Australian impact investors face hype challenge
Impact investing is becoming a hot topic in Australia, with a handful of superannuation funds among the institutions now helping to fund social and environmental programmes.
But the sector risks succumbing to hype and confusing potential investors if fund promoters are insufficiently clear about the direct impact of their investments, says an environmental, social and governance (ESG) consultant.
Duncan Paterson, director of Canberra-based ESG research house CAER, in an opinion paper issued on Friday, warned that the benefits of impact investing risk being diluted as everyone tries to get on the bandwagon.
Impact investments are made with the intention of generating a positive social or environmental outcome while also generating a financial return. The sector in Australia is growing by about 10% a year, according to the Responsible Investment Association Australasia (RIAA), with close to A$5 billion ($3.9 billion) so far committed.
The RIAA’s most recent report in 2017 said the growth “reflects an increase in the number of dedicated impact investment funds from both dedicated providers and the big four banks, as well as a larger number of themed bonds being issued in Australia.”
According to a 2013 report by the World Economic Forum, a country's social investment needs can often not be met because of the fiscal challenges facing governments, “particularly when budgets are declining as a result of burgeoning debt and fiscal austerity.”
FUNDING GAP
Philanthropic donations are insufficient to bridge the gap, which is why private investors have a potential role to play in addressing social challenges, in part by helping with the development of impact enterprises.
The A$1.4 billion ($1.07 billion) Sydney-based Christian Super fund is a leading advocate of impact investing in Australia. Its senior portfolio manager Edwin Lo told AsianInvestor: “From a strategic viewpoint, this asset class has very low downside and low drawdown, and is almost uncorrelated to other assets such as equities and bonds. That means if we allocate in a meaningful way, it actually improves the fund’s efficiency—through information ratio improvement.”
Christian Super allocates over 10% of its fund in impact investments, and Lo said “we expect that proportion to grow to 15% in the next three years.”
Australian superannuation funds and insurance companies as a whole have not been particularly active investors in the sector, but a handful of super funds are getting involved, forming ventures with local government.
Health employees super fund HESTA, for example, has made impact investments to aid the supply of affordable and social housing in South Australia. Specialist impact investment manager, Social Ventures Australia (SVA), in partnership with the South Australian Government, raised A$9 million to launch the impact bond programme. HESTA committed A$1.5 million through its A$30 million Social Impact Investment Trust, established in 2015 with SVA.
First State Super is another that is working with government, in this case in New South Wales, where a joint venture $150 million equity fund will invest expansion capital in local businesses.
Lo sees a lot more attention to impact investing being paid by super funds, endowments and family offices. From the asset owner’s perspective, Lo said impact investing makes sense “because this is a very defensive approach, essentially an income-generating return that targets 2% to 3% above [consumer price inflation].
The Christian Super fund offers five different strategies, from growth to cash, with the growth option targeting CPI +5%.
WALKING THE WALK
Assessing the impact of the investments is a developing science, based on the UN’s 17 Sustainable Development Goals.
But Paterson at CAER says a profusion of new impact investment funds would muddy the waters.
“As asset owners start reviewing impact investments for portfolio inclusion, service providers are rightly moving to fill a gap in the market with appropriate products. This poses a problem for the trustees who are considering these investments – they need to look beyond the marketing spin and reassure themselves that there is a genuine ‘impact’ behind the investments they are making.”
He explained that as more impact-themed funds come to market, some run the risk of confusing the process of measuring impact with the actual outcomes that investors looking for impact are seeking. So the investor is not making the social impact change intended.
Examples here include mid- and large-cap equity funds with a sustainability theme; and products that measure and report on impact but don’t necessarily change their investment approach.
The discussion extends, for example, to whether an investment in public markets can be considered an impact investment. "When looking at funds that invest primarily in publicly listed equities, one is forced to ask if the investor wasn’t holding those shares, would that make a difference to the positive impacts of the company issuing the shares?" Paterson said.
In the carbon market, it is known as 'additionality'—if I didn't invest in this fund, would the emissions reductions have happened anyway? Assessing this is a key feature of carbon credit schemes, but the concept has not yet been applied to other areas of ESG/impact investing.
“In the competitive world of finance, labels matter," Paterson said. "Impact investors have been striving for several years to develop products that will attract the attention of large-scale institutional investors. Leveraging significant pools of capital offers tremendous opportunities for finance to play a truly transformative role in society.
"It would be very disappointing if, at the moment when these efforts are starting to pay off, we see the emergence of a range of funds primarily focussed on investing in listed equities, but marketed as impact investments.”