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If impact investments can produce better than average returns, why aren't there more impact-driven opportunities?
It seems to be generally accepted now that investing for impact – in businesses or projects that make a positive difference to society – can be as financially rewarding as traditional investments.
This was backed up by a meta-study by Friede & Busch of more than 2,200 pieces of academic work over the past 40 years, which analysed the relationship between environmental, social and governance (ESG) factors and corporate financial performance. It found that more than 90% of them showed that ESG factors have a positive or neutral impact on financial returns.
"The results show that the business case for ESG investing is empirically very well founded."
But, the cynic might say, if that’s true, then why aren’t there more impact investing opportunities around? Logic and the laws of supply and demand would suggest that if impact investing can give decent returns, investors would be clamouring for them and the market would provide them.
On the face of it, it seems there is the demand for impact investments but not necessarily the supply.
For example, according to research by Triodos Bank, a majority of investors in the UK favour a fairer and more sustainable society. However, two-thirds of them have never been offered ethical funds, despite the fact 64% of investors would like to support companies that make a positive contribution to society and the environment.
Also, the latest UBS Investor Watch, which surveyed more than 5,300 investors in 10 countries on sustainable investing, found that currently only 39% hold sustainable investments in their portfolios, defined as at least 1% of their investable assets.
Now it’s possibly down to a lack of clarity over definition. In a recent article in Business Day magazine, Steve McCallum and Suzette Viviers, academics in the department of business management at Stellenbosch University, examine this. They say ambiguity over the definition of impact investing is a barrier to impact measurement that reduces the attractiveness of it as an investment strategy.
To complicate matters further, there’s no universally agreed set of metrics to measure and compare impact. The lack of a standardised definition has been at the centre of debate since the term impact investing was coined at the 2007 Rockefeller Foundation convention.
However, there is general agreement on four elements that make up an impact investment:
- It should be an active and intentional deployment of capital
- The impact created by the investment should be measurable
- There should be a positive correlation between the intended impact and an investment’s expected return
- It should have a net positive effect on society and the natural environment
This is a reasonably broad definition and it’s probably broader than many who haven’t gone deeply into impact investing would have expected.
In a recent article in the FT, Mark Haefele, chief investment officer of UBS global wealth management, argues that the old critics of sustainable and impact investing (SII) were unfairly and unfavourably comparing regular or traditional investing with “exclusion” investing (the exclusion of ethically questionable investments)
However, SII is no longer just about avoiding certain socially harmful activities. With impact investing it can also be a question of backing good things. Impact investments are made in businesses or projects that have a positive social impact, which could, for example, be providing clean water, clean energy, life savings drugs or education.
The implication is that too narrow a definition of impact investing fails to take into account all the opportunities that are out there.
“…[ESG factors] might include how corporations respond to climate change, how good they are with water management, how effective their health and safety policies are in the protection against accidents, how they manage their supply chains, how they treat their workers and whether they have a corporate culture that builds trust and fosters innovation.’’
The World Bank says:
“ESG investing is increasingly becoming part of the mainstream investment process for fixed income investors, as opposed to a specialist, segregated activity, often confined to green bonds.’’
Impact investments don’t have to be limited to a narrow range of obviously philanthropic or green projects. As I said right at the beginning of this piece, an impact investment can be in any business or project which makes a positive difference to lives and society.
There are hundreds of highly innovative businesses starting up every year which are seeking early stage funding. There are new businesses seeking funding in health research, clean energy, education and training.
Housing is also a sector in which there’s huge potential for impact investing to make a difference, not only in relieving homelessness and improving quality of life, but also in providing economic stimulus, jobs and training and in regenerating communities.
Financial and media company Bloomberg says:
“The investment opportunity of affordable housing, especially in emerging markets, is massive: the McKinsey Global Institute estimates that construction investments of between US$9trn and US$11trn will be necessary by 2025 to replace today’s substandard housing and build necessary additional units, and that an additional US$16trn will be needed for land.’’
In its recent report: The Economic Footprint of Housebuilding in England and Wales, Lichfields points out that last year some £12bn was invested in the housebuilding industry in England and Wales. Of this, £11.7bn was spent on suppliers, of which 90% was spent in the UK.
The UK sector generates £38bn of economic output each year, supporting nearly 698,000 jobs and, among these are 4,300 apprentices, 525 graduates and 2,900 other trainees. It paid £2.7bn in various taxes, created £4.2bn of affordable housing and spent £841m on infrastructure, including £122m on new and improved schools. So, an investment in house building is certainly going to have an impact which meets the new definition and qualifying criteria for impact investing.
Ultimately, there’s a wealth of opportunity for investments that makes for generous returns and wide diversification – as an industry, we simply need to help ensure investors know that these are also often impact investments.