Impact Investments – a new philosophy of investing

by Martin Ewald | 28/08/2019
Impact Investments – a new philosophy of investing

Summary

Investors are increasingly starting to realize that they have the power to make an impact by choosing where and how to invest their assets. Allocating capital with the intention to create impact allows investors to influence the way the economy works or how a company operates.

What are Impact Investments? A new philosophy of investing!

Impact investments have the explicit intention of achieving positive, measurable, social or environmental impact alongside an attractive financial return. They can be carried out in both emerging but also developed countries, depending on investors' strategic objectives. The impact investment market can provide capital to help address the world’s most pressing challenges in sectors such as sustainable agriculture and food production, energy efficiency, affordable and accessible basic services including housing, healthcare, and education conservation or microfinance.

Against this background, impact investments constitute a new investment philosophy that is a logical extension of traditional investment approaches. Instead of solely focusing on return and shareholder value maximisation, impact investments target to maximize the total benefit to all stakeholders, without favouring one over the other. Impact investors follow the thought that such philosophy consequently leads to the potential for an increase in return whilst seeking to minimise risk.

Private impact investments  

At AllianzGI we are convinced that impact investments can deliver significant benefits to an institutional portfolio. However, we believe that such benefit is most likely to materialize when the impact investment strategy is applied holistically. We have established three principles that define an impact investment in the private markets: First, the intention of the investment must be to generate a positive social and/or environmental impact and at the same time generate attractive financial returns. Secondly, there must be a causal connection between the investment and the impact generated. Finally, the impact needs to be identifiable and measureable and must be reported on a regular basis to ensure validation of such impact.

Measurement as key hallmark for private impact investments ensuring transparency and accountability

Given the continuous risk of “impact washing”, transparency and accountability regarding the generated impact are of utmost importance when carrying out impact investments. Thus, the key feature of impact investments is an investor's obligation to continuously measure and review the social and environmental performance of the underlying assets to ensure transparency and accountability.

Investors' approaches to impact measurement can vary depending on their objectives. Whilst the market is clear about the process stages in which impact has to be measured, the detail of measurement and applied techniques are far from being standardized.

Those process stages are widely acknowledged to be the following:

  1. Definition and presentation of social and/or environmental objectives for each investment to investors
  2. Setting key performance indicators and goals related to these objectives, using standardized indicators wherever possible
  3. Monitoring and managing the performance of investments against these objectives
  4. Reporting on social and environmental performance to relevant stakeholders

A fast growing market with significant potential

The impact investment market is a fast-growing space which is becoming increasingly popular in the illiquid alternative market. According to the Global Impact Investor Network (GIIN) reported impact AuM rose from USD 120bn in 2016 to 500bn in 2018 (+400%). Accumulative investment gap in order to reach the United Nations Sustainable Development Goals(UNSDGs)until 2030 are assumed to be around 12 trillion, representing a significant investment opportunity.1 (seeChart A/).

This growth outlook is attributable to two main drivers, both evolving bottom-up and top-down processes: First, a general change in how private businesses operate. 87% of international CEOs2 are, for example, rethinking the strategy of their businesses in light of the UNSDGs. Creating sustainable business models that address important clients’ and environmental needs is nowadays paramount for being “truly client centric” and hence essential for long term success of a business. These developments will consequently create additional bottom-up investment opportunities for impact investors.

Secondly, international agreements such as the UNSDGs or the resolutions of the Conference of the Parties in Paris in 2015 (COP 21) can be seen as a top-down growth driver. These agreements are expected to transform into a new or at least stricter regulatory framework that should facilitate the development towards more sustainability. The associated actions following the Paris Agreement, for example, are expected to result in a potential for investment of around 23 trillion US dollars by 2030. 3

A/Estimated market potential of impact investing

Chart: estimated market potential of impact investing

Source: UN Principles of Responsible Investing, UN Development Programs, Weltwirtschaftsforum

Busting the low return myth

Historically, impact investments were driven by philanthropic capital and as a result impact investing can be confused with donating capital. Now is the time to bust the myth.

According to the GIIN 2018 Annual Impact Investor Survey, 64% of the 229 Survey participants who primarily focus on impact investments target competitive, risk-adjusted market returns and hence speak in favour of the proclaimed shift (see Chart B/). Moreover, 91% of investors confirm that their investments have outperformed or were in line with their return expectations confirming the proposition that impact investments can deliver both financial return and impact (see Chart C/). 4

We believe that investors need to understand impact investments as an important part of their asset allocation. As private market strategy , impact investments have the potential to deliver the potential benefits of non listed alternative investments such as stable returns, low correlation, and inflation-linked revenue that would offer investors an attractive risk-return ratio. However, in addition to that, impact investments also deliver a positive contribution, as investments contribute to the society and the environment and address global challenges

B/ Target financial returns principally sought Chart: target financial returns principally sought

Source: GIIN (Global Impact Investing Network, 2018): Annual Investor Survey
This s for guidance only and not an indication of future results.

C/ Performance relative to expectations
Number of respondents shown above each bar: some respondents chose "not sure" and are not included. Chart: performance relative to expectations

Source: GIIN (Global Impact Investing Network, 2018): Annual Investor Survey
This s for guidance only and not an indication of future results.

1) United Nations Principles for Responsible Investment, United Nations Global Compact (2017): The SDG Investment Case, https://www.unpri.org/download?ac=5909.
2) Based on a survey of more than 1,000 CEOs across more than 100 countries and 25 industries, also see: UN Global Compact-Accenture Strategy CEO Study (2016): Agenda 2030: A Window of Opportunities, https://www.unglobalcompact.org/library/4331.
3) UN Global Compact-Accenture Strategy CEO Study (2018): Special Edition: Transforming Partnerships for the SDGs, https://www.accenture.com/_acnmedia/PDF-74/Accenture-Transforming-Partnerships- for-the-SDGs-UNGC-Accenture-Strategy.pdf.
4) Global Impact Investing Network (GIIN): What You Need to Know about Impact Investing, https://thegiin. org/impact-investing/need-to-know/#what-is-impact-investing, accessed 21.05.2019.
5) A performance of the strategy is not guaranteed and losses remain possible.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Private equity and private credit are highly illiquid, may only be suitable for persons of adequate financial means who have no need for liquidity with respect to their investment, and who can bear the economic risk, including the possible complete loss, of their investment. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

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About the author

 Martin Ewald

Martin Ewald

Head of Investment Strategy, Infrastructure Equity

Mr. Ewald is a managing director and Head of Investment Strategy, Infrastructure Equity, with Allianz Global Investors, which he joined in 2007. He is responsible for shaping the strategic direction of the team through the development and implementation of new investment vehicles.

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