The worldwide impact investing sector is, according to the Global Impact Investing Network (GIIN) estimated at around USD1.2tn AUM. That is a significant increase over the last decade with Harvard Business School estimating that in 2013, AUM stood at ‘just’ USD25bn. That’s a significant upsurge and, as passionate champions, it’s always worth taking a step back to acknowledge the wins.
UBS recently carried out research which showed that the funding required to meet the United Nations Sustainable Development Goals stands in the multi-trillions. We are a very long way from having the funds needed to solve the big issues of today, including abating climate change.
Part of the shortfall lies in the economic headwinds we have all experienced over the last four years. Fortunately, we are on the other side of the pandemic which arrested growth in markets across the world but the war in Ukraine, alongside turbulence in the Middle East and other global flashpoints, continues to undermine growth.
Challenging economy drives investors to traditional asset classes
Economic challenges tend to send investors fleeing for investment safe havens. It is the reason why the price of gold has grown over 80% over the last five years, and why private debt has become a new asset class for both institutional and private investors.
One of the consequences of the extended bear market we are seeing is that some family offices are rowing back from their impact investments to what are perceived as safer waters. It is hard to blame them given the circumstances, but is there a better way than redirecting investment portfolios towards traditional asset classes?
Impact investing is not about taking outsized risks with low returns just because it might be good for the planet. While there are some instances when impact investors intentionally adopt this approach acting as first loss guarantors for social impact bonds as an example, we believe that impact investing is still under-appreciated as a robust investment strategy for investment portfolios too. So let’s bust a few myths about impact investing, starting with the notion that it is high risk.
Impact investment can suit all risk appetites
While there are investment opportunities that test even the most adventurous investor, there are also opportunities at the other end of the scale and every point in between. One example is in the vast water sector. As the excellent whitepaper produced by the University of Zurich and sponsored Center for Sustainable Finance and Private Wealth lays out, there are a range of financial instruments investors can leverage, covering the spectrum of risk.
The second myth is that impact investing produces lower financial returns than other asset classes. The recent paper produced by Impact Capital Partners (“New Frontiers in Value Creation”) demonstrates that an impact investment approach can deliver risk-adjusted returns across a range of asset classes.
It is also worth remembering that pure monetary returns are not the only measure of investment success, and do not take into account intangible values such as societal worth or happiness - an approach followed by Happiness Capital and laid out in the Stanford Social Innovation Review.
A range of time horizons
The third myth to tackle is that impact investing is an ultra-long-term commitment. While there are some impact investments – nature-based solutions, for example, fall into this category – that require longer to show their value, not all do.
Citrine Capital - a Malaysia-based family office committed to the generation of both financial returns and health outcomes through multi-asset multi-horizon investment activities - balances its portfolio by investing in both listed companies and private businesses. This approach not only manages risk but also provides a variety of time horizons for its investment exits.
At the heart of these examples is one underlying characteristic: open-mindedness, and it is critical during times when economies aren’t booming. It means remaining open to ideas and considering them in the round, rather than through a single lens of return, time horizon or risk. It also means staying true to the cause despite the challenges that are inherent in taking an innovative approach.
Perhaps this can best be explained with an example. Mastery Holdings is a women-led Family Office run by the third-generation of the family, which traces its origins to gem mining in Cambodia and gem distribution in Southeast Asia. With a strong desire to reinvest in the region, the Principals, who are sisters, identified education and healthcare as key areas of need in Southeast Asia. In particular, in Vietnam, increased life expectancy combined with a lack of trained technicians has created a backlog of two million cataract operations.
Sophie Khau, Managing Partner of Mastery Holdings, sharing their work at the 2024 SFi Family Impact Summit
Through a healthcare focused fund, an investment in local healthcare company Alina Vision has increased quality of life for low income communities in Vietnam by providing affordable and high quality cataract surgery and eye care. The investment is also expected to return financial benefits given the demand for sight-saving cataract surgeries is expected to rise significantly in Vietnam and across the region, far surpassing the available service supply.
Do good AND well
There is no doubt that these are challenging times, but we need to focus on the bigger picture. The recent UN Sustainable Development Goals report for 2024 is another reminder that there is much to be done if we are to build the flow of money to the enterprises and projects that will make a difference to our world in the decades to come.
Though impact investment has already delivered trillions of much-needed dollars into improving lives and preserving a future for our next generation, it pales in comparison with the scale of the problems we are facing. Much more capital needs to go into impact generation, and investors should recognise there is a wide range of impact investment products, each with their own impact-risk-returns mix. While it will require time and exploration, there are sure to be opportunities matching the returns expectation for any investor committed to impact.
Comments