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May 10, 2021updated 17 May 2021 3:57pm

Special report: Is impact investing here to stay?

By Anna Solomon

Impact investing has been steadily gathering momentum. It may soon go stratospheric

Investing evolves every so often. Once upon a time, returns – the money you get back when making an investment – were the only thing that really mattered.

The 1950s saw the popularisation of risk-adjusted returns, which allow investors to select portfolios according to their appetite for risk (which is mirrored, in theory, by the size of potential returns). Then, in 2014, G8 Social Investment Taskforce chairman Sir Ronald Cohen declared that the world of investing had started to move towards ‘risk, return and impact.’

In other words, along with the question of how much money investors stand to make and the risk they take on in order to make it, people had begun to ask: ‘What impact do my investments have?’

The roots of this trend can be traced back to the early 2000s. ‘We had something called ethical investing, which meant excluding certain things from your portfolio: arms, tobacco, gambling,’ says Jamie Broderick, director of the Impact Investing Institute.

This metamorphosed into ESG, the practice of investing only in businesses or initiatives that have good internal environmental, social and governance structures.

Fast-forward to 2021. ‘It’s migrated to something where the investments are even more proactively intentional, trying to target businesses that are delivering something that’s positive for society or the environment,’ says Broderick.

It’s not just about excluding the bad, but actively seeking out the good. Impact investing came about around a decade ago, and refers to investments in companies, organisations or funds that have the express purpose of having a beneficial impact on the world.

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One early example ran between 2010 and 2015 when RAND Europe was commissioned by the Ministry of Justice to stage the ‘One Service’ at Peterborough Prison.

The idea was that private investors would fund interventions to reduce reoffending, such as introducing case workers to assess offenders’ needs and implement resettlement activities.

If the interventions were successful, the Ministry of Justice saved money, and these savings were paid back to private investors. The scheme allowed investors to ‘do well’ while ‘doing good’.

Today, impact investing is understood to be aligned with the United Nations Sustainable Development Goals, a collection of 17 global goals set in 2015, designed to be a ‘blueprint to achieve a better and more sustainable future for all’ and intended to be achieved by 2030. ESG still plays a part, however.

‘You’re still thinking about the internal operating practices of a company,’ says Damian Payiatakis, head of impact investing at Barclays. ‘There’s no point investing in a solar panel manufacturer who pollutes the environment, uses slave labour and doesn’t pay their taxes.’

In the last decade, impact investing firms have sprung up all over the globe. Tribe Impact Capital, the first dedicated impact wealth manager in the UK, is one of them.

Tribe Impact Capital claims to be the first dedicated impact wealth manager in the UK

Chief impact officer Amy Clarke says that rather than omitting ‘externalities like climate change, food insecurity, or lack of access to education, housing or healthcare’ from the decision-making process, Tribe includes them ‘because these are the very things that define whether economies become successful’.

Across the pond, Tony Davis, a Goldman Sachs alumnus and former president of Anchorage Capital Group, is ‘incorporating sustainability throughout the investment process’ with Inherent Group.

Davis’s New York-based business invests in companies which supply products and services that address one or more of the UN SDGs, and has been particularly active in health, education, decarbonisation and infrastructure.

Inherent, like RAND Europe, has been involved in ‘Pay for Success’ programmes, including one that prevented prisoner recidivism by helping them to keep their court date.

Elsewhere, impact investors Big Society Capital, Mustard Seed, and Big Issue Invest are making waves, while C Hoare and Co, along with its own Golden Bottle Trust, has become a founding investor in Snowball, an investment vehicle ‘rethinking growth’.

Large international firms such as Barclays have also incorporated impact into their mission; it is Payiatakis’s job to ‘help clients navigate the space’ and work with investment teams to ‘bring impact’.

Organisations such as the Impact Investing Institute are using awareness, research and advocacy to encourage the practice. The movement is having an effect.

Big Society Capital CEO Stephen Muers says his organisation estimates there is £5 billion of impact investment in the UK – a sixfold increase over eight years.

He adds that the figure includes only ‘deeper’ impact investments, ‘so is probably smaller than the total market’. The size of global impact investments increased by around 40 per cent between 2019 and 2020, and is now estimated at $715 billion, according to the Global Impact Investing Network (GIIN).

Globally, the total size of ESG-dedicated assets is roughly $40 trillion. Although the practice is expanding, it faces challenges.

‘There are different metrics, different data sets, and people interpret things differently,’ says Payiatakis. ‘Do you measure how much carbon is in the portfolio? How many trees have been saved? It depends what you count.’

There is also a prevailing assumption that investing with the express purpose of doing good is likely to reduce returns. However, says Broderick, just as ESG was able to move past this objection, impact investing may be able to do the same. The opportunities in impact, he says, are enough that ‘we can put to bed the notion that you have to make sacrifices to invest sustainably’.

Big Society Capital floated its Social Impact Trust on the stock market in late 2020, which is ‘targeting a decent commercial risk-adjusted return’, says Muers.

Data firm Morningstar shows that the performance of ESG and impact-labelled products has been ‘as good or possibly slightly better than conventional products’ across a 10-year period. Furthermore, these sectors tend to be immature, with plenty of headroom for growth.

‘We get excited about investing in cloud businesses because they’re 50 per cent penetrated, or payments businesses because they’re 40 per cent penetrated,’ says Davis. ‘But when you think about electric vehicles or renewables, it’s 20 per cent or single digits.’

The pandemic has also propelled the rise of impact investing, revealing imbalances in society and providing motivation to address them. Last year, the Harvard Business Review published a report with a less rosy outlook. Titled Impact Investing Won’t Save Capitalism, the report asserts that impact investing alone does not have the capability to raise the $2.5 trillion a year of additional private investment needed to meet the UN SDGs by 2030.

What is needed, it says, ‘is reform of the rules that govern how our economy works’. While some carbon-cutting initiatives fall below the ‘zero-cost line’ (they make money), most do not.

The report asserts that the UN SDGs will not be met unless ‘above the line’ initiatives – things like expanding wind energy to unprofitable sites or using carbon capture and storage – get more funding.

However, with current technology, these initiatives would only be made competitive on cost with the introduction of subsidies or carbon pricing.

Impact investing is not a silver bullet, says Davis. ‘We need at least $2 trillion invested annually in clean energy systems to have a chance of staying below 2°C of global warming. That can’t be [just] government subsidy, and it can’t [just] be philanthropy. We need policy that provides clear signposts and pricing, and then let’s let the markets get to work. I don’t think we’ll get there otherwise.’

Rennie Hoare, partner and head of philanthropy at C Hoare & Co, agrees, anticipating a point in time where retail investors can invest in impact funds on a far greater scale.

‘The big prize,’ he says, ‘is not philanthropic capital – it’s mainstream markets.’

Perhaps the answer is for impact investing to be regarded not as a discrete activity or asset class, but as an approach that more people, organisations, and governments need to adopt. That could turn the G8 taskforce’s prediction – of a three-pronged 21st-century investment paradigm based on return, risk and impact – into reality.

But it would require deep and far-reaching change. ‘We’ve created a one-dimensional highway to hell,’ says Tribe CIO Fred Kooij. ‘And in order to get off that, we have to recode everything.’

Read more

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Jim O’Neill: time to embrace the ‘exciting future’ of impact investing

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