Impact investments are those with strategies that aim to generate both, financial returns and positive, measurable societal or environmental impact.
Impact investing has gained popularity in recent years as investors increasingly seek to align their investments with their values and providing capital to address social and/or environmental challenges. The impact spectrum is diverse, from renewable energy and sustainable agriculture to education, housing and healthcare.
There are some crucial tenets to impact investing.
Intentionality – to allocate capital specifically for social and environmental solutions, actively picking companies because of their positive impact. This differentiates it from responsible investment and screening strategies. It is an outcomes-based approach seeking to achieve goals or change. There will often be a link to one or more of the UN’s Sustainable Development Goals (SDGs).
Financial returns – Returns can range from below market rate to risk-adjusted market rates; seeking a financial return distinguishes impact investing from philanthropy.
Measurability - A central tenet is the emphasis on regularly measuring and reporting on the social and environmental performance of the chosen assets. Disclosing actual impact performance data to investors and measurement against KPIs is crucial. Are there any negative impacts in a particular asset or stock which counterbalance the positive impacts?
Additionality is often also a consideration. This is the positive impact or outcome that would not have otherwise been achieved without the investment. This helps clarify what the status quo would be in the normal course of events; would the desired output have been realised anyway without investors’ capital allocated to it?
While impact funds offer financial returns, fund managers need to carefully balance any trade-off between maximising positive social/environmental outcomes and optimising return to ensure they are delivering on both fronts. Impact funds which invest in listed equities or bonds may approach ‘additionality’ from a different angle by considering, for example, the difference the absence of that security’s issuer would make to solving an environmental or societal problem. Are the company’s products or services easily available from others?
The world needs capital at scale to address many critical challenges, however impact investors also want assurance that their investments are fulfilling their brief and aren’t just a PR exercise. Therefore, transparency and reporting are key. If the investment is an impact fund, do you know what assets are held in the fund? What is the impact ‘intention’ of each asset (or, in the case of securities, the intention of the company) and the expected outcome, i.e. the positive contribution? What has been achieved during the period under review? Who are the beneficiaries? Was there any wider contribution to society? Or, if mapping against selective UN SDGs, the individual and aggregate contribution of assets in the portfolio towards the goals.
Arlingclose’s ESG and Responsible Investment Service is designed to guide public sector authorities through the complexities of ESG incorporation and monitoring. As part of our ESG service, we offer advice on thematic funds (which includes impact funds) based on the authority’s specific ESG criteria including due diligence on the funds.
If you would like to discuss further on Impact funds or our ESG service, please email: info@arlingclose.com.
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