Rise of impact investments

Socially conscious investors have to balance returns with their desire to leave the world a better place

‘“We believe the most successful businesses are the ones that make money by doing good”

Investors with a strong social conscience are turning to a growing group of investments that not only offer a solid performance but also a social and environmental impact. They don’t want to be passive investors in companies that aren’t doing the right thing. They are known as impact investors and they want their investments to change lives and help the environment.

At the end of the financial year they want to know how their investment performed but also the “output” generated by their investments. For example, how many low-income families have been helped with micro financing or how many hours of renewable energy have been generated and tonnes of greenhouse gases avoided? How many lifesaving medical devices has their investment produced or how much waste has been recycled instead of going into landfill?

There is a smorgasbord of impact investments in many different markets at varying stages of development, from community finance, dedicated impact investing funds, green and climate bonds, and responsible banking products.

“We believe that the most successful businesses are the ones that make money by doing good, and those are the ones we are going after,” says Will Richardson, chief investment officer at Impact Investment Group (IIG). “The tide is turning on business that comes at the expense of society or the planet.”

Investors range from the well heeled who meet ASIC’s definition of a “sophisticated” investor to philanthropic foundations, family trusts and self-managed industry and retail super funds. Richardson says millennials (born between 1980 and 2000) are leading the charge for companies to be a force for good, with the majority believing that a business’s financial performance is no longer the sole measure of success.

Kerry Series, chief investment officer of fund manager 8IP, says that in his experience a younger member of a wealthy family typically drives impact investing.

To also appeal to people with less money, investment groups are rolling out retail products for smaller amounts.

Impact investing is an emerging area, reaching $4.1 billion in 2017, up from $3.7 billion in 2015, according to the latest report by the Responsible Investment Association Australasia (RIAA). But impact investing accounts for only a small portion of the $622 billion in responsible or ethical investments, which make up 44% of Australia’s assets under management and use negative screening, sustainability themes and environmental, social and governance (ESG) considerations, says Simon O’Connor, chief executive of RIAA.

Often impact investing means that portfolio managers partner with creative entrepreneurs or companies with new technologies to help them build successful businesses for a positive change. This can mean higher fees than with traditional investments, as well as more risk. It is important that investors find an experienced impact investor with a strong track record or a financial planner who specialises in the area.

Kylie Charlton, chief investment officer of Australian Impact Investments, a financial advisory group, says investors want a comparable market return alongside the social and environmental benefits. She has examined over 200 impact investments for her clients and selected 22. They are all wholesale products with high minimum investment thresholds of at least $50,000, with the exception of one retail investment in the solar panels of Sydney’s International Convention Centre, which paid back an income-like return.

Charlton’s choice of impact investments are involved in a range of social issues, from homelessness, poverty and mental health to out-of-home care and disability. Environmental investments include best practice wind and solar investments as well as organic agriculture and water.

How bonds improve lives

One of Australian Impact Investments’ projects was raising capital to fund the Sycamore School, a new facility in Brisbane for children with autism. It brought together charitable foundations with the Catalyst Fund of Impact Investment Group and Foresters Community Finance.

Australian Impact Investments likes the reliable returns of social bonds, which range from 5% to 8% a year, from providers such as Social Ventures Australia and Westpac and National Australia Bank. Several social bonds have been released so far, including the Resolve Social Benefit Bond, which generates a competitive financial return while improving the lives of people suffering mental health issues in New South Wales. The target of the program is to reduce hospitalisation and related health services. In return the state government, which saves the cost of expensive hospital beds, pays the provider for a good outcome.

Investors fund the working capital of the Resolve program, run by Flourish Australia, a service that provides

residential periodic crisis care with psychosocial, medical and mental health support. It also runs a helpline for after-hours support from peers. Each participant gets support for two years.

Within the spectrum of impact investments, there are degrees of social and environmental benefits. There are investments that directly help people but there are also arm’s length projects that invest in private projects, while some investment groups claim to be impact investors even though they invest in listed companies.

