Earlier this week we hosted an event covering aspects of Impact Investing – the strategy of making investments that promote positive social and environmental outcomes, while also generating a financial return.
Our special guest, delivering the keynote address was Tim Macready, Head of Global Advisory at Brightlight and independent Investment Committee member at Pāua Wealth Management. Tim is a thought leader in this space and globally recognised for his work, having led the design and implementation of award-winning impact and responsible investment portfolios.
Joining Tim on the panel were Andrew Ryan, Tax Partner at MinterEllisonRuddWatts, Brent Ogilvie, Managing Director at Pacific Channel and Donna Nicolof, CEO at Pāua Wealth.
The panel discussed the impact investing landscape globally, challenges and opportunities particularly for New Zealand investors, perspectives from their professional and personal experience and thinking differently about how capital is deployed effectively to achieve positive social and environmental outcomes.
Below is a brief summary of the key points from our discussion and thinking about being at the forefront of impact investing.
The existing trend of assets shifting towards values alignment is only likely to accelerate
We are currently at the start of one of the biggest wealth transfers in history, as assets change hands from the Baby Boomer generation to the Millennials. By 2030, McKinsey estimates that more than two-thirds of wealth in the US will be held by women. Both of these groups are significantly more likely to say that values are important in their investment decision-making process. As a result, the existing trend of assets shifting towards values alignment is only likely to accelerate.
So how are these values being expressed from an investment perspective?
In three main ways: through ethical investing (avoiding investment into companies that cause harm), sustainable investing (ESG-type approaches that seek to allocate to companies operating sustainably and which engage with those companies to influence positive change) and impact investment.
Impact investing refers to investments that are made with the specific purpose of achieving a particular social or environmental impact (and measuring outcomes to see if that impact is achieved), while also seeking to achieve some level of financial return.
The latest study from the Global Impact Investing Network (GIIN) shows the market is growing at around 20% per annum, with allocations to impact investing strategies increasing. With the increased emphasis on yield and capital protection, growth is strongest in developed markets, in areas such as housing and technology. In New Zealand there is growing interest, as investors look to align their values with their investment portfolios.
There are generally two approaches to accessing impact investments. The first, and often most common in New Zealand, is to find direct investments that fit your criteria and invest into them. While this approach can work successfully to deliver financial returns and impact and set the stage for further direct investments, it can also be disastrous if investments in single entities fail or encounter challenges. An alternative pathway, and for many can be preferable, is to find impact investing products and funds that meet an investor’s requirements.
As the field of impact investing has grown, it has become commercially beneficial for fund managers to claim impact. This is why we have seen various jurisdictions – such as Europe, Australia and the US – take steps to ensure that products are true to label. In Australia (and, the FMA has said, shortly in New Zealand), the regulator has become increasingly willing to take action against product issuers who make claims of sustainability or impact without providing evidence to support those claims.
Barriers to Impact Investing
Most impact investments are restricted to wholesale investors. With many products domiciled offshore, access can also prove challenging for smaller wholesale investors.
Impact investments may not neatly fit into pre-existing asset classes or structures and can make it challenging to fit into a traditional risk/return asset allocation model.
Determining the scope and type of impact that investors want to achieve can also present a challenge. It’s particularly important to determine a scope that is not too narrow, which can make it impossible to find enough investment targeting the specific area, nor too broad, where there are so many options available that it becomes impossible to understand the landscape. For example, improving human flourishing and climate resilience.
There can also be governance obstacles with Trustees biased to traditional investments, risk averse and struggling to see value in impact investing. This can at times extend to purpose-driven organisations, like Charitable Trusts and Foundations who should revert to the fundamental question of how they can most effectively use everything available to them – including their investment portfolio – in progressing their social purpose and objectives. In some cases, investing can provide a more sustainable and efficient way of solving a problem than through grant funding.
New Zealand has some world leading organisations in this regard including many Iwi, religious groups and charitable foundations, however more needs to be done in collaborating to address social issues to have a more meaningful impact rather than individual projects done in isolation.
- Pathway to business ownership for blue collar workers;
- Community managers for multi-family apartments and
- Social bonds to keep children out of foster care.
How has impact investing performed?
When it comes to performance, we don’t have as much robust data as we would like however, more data continues to come out each year. Evidence is increasing, highlighting that it is possible to design thoughtful portfolios that achieve risk-return targets and impact at the same time.
The GIIN published a meta-study in 2021, that concluded that market rate risk adjusted returns were achievable through impact investing, provided that there was thoughtful manager selection and portfolio construction.
The latest 2022 report on performance from Cambridge Associates showed 10-year returns of 16.8% per annum from Developed Markets Private Equity Impact Investments – a very competitive return in a broader context. The Emerging Markets equivalent was much less compelling at 5.7% per annum.
Impact has to be measured in some way to truly be an impact investment and typically Sustainable Development Goals ‘SDGs’ are the most common framework used. This can be a challenge however depending on the theory of change i.e. how does the investment capital create the change, which ultimately needs to be closely aligned to the investment thesis. For example, in social impact bonds, where the payment-for-outcomes mechanism directly ties investment return and measured social impact.