The emergence of impact investing

September 2016  |  FEATURE  |  FINANCE & INVESTMENT

Financier Worldwide Magazine

Impact investing is a burgeoning growth area based primarily on the philanthropic goal of making a positive environmental and social impact beyond financial return. A term first coined by the Rockefeller Foundation in 2007, impact investing typically involves private sector investors providing debt or equity financing to companies with a strong commitment to corporate social responsibility (CSR). According to the Global Impact Investing Network’s (GIIN) ‘2016 Annual Impact Investor Survey’, it is a market that is currently valued at $77bn. Moreover, it is expected to rise exponentially over the next decade.

Opining that impact investing should no longer be viewed as a nascent market, Amit Bouri, CEO of the GIIN, notes in his forward to the survey that “Investors around the world are hard at work growing and improving this market—demonstrating that investments can and should be directed toward addressing some of the most pressing social and environmental challenges”.

The emergence of impact investing as a catalyst for private investment over the past few years is a welcome development. It has gained favour among a wide range of investors, including large-scale financial institutions, pension funds, family offices, private wealth managers, foundations, individual investors, commercial banks and diversified financial institutions.

Investor goals

A further definition of impact investing is provided by the GIIN, which highlights four key characteristics: (i) intentionality – the intention of an investor to have a positive social or environmental impact through investments; (ii) investment with return expectations – impact investments are expected to generate a financial return; (iii) range of return expectations and asset classes – impact investments can be made across asset classes; and (iv) impact measurement – a commitment by an investor to report the social and environmental performance.

“The value proposition of impact investment offers the dual benefit of financial returns and social returns,” says Matt Christensen, head of responsible investment at AXA Investment Managers. “Earning financial returns while doing tangible good is a very compelling value proposition. Impact investing is a significant opportunity to address societal challenges such as climate change, inclusive finance, healthcare, environment and agriculture through innovative solutions. The type of impact that investors wish to generate tends to vary and can often depend on personal or business perspectives and interests.”

Examples include a healthcare company that may be particularly interested in making healthcare more accessible to all, or an investor active in the food and drink sector who may wish to improve access to food or water, for example through gains in supply chain efficiencies. “Newer generations want to use their capital to create a better world,” adds Mr Christensen. “Institutional investors are becoming more socially-conscious by offering impact solutions that address the evolving aspirations of their client base and stakeholders.”

Popular instruments

Underpinning the rapid growth of the impact investing industry and its broadening in terms of sectors and geographies is the means by which this growth is being generated – namely, the types of instruments that are being utilised to finance those businesses with a strong commitment to CSR.

“One of the often overlooked aspects of the impact market is that the industry is being very creative in designing and offering a wide variety of financing instruments,” notes Mr Christensen. “Indeed, the industry is financed through all types of conventional financial instruments such as private debt, private equity, bonds, but also through structured products and other contingency-linked instruments, such as first-loss guarantees, and therefore relies on various pay-out profiles that can appeal and match all kinds of investor risk profiles, including very appealing asymmetric risk/return profiles.”

Challenges

However, in practice, impact investing comes with its own set of specific challenges. “The ‘double bottom line’ also implies ‘double risk’ of not achieving either the financial returns targets or the impact returns targets or even failing at both,” explains Mr Christensen. “There are other challenges such as dealing with typically small start-up projects, managing scalability of investments, lack of well-established track records and minimising ‘mission drift’.”

However, these challenges can be met by combining relevant expertise in a number of specific areas, such as investment due diligence, responsible investment and impact due diligence, as well as structural and operational risks due diligence. These combined skill sets can ensure that the challenges are adequately assessed prior to investment and also monitored after investments are made.

A rising wave

The impact investing industry is currently at an inflection point, with the incorporation of impact set to be the next phase of responsible investment. Furthermore, the industry is likely to see an ever-increasing number of investors turning their attention its way. What was once only discussed in the alternative asset classes is now becoming a hot topic in terms of fixed income, listed equity and other areas of the investment spectrum.

And while there will continue to be questions surrounding the impact, benchmarking of investment products and financial viability of projects, the general consensus is that impact investing is a win-win proposition for many firms, and will continue to emerge in the years to come as a viable investment movement.

© Financier Worldwide

BY

Fraser Tennant