The application of an impact lens can help identify opportunities overlooked by other investment approaches.
From the pen of Hill Gaston
In recent years I have seen impact investment move up the agenda, driven by investors’ desire to generate positive social and environmental outcomes alongside investment returns. Impact investing seeks to answer two questions: what financial impact will this investment have on my portfolio and what positive impact will this investment have on people and planet?
Creating transformative change
For example, microfinance, or the provision of small loans to those that aren't served by the traditional banking sector, is an established area within impact investing. It benefits people and communities across the world as well as investors, by not only generating returns, but also helping increase financial inclusion.
In Bangladesh 2.5 million people have been lifted out of poverty through microfinance over the past 20 years . These efforts have brought fundamental changes to many individuals’ quality of life and created more prosperous households.
Elsewhere, a growing number of Mercer’s Local Government Pension Scheme (LGPS) clients in the UK are putting money to work in affordable housing – a sector foundational to economic development and critical to community wellbeing while generating skilled and accessible jobs.
The impact of such investments has made affordable housing the fastest growing area of place-based impact investing in the UK.
But the challenges clearly reach much, much further – meaning there is much more opportunity, too.
As I outlined to (Global Investment Forum) GIF attendees in Europe recently, biodiversity is intrinsic to half of all economic output, meaning that $44 trillion in global GDP is either highly or moderately linked to nature . As one example of this, 75% of global food production is reliant on animal pollination.
However, the planet has lost 68% of its animal population since 1970, creating an underlying threat that risks livelihoods, food security and economies . The speed and magnitude of issues such as these, spanning environmental to social spheres, is profound and, in some cases approaching the point of no return.
It is my belief we are going to see huge investor interest in biodiversity-positive natural capital projects over the next three to five years. These projects will target areas such as sustainable agriculture and forestry, and provide further diversification benefits to portfolios, while investing capital in projects that make a meaningful difference to local communities. If investors mobilise at scale, their investments can have a global impact.
Building and scaling solutions within portfolios
I believe impact investing creates new ideas, most apparent in three key areas – innovation, emerging themes, and asset classes.
Under the umbrella of innovation, for example, impact investing can come in the form of an allocation to the latest FinTech disruptor, enabling millions of mobile payment accounts across sub-Saharan Africa. This investment can reach those who don’t have a bank account, for example. Not only does this expose investors to a growth opportunity, but it also acts as a geographic diversifier within a portfolio.
Secondly impact investing uncovers emerging themes, including biodiversity mentioned above, which I believe are going to grow in size and importance over time. I would argue there is a strong and growing case for connecting capital to meeting these challenges.
How to make your capital impact-centric
Asset classes are the third source of new ideas.
Looking at various asset classes through the impact lens uncovers myriad opportunities. And within private markets, there are some potential key advantages.
Private market investments typically provide “new” capital to opportunities that would have been unlikely to be funded or occurred otherwise, creating additional impact. For example, if we consider the affordable housing example, your capital could be the difference between a project being founded or never getting off the ground.
However, there is growing client interest in global, multi-theme, listed equity impact strategies. I view this as the most straightforward way of replacing an existing allocation and making it more impact centric.
In the corporate bond space, there is a growing opportunity set of social and green bonds. These make up a relatively small part of the market, but are growing at a phenomenal rate.
All of this contributes to a growing ecosystem of interconnected impact investments that are delivering on numerous fronts.
Not only does impact investing allow you to do good, but when well-executed, it can help and enhance your ability to meet your investment objectives.
If impact isn’t already on your agenda, it may be time to give it some attention for the benefit of the wider world – and your portfolio.
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