OPINION | Impact investing is set to continue to grow, as many investors are interested in making their money work for good, as well as for returns.
Research shows directing capital into investments that seek both attractive returns and a measurable positive environmental and societal impact could be a US$1 trillion ($1.3 trillion) business globally by 2020. This is largely driven by Millennials who want to make a difference in the world. Studies by Morgan Stanley have found that 18- to 34-year-olds are twice as likely to invest in a portfolio or individual companies if they seek positive environmental or social impacts.
While impact investing is at a relatively nascent stage in Australia and lacks scale, the term impact investing is already a decade old. It was coined by the Rockefeller Institute to acknowledge that government and philanthropic activity could not solve the world’s problems alone and that activity by publicly traded corporations was needed to address the world’s most pressing social and environmental challenges.
Addressing the headwinds
The first obstacle to overcome is the confusion around what impact investing is and what ‘impact’ means. By definition, impact investments are made into companies, organisations and funds with the intention of generating a social and environmental impact alongside a financial return. There is no compromise in either goal.
Because of this, impact investing is not socially responsible investing (SRI) nor is it the integration of environmental, social and governance (ESG) goals into investment processes. These seek to exert influence, rather than changing a specific practice or industry in a measureable way, which impact investing is designed to do from the outset − while also driving financial performance.
Up until now, impact investing has has been largely focused on unlisted markets. Moving forward, it is important that listed companies embrace impact investing if substantially more capital is to be mobilised to make a real difference.
This would open many more impact investing opportunities to individual investors who want to support listed companies with business models that address pressing environmental, social and economic challenges, but which can also support wealth generation .
An organisation that simply reduces its carbon footprint or becomes more transparent about its activities would not qualify as an impact investment. A company must seek to address a particular social or environmental concern in a quantifiable way and be shown to be an attractive investment opportunity.
Active management is key
Active management is an essential component of successful impact investing. Engagement with management is necessary to understand a company’s broader investment processes and impact strategy alongside traditional financial metrics. Engagement also encourages better behaviours and disclosures.
Impact investment strategies are also long-term in their nature and asset owners must be willing and able to assess the impact of their portfolio over the long term.
Institutional investors we talk to in Australia and overseas generally accept the case for impact investing but lack clear investment solutions, such as a benchmark to understand the kinds of returns they should expect and a framework for applying the strategy.
The lack of an application framework must be overcome and a solution agreed upon at an industry level before Australia’s largest investors, such as superannuation funds, can become more involved in impact investing and drive scale.
Aberdeen Standard Investments has overcome this issue by using the 17 United Nations Sustainable Development Goals (SDGs) as a framework to develop its own impact process and analysis. This helps ensure the companies in which we invest are truly having a positive impact.
All 17 SDGs are informed by the UN’s associated targets and factored into the investment process. The result is an investment into 35-60 companies whose activities, technologies or products are specifically designed to provide solutions in healthcare, education, poverty and many other areas.
We encourage other fund managers and companies to use the UN SDG’s as a common language and a framework that can unlock impact investing for mainstream investors. The outlook for mainstream impact investing is bright, as investors increasingly look for financially attractive investment solutions that make a difference to the world. We as an industry need to be ready.
Simone Bouch is the head of distribution, Australasia, at Aberdeen Standard Investments.