Increased awareness of issues around climate change and social issues such as racial and gender inequality, unequal access to healthcare and unaffordable housing has led to the popularity of impact investing, not only globally but also here in Australia.
Impact investing allows people to support causes that they’re passionate by using their money to finance real-world solutions to address pressing global issues while having the potential to generate financial returns.
Attributes of impact investing
Impact investing is not the same as ESG investing (which targets companies or industries with better ESG performance) or responsible (aka ethical) investing (screening out targets based on ESG risks). Impact investors intentionally contribute to social and environmental solutions aiming for a direct positive impact through their funds that otherwise would not have been realised. Yet they seek (in most cases a competitive) financial return on their capital distinguishing them from philanthropy.
A hallmark of impact investing is the commitment of investors to measure and report the social and environmental performance of underlying investments. In this regard, impact investing is the most direct and tangible market form of funding businesses, organisations, programmes that contribute to meeting the United Nations 17 Sustainable Development Goals (SDG) under its international “Transforming our world: the 2030 Agenda for Sustainable Development” framework.
In August this year, the UN issued a special report[1] that highlighted “grossly inadequate levels of investment in achieving the goals”. According to OECD[2], in order to achieve the goals by 2030, an additional investment of USD 4.2 trillion per year be required (USD 33.6 trillion over next 8 years). To put this in context, wealthy states spent more than USD 17 trillion responding to the COVID-19 pandemic, and total financial assets held by banks, institutional investors and asset managers in wealthy states are valued at more than USD 378 trillion. Allocating a mere 1.1% of all assets of developed countries annually to fund SDG initiatives would be sufficient to meet targets.
How big is the impact investment market?
The size of the global impact investment market currently stands at USD 1.2 trillion in assets under management (AUM)[3], about 1% of global AUM. It is still an industry maturing and growing in sophistication. More than 90% of these assets are originated in North America and Europe. If the global share of impact investments would reach 4% of global AUM by 2030, one third of the current SDG funding gap would be closed. Hence, accelerating the growth of impact investing has strategic importance.
In Australia, impact investing is still in its infancy, with about AUD 30-40bn AUM in 2022, representing mere 2% of the global impact investment portfolio, and less than 1% of the Australian total managed funds AUM.
By virtue of its compulsory superannuation system, Australia is ranked sixth globally for total managed assets (USD 3.9 trillion) and has the fastest growing pool of pension assets in the world.[4] Hence, Australia is well positioned to grow its relative contribution via maturing the local impact investing market.
Where are Australian investors directing their impact investments to?
According to the Responsible Investment Association Australasia (RIAA), 85% of impact investments in Australia went to green, social and sustainability (GSS) bonds in 2020 (debt instruments with strict accountability around how the bond proceeds can be applied towards eligible green, social or climate related projects), and the remaining 15% to real assets (financing solar and wind farms, sustainable commercial buildings, healthcare assets and environmental, agricultural and cultural assets).
In terms of targeted impact, 87% were aiming at environmental outcomes while the remaining 13% focused at social outcome targets. While the majority (63%) of local impact investors (funds, banks, foundations, family offices) are agnostic as to which of these two categories they target, given most of them (77%) expect competitive financial return, socially oriented programs (e.g., financing social housing) often get lower investor traction due to lower financial returns they generate.
As per RIAA’s recommendations, to advance the local impact investment market, there is a need for local intermediaries who create impact-oriented investment deals, incubators and accelerators that nurture early-stage companies with impact potential, wholesaler fund of funds that provide capital to impact driven investment funds. Also, standardisation of impact measurement and improving access to reliable research and benchmarks are needed.
Recent news of the Australian Federal government and big four banks reviewing a plan to set up a social impact investing wholesaler, similar to Big Society Capital in the UK which got off the ground with support from four of the largest UK banks and has grown the UK Impact market by 10x in 10 years, shows that state and key players have started to realise the social and market potential of a more mature local impact investing ecosystem.
As the focus on social and environmental issues and the impacts it has continues to gain momentum, we can expect to see impact investing continue to grow in the coming year as investors seek to be advocates for the causes they care about and look to invest in a better future.
By Dr Adam Flesch, Senior Client Partner, Head of Financial Services Strategy Consulting at Publicis Sapient
This article was first published by Forbes