Impact investing: the third dimension


With the increasing frequency of major environmental events and social movements – from floods to wildfires, from #MeToo to Black Lives Matter – the goal of making the world a better place has shifted from a personal choice to a global necessity.

The latest report from the Intergovernmental Panel on Climate Change sounded a “code red” for climate, and the upcoming United Nations Climate Change Conference (COP26) is shaping up to be the most important meeting in the world. this day of the major nations on the subject.

Add to that the Covid-19 pandemic – which has exposed deep social inequalities – and many investors are increasingly focusing on how their capital can help solve these global problems.

Yet, until recently, the challenge was to combine the dual purpose of “doing good” and “earning a return” into a single investment.

Fortunately, this is a challenge that the investment industry has faced head on.

The growing field of impact investing helps investors balance a measurable environmental or social impact on the one hand, with a financial return on the other.

While impact investing was once largely the preserve of direct investment in the private market, it is moving from a niche approach to a large market segment.

According to a Global Impact Investing Network survey focused on private markets, impact investing represented just 0.5% of global assets and $ 715 billion in assets under management at the end of 2019.

But it is growing at a steady pace: the volume of impact-oriented investments grew by 77% per year between 2017 and 2019, according to technology and investment consulting firm GP Bullhound.

The growth in impact investing has been in part due to an increase in investment options in different impact asset classes.

Yet all of this rapid growth has brought to light the question of what constitutes an acceptable rate of return on these investments.

Given that the underlying premise of investing for many is “risk-adjusted financial return,” how can returns be adjusted for non-financial risk?

The investment industry is working on this issue, having already introduced measures such as Social Return on Investment (SROI) and Multiple Impact of Money (IMM).

We expect to see more research in this area.

Eyes on the Ball: Managers Shouldn’t Compromise Quality Impact Investments for Short-Term Rewards

At the same time, assuming that one can accurately calculate and attribute financial and non-financial returns, what is the balance between the two?

We do not agree that there has to be a trade-off between impact and financial returns.

In fact, as non-financial returns become an increasingly important factor, they could provide a powerful technical tailwind.

As the debate continues, the investment industry is looking at where impact investing is headed and why – and how impact can be measured and reported.

Fortunately, asset managers and others are starting to rally around some newly proposed standards.

These include high barriers to transparency and reporting to help the industry keep its promise and protect itself from accusations of ‘impact cleanup’, where funds make claims that are not supported by any. relevant and demonstrable positive impact.

So where is the impact seen?

There was consensus that impact investing should contribute to at least one, and preferably more, of the 17 United Nations Sustainable Development Goals (SDGs).

The notion of “co-investment” with sovereign entities and companies to support climate transition strategies is also proving to be an integral part of impact investing.

This field can extend to blended finance, where investments from institutions and philanthropic funds can be combined to create opportunities for commercial investors.

Sovereign nations are also stepping in, where impact investing can complement initiatives such as the World Bank’s International Development Association loans to low-income economies.

Earlier this year, Benin issued Africa’s first social bond in international markets, raising funds to expand access to clean water for its population of 12 million.

And many opportunities for impact revolve around new technologies and services that are often at an early stage of development – an area that has generally been the preserve of venture capital and private equity.

Today, these solutions are being developed and scaled for wider application.

The reach of impact investing in the public and private spheres means that it can span the full breadth of all opportunities – and that doesn’t happen too soon.

This has helped change the nature of the conversation between asset managers and their clients.

Where investors previously thought only in terms of risk and return, they are now adding a third dimension of oversight to their portfolios: impact.

Matt Christensen is Head of Sustainable and Impact Investing at Allianz Global Investors

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