Green is the new black. It’s in fashion, and returns are great. Ethical investing has gained strong momentum over the last few years and fund managers routinely utilise ESG (environmental, social and governance) screens to filter out harmful companies while retaining sustainable ones. But let us go one step further.
Impact investing by comparison, is in its infancy. There is still some confusion as to what Impact Investing truly is: here is its dictionary definition:
“Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.
What that means is that investments are both socially and financially rewarding. Impact investment funds are not ESG investment funds, they actually differ markedly. For example:
- Impact investment funds tend to target a specific outcome such as reducing carbon or eradicating poverty.
- ESG investment funds on the other hand, avoid investing in companies that pollute, gamble or make weapons, or alternatively they work with businesses to improve their practices.
According to Daniel Madhavan, CEO of Impact Investment Group, the total amount of funds under professional management in Australia is about $2.25 trillion. Impact investments total about $19 billion. That’s less than 1%. In comparison, ESG investment choices account for 43% of Australian assets under management. While ESG investing is considered on-trend and able to generate great returns, impact investing creates greater value and return for the planet.
One regular focus of impact investment strategies is climate change, an area that has become increasing popular following the devastating bushfires. Under the Paris Agreement, the long-term temperature goal is to keep the increase in global average temperature to well below 2 °C above pre-industrial levels; and to pursue efforts to limit the increase to 1.5 °C. We are currently warming at 0.2 degrees Celsius per decade. At this rate, 1.5 degrees C of warming would be reached by about 2040. As you can see, we are currently nowhere near on track to meet this target. This is why impact investing will play a huge role over the next few years as a way to tackle climate change and the urgency to reduce carbon emissions.
One feature of impact investing is the ability to measure and report on the impact created. Not only does the company report on the performance and progress of underlying investments but it must also report on measuring the impact that is being invested in.
How can you have an impact?
Impact investing isn’t easy, for the simple reason that there aren’t many investment vehicles in Australia in which one can invest. According to a survey published by the Global Impact Investing Network (GIIN), about 41% of impact investors’ capital is currently invested in private debt, and 18% in private equity. It’s still in its infancy, but growing fast.
Social Impact Bonds – The Australian Government announced in 2017 that it will provide $30 million in funding over ten years to trial the use of Social Impact Bonds (SIBs). The Eaton Vance-owned Calvert has been a leader in the similar “green bonds” sector for many years, which are bonds attached to specific green, renewable or sustainable projects operated by large companies.
SIBs are somewhat different, in that these bonds pay a return to an investor when an agreed social benefit outcome has been achieved by a service provider. Such benefits could be anything from improving conditions for people experiencing chronic homelessness to improving employment outcomes for long-term unemployed young adults. SIBs use investor capital to fund upfront service delivery costs and share in the financial risk of service providers achieving the targeted outcomes.
Despite a market teeming with keen investors, there are only three available SIBs:
- Newpin –
- The Benevolent Society
- ACSO-Arbias venture
Impact investment managed funds – These are another unique way to invest with an impact. Unlike traditional equity funds, these tend to focus on investing into new technologies and opportunities with a particular preference for social infrastructure, schools, renewable energy assets, venture capital and private companies. Such a fund aims to invest into companies, organisations, assets and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.
Renewable infrastructure assets – Not all impact investments need to be high-risk. In fact, there are a number of infrastructure-like opportunities now available in Australia focusing on the renewable energy sector. One such example is the Renewable Energy Income Fund run by Foresight Group, a global infrastructure and renewable energy investment manager with $7.1 billion in assets under management. Open to Australian wholesale investors, it gives access to infrastructure via debt. The fund will invest into renewable energy projects.
- Financial return – The fund targets annual income of 4.0% – 4.5% above the Reserve Bank of Australia (RBA) cash rate.
- Social return – An indicative portfolio would save approximately 5.7 million tonnes of CO2 emissions over the life of the underlying assets compared to the equivalent coal generation. These projects would generate enough clean energy to power 1.6 million Australian homes for one year.
So, there you have it. Australian investors actively seeking out ways to employ some type of ESG screen in the investment process, should look at impact investing. It is the next step forward because screening out the negative isn’t enough to save the planet. Funds need to be directed into organisations or projects with the intention of generating measurable social and environmental outcomes as well as a financial return. Impact investing is truly a great way to be a do-gooder and make a deep rewarding impact on the world.