Impact investors shoot for clearer goals
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Giles Gunesekera, a 20-year asset management veteran, was approached by an Australian pension fund last year with a tantalising offer. The fund wanted to give his company A$1bn ($727m) to invest in a strategy that would have positive outcomes for women and girls. For a start-up like Gunesekera’s, the size of the investment was enticing.
But a week later, much to the surprise of the pension fund executives, he turned them down. He had researched the organisation and found there were reports of sexual harassment surrounding the fund, it had an all-male board and all but one of the senior leaders were men.
“They wanted to use me to make themselves look good,” Gunesekera says. “I went back to them and said I did not want to work on this. I said I did not see an alignment in what they were doing.”
Impact investing has become one of the hottest strategies in fund management. But, as Gunesekera’s experience highlights, not all those piling into the strategy are solely motivated by doing good.
At its core, impact investing is an emerging field of asset management where environmental or social outcomes are valued as highly as financial returns. The close monitoring and careful analysis that go into making sure an investment achieves a financial gain are applied to the sustainable or sociological targets as well.
Unlike philanthropy or other forms of ethically motivated investing, such as green bonds, investors in impact funds do not expect to give up financial upside just because they have other objectives.
It is tricky to pin down the true size of the world’s impact investing industry as there is currently no standard definition for the strategy. But it is clearly growing.
According to the Global Impact Investing Network, a non-profit group that promotes the strategy, impact investing is at least a $228bn industry — but as the figure is based only on data companies send to GIIN, the real size is likely to be larger. For GIIN’s most recent industry survey, published in June, 229 investment organisations provided it with their information. The 125 groups that submitted data in 2013 managed $25.4bn in impact funds.
To get an idea of how quickly the industry is growing, GIIN tracks the assets managed by the same respondents each year. For the group that provided data in 2013 and did so again this year, the average annual growth in assets was 13 per cent. The industry is also attracting a steady stream of new entrants. More than half of the organisations in GIIN’s survey made their first impact investment in the past decade.
The reason so many funds are being launched is simply due to supply and demand. Individual investors are increasingly demanding their savings do more than just appreciate in value. Much of that demand is coming from two growing groups of investors — women and millennials.
“There is a great transfer of wealth to millennials and women happening in the western world,” says Mark Haefele, a former Harvard academic who is now global chief investment officer for the wealth management division at UBS, the Swiss bank. “They are extremely interested in sustainable investing, and 85 per cent of millennials are very interested in impact investing.”
Haefele, who chairs UBS’s global investment committee, says the lender began thinking a few years ago about how it could respond to this growing demand. As an organisation that controls some $2tn of assets, it decided to use its heft to make impact investing more effective.
In 2016, UBS launched an oncology impact fund, which raised $471m from wealthy clients. Its aim was to invest in early-stage cancer treatments while allowing investors to benefit from the rising global demand for such drugs and the shorter regulatory approval times. The fund aimed to return 10 per cent a year, while it would also make donations to cancer research organisations. It made its first gift this April, donating $2.5m.
UBS asked 1,700 wealthy clients living in Switzerland for their views on ethical investing this year. Some 87 per cent said sustainable investing was important to them, while 39 per cent said it was so important that they were willing to sacrifice returns. But Haefele does not believe impact investing is about sacrificing financial gains. “Real investing is for a return, it’s not philanthropy,” he adds.
Another reason for the sector’s growth is the rising supply of worthy investments. Olivia Sibony set up SeedTribe this year as an offshoot of the Angel Investment Network, a funding site. SeedTribe is a UK-based platform that brings together impact investors and entrepreneurs with projects that need funding.
“Millennials are coming of age and launching start-ups. They are more social and environmentally conscious,” she says, adding that they are taking that approach to their businesses.
Among the companies that are due to join the platform is the developer of a device that uses artificial intelligence to help people with diabetes work out their insulin levels. Another is a service that provides support to refugees in new countries. It compiles their anonymised data and sells it to organisations to help them better allocate resources.
Sibony says SeedTribe will monitor the companies to make sure they are hitting certain performance targets, as well as being financially viable. “We absolutely only look at purely profit-driven organisations,” she says. “It means most of my time is spent regulating companies that come through the platform.”
As impact investing has become more prominent and mainstream, a debate has sprung up among practitioners over the need for a commonly accepted definition. For some, there should be strict criteria about what impact investing is, and — as importantly — what it is not. This will ensure the integrity of pure impact investors, they argue.
However, there is a counter school of thought that says a definition that is too rigid may make the strategy too daunting for newcomers. Gunesekera is in the latter camp. His company takes investors such as pension funds, foundations and family offices that have specific social or environmental interests, and creates investment strategies for them, using professional money managers.
Some purists see moves by big fund managers — and an increasing number of hedge funds and private equity firms — into impact investing as a watering down of the aims of the strategy. But Gunesekera welcomes the new interest. “A lot of mainstream managers are doing it for marketing purposes,” he says. “But you need the big players spending the big dollars to explain what impact investing is. It helps to educate the market and allows the likes of me to do my funky stuff.”
Haefele, on the other hand, is in favour of a stricter definition to prevent so-called “impact washing”, where investors launch products that are labelled as impact investments in order to cover other practices or for purely commercial reasons.
“There is a danger that because the field is so wide open, even well-intentioned people can have different definitions of impact investing. We have to make sure that the end client has a clear understanding,” he says. “Another risk is that something badged as impact investing produces sub-par returns and it remains a philanthropic niche.”
The debate over a definition has prompted the International Finance Corporation, a World Bank initiative that encourages investment in developing countries, to try to establish a consensus on what constitutes impact investing.
Hans Peter Lankes, vice-president of economics and private sector development at the IFC, says the organisation “has been an impact investor without knowing it for 60 years”. He says investors and asset owners often ask the IFC to help them classify the strategy. “There are some players who are concerned about dilution of the brand,” he says. “There have been shifting definitions over time.”
The IFC is in the process of developing 13 principles of impact investing, grouped in five main areas: strategy, structure, portfolio management, exiting investments, and verifying achievements. It plans to launch the principles in October at the annual meeting of the World Bank and International Monetary Fund in Indonesia. Lankes hopes to enlist a handful of well-known investors to sign up at the launch.
As with many impact investing practitioners, Lankes points to the launch of the UN’s sustainable development goals in 2015 as a milestone in the growth of the strategy. These 17 objectives cover 169 targets in a variety of areas, from poverty relief to gender equality. The UN hopes to meet these goals by 2030. This initiative has created a common set of targets for impact investors to rally around. Many practitioners design their impact funds to tackle one or more of the goals.
Haefele says that the biggest problems the world is predicted to face in the coming century represent a good opportunity for impact investing. “If you look at the large demographic trends — a growing and ageing population, as well as greater urbanisation — all these factors play into the hands of impact investing because they create negative [effects],” he says. “Demands on healthcare, access to clean water, the need to deal with pollution and more green public transport — we can find solutions to these problems.”
Impact Investing in numbers
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