Socially responsible investing has been on investors’ radars for years. Anyone with significant cash has probably considered ethical or sustainable funds in their portfolio.
But for those looking to make the world a better place and generate investment returns, there is a hot new topic: impact investing.
Socially responsible investments either screen out, by avoiding gun or tobacco companies for example, or screen in, by investing in wind farms and similar beneficial projects.
Impact investing, though, adds another element: the ability to measure the effect of the investment.
For philanthropists and socially minded investors, this is a big plus.
“There are many clients now that are interested in impact investing as it is getting a lot of air time,” said Marisa Drew, head of impact advisory and finance at Credit Suisse.
“They are saying ‘if I was otherwise going to give my money away, I can take that bucket of money and use it in impact investing’.”
The idea that philanthropy can be modified for investment returns is not necessarily cynical. Advisers say clients like the idea that their money can create more funds to be put into ventures that continue to do good, rather than it being a “wasting asset”.
There are two main types of impact investing.
The first aims to provide market returns. An example would be a private equity investment in a worthy cause that aims to provide a typical return on capital. An example might be an education company where the entrepreneur is willing to set up key performance indicators, or agricultural investments that aim to raise farmers’ income from subsistence levels.
The second, which Ms Drew calls concessionary return impact investing, requires the investor to accept a smaller than normal return on capital.
An example might be an agreement to take a return of, say, 5 per cent, from a debt security in a frontier market where the company is investing in education, where one would normally expect a coupon of 10 per cent for the risk taken.
Younger members of wealthy families often encourage impact investment, advisers say, even if their parents are not yet committed.
“There is an increasing interest in this area particularly from younger clients who use both head and heart when they make their investment choices,” said Tasha Vashisht, senior manager at Scorpio Partnership, the wealth consultancy.
This age effect is so pronounced that a measure of how good a private bank is at offering impact investment opportunities can be linked to how much it has targeted next-generation clients.
“Our research shows there is a planned increase in this over the next few years. Probably the limited options from private banks is the limiting factor,” she said. “Product demand is being led by clients.”
A UK government review, entitled Growing a Culture of Social Impact Investing, last year said that asset managers should increase the products available to investors in the social impact investment area. It said supply had not caught up with demand and noted that the UK lagged behind other parts of the world in some respects.
James Gifford, senior impact investing strategist at UBS, said female and millennial clients are more likely to consider sustainable and impact investing.
He said that the idea of a measurable effect is important for impact investing, adding that impact investing should be seen as part of broader sustainable investing.
Mr Gifford said firms need to be able to point to measurable impact from the investor perspective, which can be harder to gauge at larger companies.
While shareholders have tried to shake up boardrooms for years, with some success, it is sometimes hard to make a connection between investment and outcomes at publicly listed companies.
“A lot of traditional shareholder engagement was based on process,” he said — for example, whether a company has environmental management systems.
The new frontier, Mr Gifford said, would be a change in focus from process, such as when a Third World textile company offers healthcare to its workers, to what he calls “the impact era”.
“We have big problems that were outlined by the UN sustainable development goals. There is a role for private capital in addressing these problems,” he said.
Impact investing can be personalised in the same way as philanthropy: those who have made money in property often want to fund affordable housing, or a tech entrepreneur may prefer to put money into a solution in healthcare . . . adding a technical twist.
“This tends to start with a passion, therefore it’s emotive and personal for people,” said Ms Drew.
Impact investing is still new and yet to be fully embraced by investors. Most social impact bonds, where investors get paid by government bodies only if set outcomes are achieved, “are still at the science experiment phase”, said Ms Drew.
An example would be where people invest in an innovative education project with an aim for a certain percentage of students to pass a test. This type of project would appeal to governments unwilling to risk their own capital, but once the scheme is shown to be viable, they are then happy to invest.
What is clear is that impact investing does not have to mean lower returns.
Mr Gifford said: “People are increasingly recognising that sustainable impact investing strategies are not semi-philanthropic; they can be, but in general the great majority of this market is fully commercial.
“Impact investing is simply a subset of commercial investing that happens to be sustainable and impactful.”
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