Strong demand for impact investment, Association says

The Responsible Investment Association says fund managers need to develop a strong framework for reporting on their impact investments so that investors get a clear idea of what they are supporting,

Monday, September 23rd 2019, 6:30PM

It has released a new report on impact investment – investments made with the intention of generating a positive, measurable social and environmental impact as well as a financial return.

Its report, completed in conjunction with the University of Auckland, surveyed 99 investors from fund managers to community foundations and banks, accounting for $83.5 billion under management.

Respondents said they anticipated allocating a total of $5.9 billion to impact investments over a term of five years or more, a six-fold increase from their current allocations.

“We are pleased to see the high interest and demand for impact investments from all investor groups, spanning diverse asset classes and areas of impact. Importantly, the report also examines the relationship between the Māori economy and impact investment, and shines a light on some emerging Māori impact investment initiatives,” said Responsible Investment Association of Australasia chief executive Simon O’Connor.

“If we can create more impact investment opportunities, provide greater performance data, and address the other barriers to growth, we’ll see the enormous potential of the finance sector to direct its capital towards solving some of New Zealand’s most important social and environmental challenges.”

More than three quarters of active impact investors expect competitive or above-market rates of return, and the vast majority said their financial expectations were being met or exceeded. Mission alignment was the primary motivating factor for allocating funds to impact investments amongst active impact investors.

“We are seeing that investors have a preference for private equity, venture capital and real asset investment opportunities. Environment and conservation; clean energy; and health are the most popular impact areas for investors” said O’Connor.

Of those investors that were not yet active in impact investing, most (78%) were aware of the field, and the vast majority were interested in participating. Nearly a third (28%) are actively exploring impact investment options.

Active impact investors were motivated to allocate capital to impact by: its alignment to their mission (23%), to meet commitments to responsible investment practices (20%) and to contribute to building the impact investment market (12%).

The main perceived barriers preventing investors from participating in impact investing were a lack of evidence or track record of financial returns (11%) and a lack of investable deals (10%).

But impact measurement practices varied widely and 50% of active impact investors used a measurement framework with varying levels of sophistication. Of these, 9% use third-party frameworks, 15% use their own proprietary frameworks and 26% use a combination of third-party and propriety frameworks. Of the remaining 50%, 28% use anecdotal or qualitative measures only and 22% do not measure impact.

O’Connor said there needed to be a way for investors to ensure they were impact-investing with integrity, with a credible impact measurement.

“That’s one of the most challenging areas. These things don’t have dollar values associated with them so it’s harder to quantify, measure and report on. There’s a lot of work going on into how to develop a framework and standard. We see that as critical for the integrity of the market.”

He said the association had been surprised at how interested the New Zealand market was in impact investing.

The breadth of the market was deeper than in Australia, he said.

"This report serves as a call to action for those that have an interest in seeing the impact investment market grow in New Zealand; namely those that wish to see our investment practices contribute directly to improved social and environmental wellbeing. We’re primed for rapid growth if we can demonstrate the leadership required”, said Dr Jamie Newth, lead author of the report and lecturer from the faculty of business and economics at the University of Auckland.

Rebekah Swan, ESG investment specialist at AMP Capital, said data such as this, capturing market demand and activity, was critical for the development of impact investing.

“Both in highlighting the early work being done by pioneers as well as encouraging those not yet active to participate. We are certainly seeing the growing interest in this area of investment in our conversations with clients.”

Tags: AMP Capital ESG Impact investing responsible investing Responsible Investment Association RIAA