Co-Head of Sustainable InvestmentHong Kong, China
Impact investing has become much more sophisticated, as funds in this asset class start to develop more meaningful ways of measuring their outcomes. Global investors’ growing commitment to frameworks such as the UN’s Sustainable Development Goals (SDGs) are also helping increase exposure to and discussion around this still relatively niche investment area.
This style of investing was the focus of a recent AMP Capital roundtable, involving leading fund managers in this area, as well as a host of other experts in this field.
Impact investors aim to deploy capital in a way that creates positive social and/or environmental effects, in addition to a financial return.
Although impact investing is asset-class agnostic, according to a survey published by the Global Impact Investing Network (GIIN)1, on average 41 per cent of impact investors’ capital is currently invested in private debt and 18 per cent in private equity. While the tides are slowly turning, this is largely due to the fact it’s still more difficult to find pure-play companies in impact investing in public markets.
Additionally, there tends to be more opportunities for impact investments in developing and emerging markets, rather than developed markets. This is because far more capital is required in developing markets to achieve a real social impact, compared to developing markets.
One example discussed at the roundtable was the Newpin Social Benefit Bond, which is funding the expansion of the Newpin program, run by Uniting Care Burnside. The A$7 million bond aims to reduce the number of children needing to enter foster care, and support those currently in foster care to return to their families. Designed to achieve specific outcomes, it also includes capital guarantees, while returns depend on children being able to stay with their families on a permanent basis.
The bond aims to achieve a 60 to 65 per cent success rate in terms of children going back to their families, and a return of between 8 per cent and 12 per cent a year. So far, it has achieved a return of 12.2 per cent and 130 children have been reunited with their families.
Challenges of impact investing
One of the challenges of impact investing discussed was how to measure success. Environmental impacts tend to be easier to measure than social impacts because there is more common quantifiable data, such as the amount of CO2 emissions avoided, or the number of gigawatts of renewable energy produced. Social impacts, on the other hand, may include the number of affordable homes provided or dollar savings achieved by the government.
However, it’s difficult to attain consistency of measurement across different investments because of the vast array of impacts, a lack of commonality and difficulty in quantifying and comparing impact. Currently, the 17 SDGs are the most commonly used impact performance measurement tool, where investors assign impact to one or more of the goals, such as climate action or gender equality. The Impact Management Project is also being commended as another potential solution for impact reporting frameworks.
Similarly, getting the balance right between delivering a strong return to investors and ensuring the community or issue the investors are attempting to resolve receives adequate funding, is another obstacle impact investing is currently navigating.
In short, it is absolutely possible to achieve competitive returns. The Responsible Investment Association of Australia2 recently found that investor experience in Australia has largely been in line with their expectation for market returns. Globally, The GIIN1 2018 Annual Investor Survey found that the majority of respondents reported performance in line with both impact (82%) and financial (76%) expectations (where financial targets were mostly risk-adjusted, market-rate returns). 15% even experienced outperformance versus expectations in terms of both impact and financial returns.
Despite these encouraging findings, it is still proving difficult to draw meaningful conclusions about impact investment performance, due to a lack of available data over the short history of the industry, and lack of clarity over the appropriate definition of market return or benchmark in these instances.
Overall, we believe there are plenty of opportunities for impact investors to improve and refine the way capital is allocated and returns are measured. It appears that the sector is moving in the right direction to achieve these aims, for the benefit of groups that require funds to tackle social and other global issues, and the communities in which they are focused.
1Global Impact Investing Network. See https://thegiin.org/assets/2018_GIIN_Annual_Impact_Investor_Survey_webfile.pdf
2RIAA is the Responsible Investment Association of Australia, the peak body for impact investing advocacy in Australia, see https://responsibleinvestment.org/about-us/ for further information. Impact Investing is a relatively immature but rapidly growing industry, so there is limited information available on actual investments and their financial and impact performance outside of RIAA’s work. In this article, unless otherwise stated, we have sourced all data from the RIAA Benchmarking Impact – Australian Impact Investment Activity and Performance Report 2018
Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.