"...Boomers see doing good as separate from investing;
whereas millennials don't see how you could possibly separate the two."[1]
What is Impact Investing, anyway? Impact is the Millenials' way of investing. Within ten years, this generation will be the largest share of workers and leaders. Importantly for both the corporate world and the investment markets, this cohort is expected to inherit $30 trillion in assets from their parents by 2025[2].
'Investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.'[3] This definition of Impact Investments, offered by GIIN, the Global Impact Investing Network, is the most widely-accepted definition.
That's a good start. But it is only a start. Traditional investors demand standardisation and comparability of investment results. GIIPS and other globally-accepted performance measurement systems have been developed to satisfy most needs for defining financial performance.
No such standard exists for measuring and comparing the impact of an investment. Some investors are beginning to employ the 17 UN Sustainable Development Goals as a framework for reportable impact measurement. An impact project may be designed with one or more impact goals in mind; any given project usually aims to generate an impact in two or three of the 17 SDGs.
How does Impact Investing differ from ESG Investing?
Both have the dual objective of achieving financial returns and societal or environmental impact for investors. At Candriam it is our conviction that those companies which embrace sustainability-related opportunities and challenges, in concert with their financial opportunities and challenges, are the most likely to generate shareholder value.
For us, the defining characteristic of Impact Investing is intentionality. Because they are conceived and launched with the intention to meaningfully impact society or the environment, these businesses are often private equity or private debt investments. We seek to invest in businesses which are scalable and can increase the magnitude of both their impact and their profit.
Slaying the Dragons
How do we measure the impact?
Measurement of the social and/or environmental impact is critical to the growth and success of Impact Investing as a strategy. Adopting a definition which includes intentionality, as well as key impact performance indicators, can offer investors greater information and confidence in the impact performance reporting. To express impact goals in measurable terms; the UN Sustainable Development Goals are increasingly used as a framework. For example, a 'last-mile' inner-city logistics company could express performance targets using two UN Sustainable Development Goals. SDG 13: Climate Action, to reduce C02 by a set number of kg per km driven versus a pre-set benchmark, and SDG 8: Decent Work, by hiring van drivers without formal education and training a pre-set number of them for management jobs requiring qualifications as the firm expands.
Are impact investments financially competitive?
Yes! Two-thirds of surveyed Impact Investors target risk-adjusted returns at market rates or better.[4] The 2019 GIIN survey showed that almost 90% of respondents met or exceeded their financial expectations.[5]
Certain types of enterprise are missed by the larger financial channels. Impact Investing "is fundamentally about investing where the market would not automatically go."[6]. Businesses which are not on the radar of traditional investors can offer attractive rewards to the early investors. Impact Investors are simply a new type of financial intermediary integrating the non-financial aspect in their long-term results. Impact investors are making resources available to particular sorts of businesses. Think affordable housing, sustainable cities, clean energy, recycling, and 'circular economy' enterprises. What is important to us is to repeat that success, both for impact performance and financial performance. We seek investments which are scalable.
What are the practical considerations of investing in nascent industries?
The investment industry already has the building blocks to manage and measure both impact performance and financial performance. By definition, impact businesses are founded with the intentionality of solving meaningful social and environmental problems in a measurable way, and to produce profit. As a new concept, perhaps ten years old, impact companies are a relatively new investment. Alignment, accountability, and an investment vehicle are among the building blocks already in place which can be incorporated into an Impact Investing structure.
Alignment.
Traditional investment managers may be paid incentive fees for achieving certain financial return targets, to align their incentives with investor goals. Expand the concept to impact investments, managers could create a fee schedule under which incentive fees are paid only if both impact performance targets and financial performance targets are met.
Accountability.
Impact performance results can be measured. Express and quantify the intended impact into metrics and goals; for example, number of gallons of clean water created, number of new jobs created, or number of new schools opened. Monitor these goals and report on them clearly and with the same frequency and detail as financial goals, to increase transparency between investors, portfolio companies and private equity managers.
Investment Structure.
Private equity Impact managers have companies up and running, many already profitable. These Impact managers often have sector specialisation; hence their funds may lack diversification. Investment vehicles are available to address this lack of diversification. A fund of funds can be designed to increase sector diversification for investors. Experienced multi-managers have the specialized skills to evaluate these private equity managers and build a "fund of funds" portfolio of diversified impact investments.
Investing in impact businesses today means investing in a better tomorrow. We are convinced that Impact Investing will be seen as an attractive and mainstream asset class.
Ok, Millennial! Impact? We can measure it. We can manage it.
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[1] Julia Balandina Jaquier, family advisor and impact investor, quoted in 'The Economist', 25 November 2017
[2] "How green are your intvestments?", Financial Times, 23 May 2019, quoting JPMorgan Private Bank.
[3] https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing, accessed 27 November, 2019.
[4] Of 266 respondents, 176 indicated they sought market returns or better. https://thegiin.org/research/publication/impinv-survey-2019, Executive Summary, accessed 4 December, 2019.
[5] Annual Impact Investor Survey, Global Impact Investing Network, Ninth edition, 2019. Of 266 survey respondents, 95% responded to the question of financial performance relative to expectations. Of those who responded, 91% reported financial performance in line with or exceeding expectations.
[6] Ommeed Sathe, Vice President, Impact Investments, Prudential Financial; https://thegiin.org/prudential-financial, accessed 4 December, 2019.