The difficulty facing many people is how to conduct impact investing and determine which investment vehicles are best suited to their causes. The good news is that there are an increasing number of specialist equity funds, bond investments and private assets that can enable private investors to align generating financial returns with achieving their societal or environmental goals.
Recent research by the Global Impact Investing Network (GIIN) showed that more than 3,000 organisations around the world are managing impact-related strategies.
According to Victoria Leggett, head of impact investing and portfolio manager at UBP, the industry now offers vehicles that more precisely meet the impact ambitions of clients.
‘Impact investments can be found across asset classes, from project-based finance to funding the building of a school to private equity portfolios and listed markets,’ she said.
Leggett also pointed out that for listed markets, the long-term risk adjusted returns should be the same or higher than non-impact alternatives. Among listed equities, ‘we search for companies that will outperform over the long term because they are selling products that are solving problems’, said Leggett.
‘For projects, the return could be fixed at 1-2% or significantly higher,’ she said. ‘Impact investing is an investment. It’s not philanthropy so a financial return can and should be expected.’
These can include innovation in the renewable energy value chain, education providing access to underserved demographics, or affordable healthcare.
‘We invest in the disrupters of the old economy, the innovators that are driving change,’ she added. ‘We see them as the fixers.’
Not enough capital to achieve targets
However, GIIN chief executive Amit Bouri believes that ‘vast allocations of capital’ are still needed to achieve the UN Sustainable Development Goals (SDGs) by 2030 and to reach net-zero greenhouse gas emissions by 2050.
‘The work to scale the market with integrity is crucial if the world hopes to reverse the tide of climate change and address social inequity head on,’ he said.
The SDGs, which are built on decades of work in various countries, consist of 17 aims that include ending poverty, tackling climate change, and working to preserve oceans and forests. However, progress has been complicated by a combination of the Covid-19 pandemic and the Ukraine conflict, according to António Guterres, secretary-general of the United Nations.
In the UN’s latest Sustainable Development Goals Report 2022, Guterres warned that these problems had further delayed the ‘urgently needed transition’ to greener economies. Climate change, he insisted, was a ‘crisis multiplier’, with increased heatwaves, droughts and floods affecting billions of people and contributing further to poverty, hunger and instability.
‘Based on current national commitments, global greenhouse gas emissions are set to increase by almost 14% over the current decade,’ he said.
Danger of impact washing
Joanna Heywood, impact investment director at Oxfam GB, agrees that the fast-growing area of impact investing is attracting new types of investors to help resolve these global problems, but she also highlighted potential problems.
In particular, she cited increasing risks around impact washing, which included overstating positions or even making false claims.
‘As some funds focus on financial returns, there is a lack of agreed metrics for social and environmental impact in the sector,’ she said.
Heywood emphasised how Oxfam had been working for more than a decade to support high-impact enterprises in sub-Saharan Africa, Asia and Latin America.
‘In spite of the low historic default rates, we have observed how enterprises in emerging markets continue to face very high barriers when seeking to access finance,’ she said.
It is an area the organisation is keen to tackle through working with vulnerable people, promoting women’s economic justice and supporting systems that value women’s work. ‘Over the coming years we hope to see more impact-first, catalytic capital addressing these needs,’ she said.
Yet improving social and environmental well-being can be attained while generating financial returns for investors.
Diversifying risk and generating alpha
Yvonne Leung, Asia head of managed solutions, JP Morgan Private Bank, believes impact investing can provide investors with different sources of alpha, as well as diversifying risk.
‘Opportunities are primarily found in private markets but there are opportunities in public markets to help scale up impact investing,’ she said, such as green bonds that fund climate projects.
Leung also believes the public market gives private impact investors a different avenue to source alpha by participating in an initial public offering.
‘This can really help amplify impact by attracting a wider set of mainstream retail investors, something existing sustainable investing strategies do not participate much in,’ she added.
Looking to the future, Leung expects impact investing to have an ‘even more meaningful’ allocation within clients’ private investment portfolios.
‘We expect to see more multi-generational family offices preferring to commit to 10+-year investments that are able to create a positive sustainable impact that aligns with their values, rather than the traditional private equity investments with a similar investment tenor,’ she said.