From solar power to fashion

Impact Investment Group has a number of private investments worth around $730 million from a fund that invests in innovative green businesses to renewable energy and efficient buildings. It is building one of Australia’s biggest solar farms at Swan Hill in Victoria with 50,000 panels operating on a single-axis tracking system. In its first year of operation the farm is expected to produce 37,700MWh, enough to power about 6300 homes. Over its 25-year expected lifetime, the $32 million project will avoid creating around 1 million tonnes of carbon emissions and IIG’s modelling estimates it will save 14,300 people from pollution-related diseases. The farm will create 60 jobs during construction, and the same number again through indirect employment during its operation.

IIG has property syndicates invested in green buildings such as 100 Broadway in Sydney’s Ultimo, which is designed with efficient systems for power, heating, cooling and recycling grey and black water for re-use in laundries, toilets and gardens. The building also used recycled materials and environmentally certified products during construction. It is designed with thermal and acoustic features as well as power-saving initiatives that will cut carbon dioxide emissions.

Richardson says IIG invests in B Corporations, a term for a type of company that uses the power of business for social and environmental good.

IIG has a venture capital fund called Giant Leap, which has invested in groups such as GlamCorner, an online fashion business that rents out pre-owned designer clothes, and YourGrocer, a home delivery service allowing shoppers to buy products from local independent butchers, delicatessens, greengrocers and bakers.

Many impact investment funds are only available for sophisticated investors or those that have been certified by an accountant as meeting the ASIC requirements of a gross income of $250,000 a year or more in each of the previous two years or net assets of at least $2.5 million. Often the minimum investment is between $50,000 and $100,000.

For example, 8IP offers a wholesale fund, the 8IP Australian Equity Impact Fund, which has a minimum investment of $100,000. It invests in 25 listed Australian companies that Kerry Series, chief investment officer of 8IP, says have a positive social impact. They include Genex, which has solar farms and pumped hydro storage.

While privately managed impact investments can be found, listed ones are harder to come across. Often they tend to be a more akin to responsible or ethical funds with a positive screen.

The WHEB Sustainable Impact Fund has been going for 12 years in the UK. Since August it has been available in Australia as the Pengana WHEB Sustainable Impact Fund (formerly the Hunter Hall Global Deep Green Trust). With a minimum investment of $10,000, it targets quality growth companies that contribute to the changing world and will have a better impact, says George Latham, chief investment officer of WHEB. The fund holds 60 companies and the biggest sector is resource efficiency (28%), which includes energy-efficient products, efficient buildings and technology to improve manufacturing. The next biggest sector is health (21%), which includes companies that aim to reduce costs in healthcare, undertake research and diagnostics work with ageing demographics and tackle obesity and preventative care.

Monitor the returns too

Impact investors want to hear about the social and environmental returns or output of their investments and WHEB sets out what $1 million has delivered. Latham says the fund generated 703MWh of renewable energy (the average usage of 35 UK households), treated 937 litres of waste water (53 households), provided 17.6 million litres of drinking water (100 households) and avoided 938 tonnes of carbon dioxide emissions (equivalent to taking 195 cars off the road). The money also went to ensure that 82 tonnes of waste material was recycled, which equates to the total waste of 35 households.

When investors seek investments that match their passions, often it means that they have to keep an eye on returns too. They could be compromised, particularly in early-stage private ventures.

While responsible investments have been performing a bit better than general investments, there are few benchmarking measurements for the performance of impact funds. Responsibly invested Australian share funds and balanced multi-sector funds have outperformed their equivalent mainstream funds over three, five and 10 years, according to RIAA. “It is a long-outdated myth that financial returns must be sacrificed to invest responsibly or ethically,” says O’Connor. “The performance figures and trends we are now seeing each year are telling us the opposite story.”

It is important for impact investors to put parameters in place to stay focused on their passions but not to go broke.