Philipp Müller, BlueOrchard’s Chief Executive Officer
Philipp Müller,
BlueOrchard’s chief executive officer

The current market environment poses significant challenges for institutional investors, particularly as they increasingly look to include environmental, social and governance (ESG) factors into their investments while achieving a financial return.

For pension funds, in particular, the challenge is to find investment opportunities that support their return targets and meet a number of other sustainability requirements. In addition, these investors are often seeking ways to diversify away from existing asset classes in their portfolios.

Impact investing offer an appealing way for pension funds to achieve dual objectives: incorporate sustainability requirements into investments while also providing diversification benefits.

Impact investing enters the mainstream

The trend towards sustainable investing continues to gather momentum in line with the goal of generating financial returns while also making a positive contribution to the world. Often, investors look to achieve this via funds that screen-out companies that do not meet a certain threshold of sustainability, or by focusing on specific ESG themes. However, it can be hard to know how much of an impact an investment is really making.

This is where impact investing can help. It focuses on delivering measureable impact, while aiming to also provide attractive investment returns.

Correlation between impact investing and financial performance has been tested, demonstrating synergies across risk, return and impact metrics. Impact investing is often described as having a ‘triple bottom line’, whereby the social or environmental impact and the financial return have equal importance and reinforce each other.

Diversification benefits for pension funds

While impact investing can cover a wide range of asset classes and themes, the focus tends to be on areas that are traditionally not accessible via public markets. These include private debt, private equity and sustainable infrastructure. This therefore means there is typically very low correlation with public markets, making impact investing a good tool for diversifying a portfolio, even amongst other ESG investments.

In the face of challenging market conditions and mixed investment performance over recent years, pension funds have increasingly looked to move some of their assets away from traditional markets. As this trend continues through current challenges, the low correlation between private markets and more traditional asset classes could make impact investing an attractive diversification option.

In addition, the industry has now reached a size that means it can absorb large investments, supporting the investment appetite and commitment of pension funds.

Goals focused

Besides supporting pension funds in achieving their financial goals, impact investing helps them to meet the growing appetite for integrating sustainability into their portfolios. An increasing number of investors focus on achieving ‘capital with a purpose’ and allocating funds with a specific goal in mind.

In some cases, it is easier for pension funds to steer their portfolio towards new investments instead of influencing the investments in their existing portfolio. For example, it is easier to invest in a new eco-real estate development than shifting existing real estate property portfolios into more energy efficient buildings.

Impact investing has the power to contribute towards finding solutions for many of the world’s social and environmental challenges, plus it can help to fast-track the move towards a more sustainable strategy. However, it is also important to ensure that the ‘impact’ is effectively managed and measured, to reduce concerns around ‘impact washing’.

To do this requires a clearly defined intent and contribution, which makes it easier for pension funds to allocate investments to areas that align most closely with their own goals. Pension funds with a deliberate intent can define the objectives of their contribution and align their measurement of impact to tailored key-impact indicators, as highlighted by the IFC-led Operating Principles for Impact Management.

Click here to learn more about how Schroders integrates sustainability considerations firm wide, as well as relevant insights across asset classes.

About BlueOrchard

BlueOrchard is a pioneer in microfinance and impact investing. They are dedicated to generating lasting positive impact for communities and the environment, while providing attractive returns to investors.

Schroders acquired a majority stake in BlueOrchard in 2019. This partnership demonstrates the firm's commitment to the increasingly important sustainability and broader impact investing space.

IMPORTANT INFORMATION

Investment involves risks. This material is issued by Schroder Investment Management (Hong Kong) Limited and has not been reviewed by the SFC.