Brace for impact
If the events in the financial markets during the past year have taught us anything, it is that nothing is a sure thing.
But events have compelled investors to look for something different for their portfolio, which means that impact investments are getting a closer look. Impact investments have positive social or environmental benefits as their primary raison d’être.
The seeds for the impact investing industry were sewn in the 1980s and 1990s with the socially responsible investment and corporate responsibility movements. They challenged the prevailing attitude that companies’ and investors’ only responsibility is to maximise financial returns. Since then the idea that investment, rather than pure philanthropy or a corporate social responsibility programme, can generate development outcomes has become increasingly widespread. Impact investments offer both a financial return and the delivery of high social or environmental impact.
Financial advisers and institutional asset managers are in a perfect position to broaden their relationship with their clients by offering them advice in this emerging field. They may even be responding to a specific investment brief which contrasts the normal risk-adjusted profit maximizing approach to one where the primary reason for making the investment is the positive social and environmental impact investment capital can make.
In addition to offering considerable social and environmental benefits, these investments are also appealing on a number of financial fronts. Impact investments often operate in geographic areas and sectors outside of the financial mainstream, which are thus less correlated to other asset classes. Incorporating impact investment strategies into portfolio management can lead to better diversification. They can also appeal because these are not volatile instruments requiring delicate market timing or active portfolio management.
Impact investments can also lead to better relationships between investors and their money. The dangers of abstracting borrowers from lenders through complex structures are now only too apparent. Impact investments engage investors directly with the projects they are financing. Moreover, these projects are invariably focused on real rather than speculative needs.
Current interest in social investments is high on both the buy and sell sides of investment capital. Investors can be high net-worth individuals who have been prompted by a liquidity event and who are responding to the entrepreneurial values of social enterprises. They are also private and public foundations who see impact investing as an alternative to perpetuating grant dependency to deliver their mission, through to institutional asset managers of charity mandates who are responding to a requirement that these portfolios be more mission aligned. The construction of impact portfolios reflects traditional asset allocations between cash, structured notes, securities, funds and private equity, each with different yields, risks and return expectations.