Impact investing: the logic behind the emotion

Written by Harry Penberthy on 30th Jan 2020

Here, Harry Penberthy – head of marketing at private investment specialists Triple Point – gives his views on the rise of impact investing and the strategies behind how it is marketed.

 

Harry Penberthy

The rise of impact investing

Anyone who has paid attention to investment media over the last year will have noticed that “impact investing” is a term sweeping across the marketplace.

The rise of impact investing is capitalism evolving to deal with our contemporary environmental and social challenges.

Not a day goes by without a new foundation, forum or commentator heralding the power of impact investing in addressing pressing societal ills whilst still delivering maximised returns to investors.

Even overtly Capitalist institutions like The World Economic Forum are now engaging in impact driven discourse, with the theme for this year’s Davos Forum being “Stakeholders for a Cohesive and Sustainable World.”

Some have gone so far as to say that the rise of impact investing is capitalism evolving to deal with our contemporary environmental and social challenges. And to be frank, I would agree.

But I would go one step further and say that the rise of impact investing is also something else: it is actually traditional investing responding to increasing market demand for solutions to socio-economic problems, driven by both global non-financial organisations and by international investors simultaneously.

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A growing market

One non-financial catalyst is the UN’s 2030 Agenda – a commitment by the organisation’s 193 members to align economic growth with sustainability. As part of this, the Global Investors for Sustainable Development Alliance is now directly leveraging finance and investment experts from around the world, including Allianz CEO Oliver Bäte, and the leaders of Bank of America, PIMCO and UBS to promote sustainable development around the globe.

Between 1997 and 2017 the number of impact investors.. rose from under 50 to over 200.

On the investor side, demand is being reflected in mainstream investment managers shifting their focus from solely financial returns, to pursuing investments that have wider positive outcomes. And the market for impact investing is also seeing new entrants and larger portfolio allocations from players already operating in the space. Indeed, between 1997 and 2017 the number of impact investors identified by the Global Impact Investing Network (GIIN) rose from under 50 to over 200. Investors that responded to the 2019 GIIN survey managed a combined total of $502 billion (£385 billion).

 

Pressure to deliver

And it seems that large investors are increasing the amounts of their money that they want to be directed at responsible investing. They want to see that – combined with risk reduction and increasing returns – environmental, social and governance (ESG) issues have been properly considered.

Global investors continue to allocate to private equity firms, whose managers are also under pressure to deliver on responsible investing criteria.

Indeed, in a recent study[1] by the Alternative Investment Management Association, 62 per cent of responding hedge fund managers said they had received increased interest from current and prospective investors in their firm’s responsible investment capabilities. In the UK, the Impact Investing Institute was established in 2019 to work alongside the pension and fund management industry to manage this growing demand.

Similarly, global investors continue to allocate to private equity firms, whose managers are also under pressure to deliver on responsible investing criteria. What’s more, these managers have the advantage of being more suited to impact investing. That’s because closed-ended funds are well structured to invest in impactful infrastructure such as hospitals and schools.

A 2017 report predicted that the UK retail impact investment market alone was estimated at £87 billion, with 194 retail funds mapping onto the impact spectrum. This number has only grown since.

 

Addressing societal challenges versus financial return

Impact investors have the opportunity to meet this demand and to finance projects such as housing, infrastructure and renewable energy. These investments offer long-term returns to investors and generate increased aggregate demand through employment, operating efficiency, and benefits such as lower harmful emissions and improved quality of life.

Neither financial returns nor moral principles have to be sacrificed, nor should the financial risk be greater than traditional investments.

Whilst smaller advisors readily acknowledge the altruistic benefits of addressing societal challenges, they can sometimes be sceptical about the pure financial evaluation of impact investing. This is partially a function of the dissonance caused by merging an overtly philanthropic agenda with the dispassionate assessments normally conducted with financial investing.

The reality is that impact investing is compatible with both. Neither financial returns nor moral principles have to be sacrificed, nor should the financial risk be greater than traditional investments. In fact, and as demonstrated, macroeconomic risks such as a global water shortage and global warming are actually reduced by deploying patient impact investment capital.

 

Can impact investing be LESS risk with MORE return?

Even just looking at the financial returns, as long as four years ago Morgan Stanley suggested that sustainable investing funds met or exceeded the median returns generated by traditional equity funds. Their report also showed 72 per cent of companies surveyed that had a social impact purpose displayed higher profitability as well as reduced volatility.

Investors may feel impact investing is what their hearts tell them to do, but it’s also clearly what their heads should be telling them to do too.

More recently, data from Morningstar found that sustainable and social impact funds performed better than their non-sustainable sister funds. In fact, three quarters of Morningstar’s ESG indexes have outperformed their non-ESG equivalents since their inception.

Ultimately, despite the emotive context surrounding this sector, impact investing is actually meeting a demand mix generated by a wider and deeper set of financial, commercial, governmental and ethical factors. And on top of that, investors themselves are clamouring for more exposure to impact strategies. They are also receiving superior, often uncorrelated returns with lower volatility. So yes, investors may feel impact investing is what their hearts tell them to do, but it’s also clearly what their heads should be telling them to do too.

[1] https://www.aima.org/sound-practices/guides-to-sound-practices.html#?active=tab-aima-guidance-note