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Impact investors win 13 per cent growth rate as the sector rapidly develops

Investors who put their money into social and environmentally worthwhile projects aren’t looking back. They’ve enjoyed excellent returns – 13 per cent annually on a compound basis. Globally, their assets grew from US$30.8 billion (AU$55 billon) in 2013 to US$50.8 billion (AU$71 billion) in 2017 at a time when there are calls to accelerate adoption of impact measurement and management. 

The headline result of the 2018 Annual Impact Investor Survey , the eighth from the Global Impact Investing Network,  shows the size of a diverse and dynamic impact investing market. This level of return on investment was reported by the 82 respondents that completed the survey both five years ago and this year.

The report findings are based on survey responses from 229 of the world’s leading impact investing organisations, including: fund managers, banks, foundations, development finance institutions, pension funds, insurance companies, and family offices. 

In total, respondents collectively manage over US$228 billion (AU$320 billion) in impact investing assets, a figure which serves as the latest best-available ‘floor’ for the size of the impact investing market. It is chiefly fund managers (59 per cent of investors) who are driving the trend.

Their investment choices are made not by ethics, but primarily by risk-adjusted, market-rate returns (64 per cent).  All the same, two-thirds of respondents to the survey make only impact investments; the remaining third also make conventional investments. As to location, this is pretty much evenly split at present between emerging markets (45 per cent) and developed markets (42 per cent).

“From the smallest enterprise to the largest firm, innovators and investors are creating an unstoppable momentum that proves when it comes to climate change, business is not the problem but the solution.” Greg Clark, UK energy and industry minister said on Monday, launching the country’s Green GB Week.

But impact investing is not just about climate change but all of the Sustainable Development Goals. The GIIS puts the bill to reach all of the goals by 2030 at a staggering US$5-7 trillion (AU$7-10 trillion), which is the biggest investment challenge ever.

However, there is a plethora of different criteria and standards that often confuse investors.

“If we want impact management to become the norm for every enterprise and investor, as the SDGs demand, we need shared principles, reporting standards and benchmarking methods for impact,” says Clara Barby, who is the lead facilitator of the Impact Management Project.

What do impact investors choose?

The report found that that investors like a substantial spread of investments but energy tops the list at 14 per cent, followed by microfinance (lending to small borrowers – 9 per cent) and housing (8 per cent).

The spread of sectors investors are choosing is wide.

The 13 per cent growth was spread out across the majority of regions, sectors and instruments, but was particularly pronounced in the East and Southeast Asia, MENA, and Oceania regions, and the education and food and agriculture sectors. Public equities performed particularly well.

Different investors have a preference for social or environmental objectives for their investing, the survey reveals. Over half of investors target both, but a further 40 per cent primarily target social objectives, and just 6 per cent primarily target environmental ones. Over three quarters set impact targets to measure the success of their investments.

The barriers

Barriers to the spread of impact investing were identified in the survey, but these are reducing year on year.

In particular there is a perceived lack of appropriate capital across the risk/return spectrum, and of a common understanding or definition and segmentation of the impact investing market. Also, the range and availability of exit options are sometimes less than in conventional markets.

The Global Impact Investing Network itself works to reduce barriers to impact investment so more investors can allocate capital to fund solutions to the world’s challenges.

Standards

All of this points to a need for generally accepted standards. This is being tackled by another global network of standard-setting organisations that has come together to accelerate widespread adoption of impact measurement and management. 

As founder members, Aviva, the UN Foundation, and the Index Initiative, are working to create a publically available way for companies to report progress on the Global Goals for sustainable development. 

This World Benchmarking Alliance consists of nine leading organisations with expertise in data, principles, disclosure standards and benchmarking and builds on the work of the Impact Management Project, through which over 2000 stakeholders across more than 50 countries have already co-operated to agree on norms for impact management. 

     

The World Benchmarking Alliance was launched on 24 September in New York, where Gonnie Been, its Operations Director Index Initiative, said that, “We have a tremendous opportunity to create something beautiful that not only leverages the brilliant work being carried out by many already, but also bridges the gaps between all of us and what is required to achieve the targets put forth by the SDGs”. 

Steve Waygood, co-founder of WBA and Chair of WBA Steering Committee, says that their ambition is “to rank businesses on their sustainability performance and contribution of leading companies in key industries will highlight the best and worst performers through benchmarking. The benchmarks will provide financial institutions, companies, governments, and civil society with information that can be used to challenge businesses to do better.”

Another initiative is the Blended Finance Taskforce, which aims to mobilise large-scale private capital for investment in the SDGs, especially for sustainable infrastructure. 

Blended finance is thought to be one of the best ways to attract the extra trillion dollars from the private sector to meet the annual US$6 trillion needed to achieve the SDGs.  The word “blended” comes from the notion of combining private finance with public money by development banks.

Currently the ratio between the two finance sources for investment by development banks is on average half and half and this needs to change substantially if the world’s problems are to be tackled successfully and the SDGs met, according to its own new report, Better Finance, Better World.

The majority of this money will be needed for sustainable infrastructure projects in emerging markets, which are often seen as too risky for mainstream investors. Using public funds can attract private investment by mitigating these risks, blending public and private capital could be a win-win for both investors and global development. 

But the blended finance market needs to scale up in order to get from billions of dollars of aid or public funds from the development banks to trillions of dollars of private investment.  The Blended Finance Taskforce calls for leadership to develop the blended finance action plan – with the reassurance given by standards – in order to get to scale.  

“Action is needed end-to-end across the whole investment system to scale up the use of blended finance if we are serious about closing the funding gap for the SDGs,” said Lord Mark Malloch-Brown, chair of the Business & Sustainable Development Commission.

If it really is true, as its advocates like to suggest, that capitalism can save the world, then this is the perfect opportunity for capitalists to prove their case.

David Thorpe is the author of The One Planet Life, amongst other books about sustainability.

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