Impact investing: A primer for IR professionals
1. What is impact investing?
One definition of impact investing, also known as values-based investing, comes from a paper issued by Athena Capital Advisors entitled Values-based and impact investing: An introduction: ‘Impact investing is investing with the intent to earn a financial return while creating a positive social impact consistent with an investors’ core values.’
The paper goes on to state that there are three important steps to creating a values-based investment portfolio:
1. Construct a values-based framework by clarifying the specific ethical, religious and/or environmental objectives
2. Choose a values-based investment strategy by choosing the kind of investment or investments that will achieve the goals of the strategy and whether the investor requires market rates of return or will accept below-market rates in exchange for other mission-related benefits
3. Choose how to express specific values by deciding whether to invest across industries, asset classes and geographies.
As Anna Snider, head of due diligence, global wealth and investment management at Merrill Lynch, adds: ‘It’s all about how to get to the exact issues on which you want to have an impact – environmental, healthcare, education, economic development, gender – and still retain the growth component.’
2. What is the difference between impact investing and sustainable investment?
‘If you asked 10 people, you’d get 10 different answers because the terminology is far from settled and continues to evolve,’ explains William McCalpin, who leads Athena Capital Advisors’ impact investments team. ‘But from my standpoint the difference is that sustainable investing focuses generally on public market investments – public equities and fixed income securities – while impact investing focuses largely on private funds and direct investments, though some use impact investing as an umbrella term for investments across all asset classes.
‘Sustainable investing often carries a strong reference to environmental objectives while impact investing embraces a more comprehensive set of non-financial considerations, including the environment but also innovative healthcare solutions, economic opportunity in low-income communities, and so on.’
Impact investing can promote religious values as well as social and environmental, though themes can intersect. Within values-based investing, impact investing stands out because it aims to ‘generate financial profits and measurable social and/or environmental good directly through its investments,’ as the Athena Capital report points out. Impact investments can also be separated out into mission-related investments (MRIs) and program-related investments (PRIs). MRIs provide impact without sacrificing return, while PRIs have below-market rates of return but provide a level of social good such that foundations are allowed to treat them as charitable contributions.
3. Why should IROs know about it?
While impact investing has been around for a while in Europe, it is still relatively new in the US. Impact investors have a wide variety of investment portfolios and many invest across asset classes, industries and geographies, though others are much more focused. There are more than 80 asset advisers and managers that are members of the Global Impact Investing Network.
In a report for Merrill Lynch, Snider notes the growth in information needed to engage in impact investing in the US: ‘The number of investment funds incorporating ESG factors has nearly doubled from fewer than 500 funds in 2010 to more than 900 in 2014, and assets have risen roughly 650 percent, from $569 bn in 2010 to $4.3 tn in 2014.’ And that rate of growth has continued.
Before this boom, Europe – apart from a few sector-based US exchange-traded funds – was the only place to engage in impact investing, according to Snider. ‘I recently traveled to Europe to talk to asset managers about specific impacts and how they were constructing a portfolio,’ she says. ‘It’s not as simple as just getting out of fossil fuels, plastics and pharmaceuticals. You’d have no stocks left. And 10 years ago all you could do was divest problem stocks or invest in renewables, for example.’
That situation has changed considerably. The kinds of investments that can be used by impact investors today include:
• Fixed income
• Hedge funds
• Private equity (and debt)
• Real estate