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Impact investment performance

This article is part of
Guide to impact investing

Impact investment performance

Clients interested in impact investing will need to understand the performance metrics, how to monitor investments and how this fits into a wider investment portfolio.

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.

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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.

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.