Impact investing, which proactively invests in solutions to these problems, e.g. renewable energy and healthcare.
So what do impact products invest in?
Until recently, impact investing was a niche opportunity set in a limited asset pool. It now extends to virtually every asset class – equities, bonds, property, infrastructure, agriculture etc. While opportunities exist in listed markets, maximum impact is generally achieved in unlisted markets. Here, capital is deployed to fund new ventures (i.e. providing impact ‘additionally’), as opposed to listed markets (shares and bonds) where securities are purchased in businesses which already exist.
What impacts can I achieve and how are they measured?
There are an untold number of social and environmental impacts achievable. Impact investors are mostly able to align their investments to those impacts important to them. It could be funding disability accommodation, reducing carbon emissions by investing in rooftop solar or investing in a medical technology which may provide life-changing benefits to those in need. There are products available which focus on just one impact, and others which invest in multiple impacts.
Impact must be quantifiable too, not just aspirational. The examples given above can be measured with metrics such as the number of specialist disability homes provided, the amount of CO2 emissions abated, and the number of people given access to potentially life changing medical technology.
The United Nations created 17 Sustainable Development Goals (SDGs) in 2015 as “a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030”. The SDGs are now a globally accepted framework for categorising investment impacts. Many impact fund managers align their products with one or more SDGs. This of course doesn’t necessarily mean that they will be ‘true to label’, and therefore thorough due diligence is necessary to uncover which managers are “greenwashing” and which are genuine. A question we seek to answer in our due diligence, is whether a product addresses some of the 169 key targets which underlie the 17 SDGs.
United Nations 17 Sustainable Development Goals
For more information visit https://sdgs.un.org/goals/
Comparability of impacts from one investment to another is pretty much impossible though, given there are so many different impacts and there is an inevitable degree of subjectivity involved in assessing them. The metrics mentioned above aren’t directly comparable, and whilst you can quantify the number of lives which have been enhanced from disability accommodation or a particular medical device for instance, there is still a subjective element regarding the degree of enhancement or in comparing them to each other.
What returns can I expect? Do I have to accept a lower financial return in order to make an impact?
Like traditional investing, impact investments have a range of return expectations, depending on the asset class (e.g. equities, bonds, infrastructure), liquidity constraints, the risk level and the quality of the investment. A popular misconception is that impact investment returns must be lower than those of non-impact investments. That is, you must give up something if you’re doing some good. The reality many have observed is otherwise – in other words, you can potentially have your cake and eat it too! Indeed, often the investment thesis is actually driven by consumer demand for impact and sustainability. An example is demand for sustainably produced organic vegetables driving the investment returns for regenerative agriculture.
According to a RIAA survey in 2020, 92% of respondents reported that their impact investments met or exceeded their financial return expectations, whilst 93% of respondents reported the impact of the investments met or exceeded their impact expectations.
What are the risks? What about liquidity?
Like any investment, impact investments carry risks, some of which may be specific to the particular product being considered. Investors need to be aware of the general and specific risks before investing, and ANZ recommends that investors should read the applicable offer documents for each investment and consider whether it is appropriate for them.
Impact investments tend to carry different sorts of risks than traditional investments, thereby offering investors very attractive diversification benefits at a total portfolio level. Regulatory risk is one such risk commonly associated with Social Impact Bonds and unique impact opportunities like disability accommodation. This is because their returns typically come from Government payments linked to regulation (policies), which could change. A traditional office real estate asset doesn’t carry this risk for instance, but instead is exposed to the risk of poor economic growth and working-from-home trends reducing demand for office space.
The majority of impact products are in unlisted markets (in order to provide impact ‘additionally’ as discussed earlier). By their nature, unlisted assets typically require capital to be tied up for varying periods in order to finance construction of an asset or a project (such as a solar farm or a community program). This brings illiquidity risk, for which investors should earn a premium given they can’t liquidate these assets as quickly or easily as listed assets. Impact products in listed equities and bonds on the other hand, will tend to have daily liquidity, as you would expect from traditional equity and bonds funds.