The Responsible Investment Association Australasia (RIAA) recently released the 2021 figures for the growth of the responsible investment industry which saw the Australian market hit a record $1.54 trillion in assets under management (AUM). However, when we dig into the numbers, there was only a modest increase in formally defined impact and community investing, namely from $29 billion to $30 billion in 2021.
The figures do not quite explain the whole story on growth in investing for impact where we are seeing many outcome focused, sustainability funds entering the market. Sustainability-themed investing more than doubled to $161 billion from $76 billion in 2020 − the fastest growing area. These funds are not impact funds by definition but have impact related intension, but their impacts are not measured and their additional contribution to impact is often questionable.
Internationally we have seen significant growth and forecast growth for impact investing. Morgan Stanley has forecasted growth to be around 30 per cent a year, and impact investments’ share of responsible investment is expected to rise from 6 to 11 per cent by 2025. In a recent report, the International Finance Corporation estimated the impact market at US$2.3 trillion ($3.2 trillion) in 2020, splitting between measured impact (US$636 billion and intended impact (not measured) at US$1.6 billion. While the Global Impact Investing Network have sized the measured impact market at US$1.2 trillion, double the IFC measured impact numbers.
While the impact market is relatively small in Australia, it is forecast to grow exponentially to around $500 billion by 2025, from the $30 billion recorded at the end of 2021 according to RIAA data. That said, this research was undertaken before the dramatic fall in markets in 2022.
In 2022, we’ve seen strong growth in funds in the private equity and real assets market in areas such as disability and affordable housing and renewables. Looking to 2023, there are a few triggers that could catalyse the growth in impact investment. Firstly, several superfunds are exploring impact investment mandates across asset classes. Traditionally they have recorded their impact investments primarily in private equity segments of their portfolios. Secondly, the possible adoption of the Social Impact Investing (SII) Taskforce recommendations by the Albanese government.
Social Impact Investing Taskforce
The Morrison government established the SII Taskforce in the 2019-20 budget which comprised an expert panel supported by a team within the Department of the Prime Minister and Cabinet, and chaired by Michael Traill, chairman of the Paul Ramsay Foundation. The Taskforce made three core draft recommendations designed to support the impact investment market and aimed at encouraging the government to play a leadership role to help leverage capital and reduce risks in the impact market.
The central recommendation was for the establishment of an impact capital wholesaler to warehouse capital to support further capital raising from private investors. The aim of the wholesaler is to make reasonable financial returns through investing in social impact funds that invest in various social service businesses required to meet minimum standards of financial performance and delivering improved social outcomes.
The other two key recommendations were for more outcomes-based government funding and an early stage foundation or fund to support entrepreneurs to provide capacity building, mentorship and support for organisations to help them win early-stage capital. This would sit alongside the larger impact wholesaler. Each of the three entities would act as market champions and help link social service providers with capital.
Impact Investing Australia, which has advocated for a similar body in Australia for many years, wants the government to commit a minimum $200 million to the fund to be matched initially by financial institutions. According to recent media reports, discussions with the big four banks regarding funding are progressing well.
Prime Minister Albanese has invited the taskforce to reconvene, and update the recommendations before the next May 2023 budget. The key benefit for government in adopting the recommendations would be to leverage its financial contribution from the private sector capital, all while achieving their social objectives in areas such as housing, aged care and early learning.
Mobilising private capital
Super funds could also play their part in in the wholesaler to help accelerate the impact market growth. Australia has one of the largest pension systems in the world with over $3 trillion in AUM that could be put to work to help address social disadvantage in areas of social impact.
The wholesaler concept has been created in other markets including Japan, South Korea, Canada, UK and the EU. While this concept is aimed at social impact, we have seen the significant growth in the renewables market after the government established the $10 billion Clean Energy Finance Corporation and the $2 billion Australian Renewable Energy Agency for grant funding in 2012. These agencies have leveraged many multiples of private capital into the fast growing and now established renewables market.
Treasurer Jim Chalmers has signalled he would like the superannuation sector to support both housing and renewables. However one of the challenges with the superannuation fund allocation is their fiduciary duty to maximise returns for their members. Some investments from the wholesaler could be riskier and more volatile than traditional investments, and therefore could be challenged on this basis.
The wholesaler and other SII taskforce recommendations could be just the trigger for institutional capital to come into the Australian market and accelerate its growth into an investment segment that is more mature and can stand on its own two feet, similar to the development of the renewables sector.
Michael van Niekerk is managing director of Peakview Strategy, a responsible investment and impact investment advisory firm and chief impact officer for NorthStar Impact Funds.