Impact investing was a term first coined around a decade ago, and this week there was powerful evidence of how it has since come to grip the attention of investors across the spectrum from wealthy individuals to the largest institutions. Over 800 market participants from 45 countries crammed the lofty 19th century ballrooms of the Grand Krasnapolsky Hotel in Amsterdam for the 2016 Investor Forum of the Global Impact Investing Network.
GIIN CEO Amit Bhouri reckons this is about double the attendance at the last Forum in 2013, but also readily acknowledges that despite the progress in stimulating interest, there is still a long way to go. “We have gained momentum and come a long way in the last 10 years,” he said, “but linear growth from here on is not enough, we need to steepen the curve dramatically. We need more urgency.”
Note: The Global Impact Investing Network brings together all types of participant in the sector, from investors to service providers such as transaction advisers to market observers like think tanks and academics. The GIIN definition of impact investing can be found below this article.
Technical terms are marked with a * and explained in the Glossary
As well as the buzz in the room, the Forum saw an important announcement from the Dutch finance sector, on “Building Highways to SDG Investing” which we cover as our Featured Resource this week. As readers will know, a constant theme from our interviews with practitioners is the need for joined up thinking between mainstream finance, regulation and policy. The Dutch initiative represents precisely that approach, and could become a model for mobilising substantial flows in support of sustainable development, so we urge readers to look at the report and think about how it might work in their own context. We also append below this article some answers to questions we put to the Dutch Minister for Foreign Trade and Development Cooperation, Lilianne Ploumen.
So … This was a gathering of investors that are the best informed on – and most empathetic to – social and environmental change in the world. Quite a number are specifically aligning their investment allocations with one or more of the SDGs. But here’s the thing: in the scores of conversations I had during the Forum, not one of these investors immediately recognised the letters “NDC”, and it was clear that very few are aware of the financing needs (and opportunities) created by these country commitments.
That this set of investors – absolutely through no fault of their own – is so woefully under-informed sends, in our view, the loudest of wake-up calls to the UNFCCC and others with a responsibility to deliver the NDCs. If you can’t interest and engage this audience then Paris is indeed doomed.
We say this because of the composition of the financing needs arising from the Paris agreement, which will become clearer as countries start to develop their NDC investment plans with support from agencies like the IDB, as we reported in November.
Broadly speaking, we believe that three categories of need will emerge.
The first is financing for infrastructure and clean energy, where there are reasonably well understood technologies and financing techniques that should be transferable from the developed markets where they have been proven to the more advanced developing markets. Here the key public support will probably revolve around policy and regulatory changes and ensuring investments are sufficiently de-risked, including politically and currency-wise. One way of financing such projects is green bonds, and we are already seeing a mushrooming of these, with China leading the way and 2016 issuance already far outstripping last year’s. Market infrastructure such as green bond standards and verification mechanisms are already emerging and the prospects for this type of finance look good.
A second category of needs, at the opposite end of the spectrum in terms of how they are financed, are projects which have little or no commercial potential and will have to be entirely or almost entirely financed from public sources. Adaptation actions such as capacity building in civil society fall into this category, and the finance for these will need to come from sources such as foreign aid, NGOs, philanthropy and official funds such as the Adaptation Fund and (to some degree) the GCF.
Between these ends of the spectrum there is a category of projects which are critical to full (and equitable) implementation of Paris, but which are complex in their nature for a range of reasons. These include where the investments need to be made (so-called ‘frontier markets’) to their nascent business models (‘base of pyramid’ products and services such as inclusive finance, health and education, all of which are vital to adaptation) to their unproven investment risk/return profiles and lack of liquidity*.
It is this ‘hybrid’ investment category where impact investing has developed a skillset over the past two decades or so (coining the term came some time after the activity began). As Tim Macready, Chief Investment Officer of the pioneering Australian pension fund Christian Super* put it to me: “The skillset we in impact investing bring is the ability to connect commercial finance with government with NGO with philanthropic capital. What we’ve been doing in this space is making deals work by bringing all those people together. Sometimes you need them working together because the deal as a whole is not commercial, so you need a sub-commercial piece as well as the commercial one. Sometimes the deal stacks up commercially but you’re worried about policy change by the government in a frontier market, so you need an IFC or whoever to provide that political cover.”
