Impact investment is booming, even now under Covid

westpac building blue sky

The market for impact investment in Australia is exploding and shows no signs of slowing down, even under global pandemic conditions.

The bi-annual benchmarking report from the Responsible Investment Association Australasia (RIAA) released on Tuesday showed that the market for impact investment had more than tripled over the past two years from $5.7 billion to $19.9 billion.

These financial products create positive outcomes of all sorts, including:

  • 32,000 homes for people on low incomes, living with disability or transitioning out of homelessness
  • producing 84,000 GWh renewable energy
  • delivery of 788,000 healthcare treatments and mental health interventions
  • 446 jobs secured by candidates previously excluded from employment
  • training of 179,000 teachers
  • 37,856 homes provided with electricity
  • saving, treating or delivering 483,235 mega-litres of water

RIAA chief executive officer Simon O’Connor told The Fifth Estate that it’s no longer just the responsibly-minded investors showing interest in impact investment opportunities. It’s now attracting a broader pool of investors, many of which are buoyed by its healthy returns – with an overwhelmingly 92 per cent of this sector meeting or exceeding their financial return expectations.

Both awareness and activity in impact investment is growing, with 61 per cent of surveyed inactive respondents interested or very interested in impact investing compared with 40 per cent of respondents in 2016.

O’Connor also says that these investors now cross the full spectrum – everything from super funds and banks to family offices and individual investors.

He doesn’t expect the appetite to abate because of  COVID-19 either.

Although the bulk of the research was compiled before the coronavirus took hold, O’Connor is not observing many investors stepping back from their commitments.

In fact, in many ways it has reinforced investor interest in broader social and environmental outcomes as a way of securing investments. He says companies that are strong on ESG are holding up better in these volatile times.

For institutional investors, it’s more important than ever to show clients that they are doing some good and are helping with employment issues. For super funds, people will want to know that their retirement savings are going towards a positive recovery.

There’s been some positive signs that investor commitments to better social and environmental outcomes won’t waver, such as more than 50 per cent of investors backing motions for Woodside Petroleum to cut emissions and link executive pay to achieving reduction targets.

Westpac has also upped its game – by 2030 it will stop lending to major thermal coal companies, and make billions available for new low carbon enterprises.

“We aren’t going to be able to recover if we don’t deal with the social issues and climate issues that haven’t gone away.”

O’Connor says it’s also encouraging to have the federal government partnering on the report. The Morrison government funded the Social Impact Investing (SII) Taskforce the 2019-20 budget.

While O’Connor recognises that $19.9 billion is drop in the ocean of the total financial stock, when you start talking about responsible investment it’s now close to $1 trillion – close to half of $2.24 trillion managed by professional investors.

What exactly is it?

While impact investment links positive, measurable social and environmental outcomes to investments, “responsible” investment captures a broader cohort taking actions such as excluding tobacco and weapons, engaging directly with corporations to ensure they are managing climate risks appropriately, or lowering the carbon footprint of their investments.

O’Connor says that responsible investment has entered the mainstream and that “the next iteration will require investors to demonstrate the real-world outcomes they are generating through their investments.”

Environment dominates

Most of the finance from this sector ends up in conservation, environment and agriculture ($16.8 billion or 84 per cent), followed by multiple outcomes ($1.8 billion or 9 per cent), housing and local amenity ($766 million or 4 per cent) and income and financial inclusion ($327 million or 2 per cent).

The study found that most impact investment products are dominated by green, social and sustainability bonds ($17 billion), while the remaining $2.9 billion is held by Australian investors are real assets ($2.2 billion), private debt ($287 million), public equity ($195 million), private equity ($97 million), social impact bonds (SIBs) ($66 million) and others ($44 million).

 

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