The rise of impact investing

Only very recently there have been several instances of extreme weather conditions, including hurricanes, which have hit North and South America, causing untold damage.

As the impact of climate change is becoming harder to ignore, so more investors are interested in measuring the positive impact their investments have.

The key word there is ‘measuring’. Impact investing is characterised as a more measurable way for investors to consider their investments.

According to a May 2017 Standard Life Investments report titled ‘Impact Investing’, JPMorgan research reveals demand for impact investing may reach $1trn (roughly £0.75trn) by 2020.

This suggests not only that asset managers will capitalise on this by launching more impact strategies but also that investors will gain a better understanding of what it is and how it works.

Where most socially responsible investing adopts a passive ‘do no harm’ approach, impact investing actively seeks positive change.Gary Waite

Bonny Landers, head of sustainable, responsible and impact investing at Sandaire, notes: “I think absolutely climate change is the key that has made everybody sit up and notice because it really does effect everything. It effects our health, it effects companies and how they do business.

“I think it really has come home to people that this is not sustainable, and I know that word is overused but I use it properly. What we need to look for are ways to counteract it.”

Measuring impact

Gary Waite, portfolio manager at Walker Crips, says impact investing funds have a dual purpose – “to address environmental/societal challenges as well as produce an ‘acceptable’ financial return”.

“Where most socially responsible investing adopts a passive ‘do no harm’ approach, impact investing actively seeks positive change. 

“One of the key differences of impact investing versus other forms of ethical investing is the requirement to measure and report the social and environmental performance of underlying investments,” he explains.

The Standard Life Investments report sets out the main characteristics of impact investing:

• Seeking positive financial returns – a company should have clear financial return targets 
• Mission-led business objectives – a company’s strategy should clearly outline how its operating model is designed to achieve a specific positive societal and/or environmental impact 
• Measurable outcomes – a company should aim to measure and disclose the positive contribution to the environment and society in relation to its stated goals.

Andrew Parry, head of equities at Hermes Investment Management, notes that impact investing is long-term, with a focus on companies developing new capabilities that meet specific needs of society in what he calls a “mission-led manner”.

He insists: “It goes beyond best-in-class ESG practices or a well-developed corporate social responsibility programme, requiring investors to identify companies that are mission-led and which have a clear approach for delivering additional and measurable societal benefits that will endure over time.”

Mr Parry outlines three key concepts that impact investing brings to the public domain:

• Intentionality – the intention of an investor to exert a positive social or environmental impact; 
• Fulfilling a good cause beyond the provision of private capital; 
• and measurement – being accountable and transparent in reporting on the financial, social and environmental performance of investments. 

One step ahead

Some asset managers have gone further than simply offering impact investing funds or ethical investing strategies to clients.

Jupiter Asset Management announced in September it has joined The Climate Group’s RE100 Initiative, thereby committing to sourcing 100 per cent of the energy consumption in its leased offices from renewable sources by the end of 2017.

The firm’s headquarters which is based in London already uses 100 per cent renewable electricity.

Maarten Slendebroek, chief executive at Jupiter, said in a statement: “We believe our decision to target 100 per cent renewable electricity through RE100 highlights the alignment between our corporate strategy and our investment activities.

“As long-term active investors, we believe that climate change and energy transition carry risks and opportunities that warrant our attention. This initiative demonstrates Jupiter’s commitment to environmentally responsible corporate behaviour.”

Amanda Young, head of responsible investment at Aberdeen Standard Investments, observes: “The world faces a number of environmental and social challenges. The rise in technology and access to information has made these challenges very much part of public awareness.  

“People can now find out exactly where companies operate, the impact business has on the environment, how companies treat local communities and what affect business operations have on their employees. Companies cannot operate in isolation.”

This applies to asset management groups as well, of course.

Doing good

Impact investing is increasingly being adopted by responsible investors who seek to achieve positive social and environmental change while achieving a financial return, according to Perry Rudd, head of ethical research at Rathbone Greenbank Investments.

“This is often characterised as enabling investors to ‘do good while doing well’,” he notes. 

We believe impact investing is becoming an increasingly attractive option for both individual and institutional investors because it offers a ‘win-win’ investment model whereby investors are able to generate both financial returns and have a positive impact on society.Matt Christensen

“Under this broad category, there are a number of more specialised approaches, including social investment, impact-first investment (where social return takes precedence over financial return) and social enterprise investment. These approaches can be applied across different asset classes, including equity, venture capital, debt and fixed income.”

He suggests: “As fiscal constraints make it increasingly difficult for governments to meet the funding requirements necessary to address the world’s most urgent challenges, impact investing is viewed as one of the potential sources of capital for under-resourced sectors such as social housing, healthcare and education. 

“In addition, it can also be used to support sectors providing environmental solutions or mitigating the damaging effects of climate change such as renewable energy, protection of natural capital and sustainable agriculture.”

Impact investing has been far more prevalent in the institutional investor space so far, but there are signs this is becoming a strategy more familiar to retail investors.

Matt Christensen, global head of responsible investment at Axa Investment Managers, admits it will take time for the market to mature and expand to the retail segment.

“We believe impact investing is becoming an increasingly attractive option for both individual and institutional investors because it offers a ‘win-win’ investment model whereby investors are able to generate both financial returns and have a positive impact on society,” he adds.

One sign that impact investment has become far more mainstream is a recent fund launch by Barclays. 

The Barclays Multi-Impact Growth fund claims to be the first of its kind from a major UK Bank.

Damian Payiatakis, director of the impact investing business at Barclays, confirms the group will be looking to expand its range of products available to UK retail investors.

“Part of the reason we got involved in the impact investing space, this fund being the first product we’re launching, is the recognition there is a win-win for society where we as a bank are able to serve the needs of clients and broader society,” he explains.

“When I think about the purpose we have as an organisation to help people achieve their ambitions in the right way, I would imagine most advisers have that same goal. Therefore, being able to serve those clients with products that have this consideration built into them or portfolios that enable clients to achieve those ambitions, it makes a lot of sense for them as well.”

eleanor.duncan@ft.com