“It’s clear when you look at the SDGs,” Macready continues, “that these are not problems that can be solved by one sector of society alone. So you need public sector working together with private sector working together with NGOs, and that’s what impact investing has done well for a decade or more.”
GIIN CEO Amit Bhouri notes that impact measurement and reporting is another key impact investing skillset that could have wide application in the climate finance space. The GIIN houses the IRIS catalogue of ‘generally accepted’ impact metrics, which it makes available for free to anyone wishing to understand the social and environmental impacts of their investments or activities. There are currently 554 metrics, but as Kelly McCarthy, IRIS team lead explains, users ‘pick and mix’ these depending on the outcomes they are seeking to measure. Moreover, some 45 ‘standards’ have been developed that provide basic templates for a range of activities. Ms McCarthy notes that some of these standards are already being used in climate-related areas. For example the Global Off-Grid Lighting Association (GOGLA) has a standard for measuring the impacts of the availability of solar lamps and similar products for populations that may never be reached by grid energy. The GIIN is also already working with green bond issuers, especially on issues such as additionality.
Noting that the IRIS metrics cover both direct and indirect effects, and are available for social impacts such as education and health as well as environmental ones, Ms McCarthy agrees that impact measurement is harder to achieve the further an investor is away from actual projects on the ground. For example, a major institutional investor – with small holdings in very large global companies – will be hard pressed to give a precise assessment of how their investments are affecting particular communities, though their investment (or, indeed divestment) decisions can have a signalling effect.
This issue of ‘macro’ impact assessment is also one that is focussing the mind of Michael Jantzi, CEO of one of the largest commercial green finance analysts, Sustainalytics. He says that “larger pools of capital, pension funds and so on, are starting to ask questions and having an interest, broadly speaking, in the impact of their portfolios. So our focus is on how we assess impact in the public markets, where a small change in behaviour by a massive company can have big impacts.
And these companies, Jantzi says, are already starting to ask new questions, at the systemic level. “The CIOs want to know: I can have the greatest investment team, I can make all the right decisions, I can set all the right targets. But is my behaviour really contributing to getting to below the 2°C, at a systemic level. Are we collectively on track to achieve that through these behaviour changes?” Jantzi says that he is working with a UK-based foundation on the creation of tools to make these calculations. Asked about the timeframe for this, he says that by early 2017 the pathway will be much clearer and the aim is to have useable methodologies “within three years”.
As well as the Dutch finance industry’s launch of its report on “Building Highways to SDG Investing“, two further reports were launched at the GIIN Forum this week.
The first of these was an analysis by the TONIIC Network of the performance of more than 50 portfolios held by high net worth individuals (HNWIs) and family offices that have committed to investing only in impact assets. Among the findings of the report were that impact investors could find such opportunities in all the asset classes they would normally invest in, from cash to fixed income to equities and real estate.
As a result, as TONIIC CEO Adam Bendell says, “100% impact portfolios actually look pretty similar to mainstream asset portfolios in terms of broad allocations, with the same benefits of diversification if investors need this. What’s more,” Bendell says, “the financial expectations of these portfolios is not out of kilter with mainstream portfolios, and the financial performance is good too.” 83% of TONIIC respondents said they expected market-rate returns on their investments and (coincidentally) 83% of these investors said their expectations were being met.
The second report was the GIIN’s own analysis of impact investment trends, based on data collected from 62 investors who have reported to the GIIN for all of the past three years. Here the headline was an 18% year-on-year growth in impact investing since 2013. Over 60% of investments were in emerging markets, with the top three sectors being microfinance, other financial services and clean energy. Tellingly, however, 70% of investments were in private equity and debt, signalling the failure (as yet) of the sector to break out into public markets.
GIIN CEO Bhouri’s closing call at the Forum says it all – there needs to be far greater urgency to create a far steeper growth curve.
And the climate world needs to engage far better with the impact world. “NDCs” should not be a mystery acronym.
GIIN Definition of Impact Investing
Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals.
The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services including housing, healthcare, and education.