Impact investment performance

The trouble is, with the term only having been coined in 2007, there is comparatively little data available on the global and domestic success of impact investment.

Compare this with socially responsible investment (SRI) funds such as the Friends Provident’s Stewardship range, which was launched in 1984 by the former Quaker UK Life Office Friends Provident and has more than 30 years of documented performance history.

There are now more than 100 SRI/ethical open-ended funds available to UK retail investors, according to the Investment Association (IA).

However, these are not all kept within the same sector, making it exceptionally hard to compare performance, style and risk, unlike the 64 UK registered offshore funds, which are in the Equity - Ethical sector.

Rigorous impact measurement helps ensure transparency and accountability, and is essential to informing the practice of impact investing Lisa Beauvilain

There are also four investment trusts in the Sector Specialist: Environmental sector; six renewable energy infrastructure investment trusts; 11 specialist environmental VCTs and three Specialist Environmental Pre-Qualifying VCTs, according to the Association of Investment Companies.

Yet when it comes to impact investing, the average investor would have to search through less familiar databases such as Big Society Capital or Social Finance for any performance metrics.

A blog post from the Case Foundation, entitled ‘Show me the Data’, states: “Very little data is available on impact investments in private companies. We recognise the challenges: it is harder to access data from private companies.

“Impact investments are relatively recent, there are few funds with fully realised track records, and investments are dispersed through a broad set of investors and intermediaries.”

Further, while there can be a reticence among UK financial advisers to discuss even SRI funds, which have long performance records and myriad documentation available for research, impact investing may only reach the peripheries of most retail investment advisers’ portfolios, and even then only for a select few wealthy investors.

However, this is expected to change over the next 30 years as the popularity of investing with a difference grows among ordinary investors.

Performance

An important point to make to clients interested in impact investment is that a range of returns are expected.

While impact investments are expected to generate a financial return on capital or, at minimum, a return of capital, there is a spectrum against which performance can be measured.

According to the Global Impact Investing Network (Giin), impact investments target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate.

A 2015 study by GIIN found while impact investors have diverse financial return expectations, so their asset choice or portfolio mix will reflect this, the majority wanted to pursue competitive, market-rate returns.

The impact investments covered by GIIN’s study revealed the majority of returns sought by these investors were risk-adjusted market returns, suggesting 55 per cent of investors want to get a bang for their buck both ethically and economically.

Asset mix

Investors keen on impact investment have a range of vehicles, from open-ended funds and Sicavs, through to investment trusts, specialist Social Investment Tax Relief-qualifying funds, social impact bonds and through certain venture capital trusts.

They can also invest across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.

Investments can be global, sector or regional specific and, according to a 2015 study by GIIN, performance has been strong.

It said: “Respondents also report that portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole”.

We benchmark investments of this type against conventional assets where possible as it is important investors see a financial return John Ditchfield

While impact investing is younger, and will not have the track record of, say, the average UK All Companies fund, Bertrand Gacon, head of impact investing for Lombard Odier, says this will change.

He explains: “As the track record increases, more studies can demonstrate that sustainable businesses have a better cost of capital, are more resilient to risks and therefore tend to outperform over the long-run.

“Demonstrating economic performance is therefore less and less an issue.”

The more products, and the longer the track record, the more information advisers can give to their retail clients.

Indeed, Jon Hale, head of sustainability research for Morningstar, adds: “The idea sustainable investing carries a performance penalty is a myth.

“For years, studies of publicly available sustainable/responsible/ethical funds, by whatever name, have shown no difference between their returns and those of conventional funds.”

Studies of its own global Morningstar Ratings database show:

■ The 1,214 socially conscious funds have better Morningstar Ratings than the fund universe as a whole

■ 35 per cent have ratings of four or five stars

■ 75 per cent of the socially conscious funds earn three, four and five-star ratings.

John Ditchfield, partner at Castlefield Advisory Partners, offers another tip: “We benchmark investments of this type against conventional assets where possible as it is important investors see a financial return.”

Impact and measurability

But it’s not just financial performance that is important: clients interested in impact investment want to know their money had the intended effect.

Even the 2015 OECD report highlighted the importance of giving investors clear indicators of performance - not just in terms of money back into the portfolio but also whether the investment had its desired social or environmental effect.

It said: “Just as with financial returns, social impact investment (SII) investors require some form of measurement of social impact to factor both financial outcomes and social impact into their investment decisions (WGAA, 2014).

“This characteristic can range from the lack of measurement to formal evaluation with monetary valuations of social impact (see Table below). Without having any form of social impact measurement a transaction cannot be considered SII.

List of attributes for Measurability of Social Impact

Duty of monitoring

According to Lisa Beauvilain, director and head of ESG and sustainability for Impax Asset Managment, investing along these lines means the investor bears some element of responsibility for monitoring the positive social or environmental impact.

This means impact investing is not for the person who wants to ‘invest and forget’: it has to be for someone keen to work with their adviser to make their money have a discernibly positive outcome.

She explains: “A hallmark of impact investing is the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments.

“Rigorous impact measurement helps ensure transparency and accountability, and is essential to informing the practice of impact investing.”

However, not all retail investors will have this level of access to information or ability to monitor the social intent and performance of an investment, or to engage with company management.

This is why many investors use the expertise of a bond fund manager or private equity investment adviser - and advisers who are whole-of-market will need to make sure they have the right professional connections.

Standard Life Investments (SLI) is creating its own measures to demonstrate the positive social and environmental impacts investments can have.

Earlier this year, SLI carried out research with the University of Cambridge Investment Leadership Group (ILG) to see how impact investment funds could be measures as well as how the underlying impact of any fund could be measured.

Amanda Young, head of responsible investment for SLI, explains: “Impact measurement will be key to the successful delivery of an impact proposition but currently there are no standardised measures.

“The purpose of our work with Cambridge’s ILG is to allow asset owners to understand how much positive impact the allocation of their capital is having.

“Impact investing is at its early stages, and it is possible it will take a similar route to performance metrics surrounding green bonds, which are now at the early stage of a rating process by Moody’s.”