Research conducted in Canada and around the world shows continued growth for investments that take into account environmental, social and governance (ESG) factors. That growth is reflected in many ways, from the increasing number of mutual funds that incorporate a responsible investing (RI) mandate and the increase in the number of certified Responsible Investment Advisors in Canada, to the growth of areas within RI that were once considered niche categories and asset classes.
One such specialized area is in impact investing, which the Global Impact Investing Network defines as "investments made in companies, organizations, and funds with the intention to generate a measurable, beneficial social and environmental impact along with a financial return."
The total value of impact investments in Canada has risen significantly during the past few years. In 2012, there was approximately $3.8 billion worth of impact investments in Canada, based on a report by Purpose Capital and MaRS Discovery District. However, the total value of impact investments has risen subsequently by 145% to $9.2 billion as of the end of 2015, according to the Responsible Investment Association's (RIA) 2016 Canadian Impact Investment Trends Report, which was funded by Royal Bank of Canada (RBC) and released in mid-October.
"This research reinforces what we're seeing at RBC," says Andrea March, manager of research and partnerships, social impact, with RBC. "Investor interest in responsible and impact investing is growing, with more and more investors asking how their wealth can be used to create positive social and environmental impact."
The report identifies three main reasons for the significant growth of impact investing in Canada:
- Institutional and high net-worth investors have increased their interest and appetite for making investments that aim to produce tangible, measurable environmental or social impact.
- A growing proportion of average investors who are keen on making responsible investment decisions have also increased their interest in putting their money toward impact investments.
- The broad growth in demand for impact investments has led to increased availability of impact investment products in Canada.
Only a few years ago, many would have perceived impact investing as a strategy that sacrificed financial returns for an investment's environmental or social goals. But a survey of investors, asset managers, financial services firms and investment advisors conducted for the RIA/RBC report found that almost two-thirds of survey participants aim for competitive returns at or above the market rate. Furthermore, 96% of those survey participants said that their investment's performance either met or exceeded their expectations.
Recognition of these positive returns and the corresponding increase in demand has contributed to the expansion of available impact investing products for environmentally and socially conscious investors in Canada. In 2013, the vast majority of impact investments were made in private markets with capital directed toward traditionally underserved individuals or communities through private equity or venture capital investments, or private debt financing made available to businesses with a clear environmental or social purpose.
OceanRock Investments Inc.'s Meritas SRI Funds have allocated a portion of their portfolios to impact investments for more than 15 years. Beginning with microlending in developing countries, these mutual funds have expanded to invest in a broader range of impact projects, such as New Market Funds' NMF Rental Housing Fund.
The impact investing market is broadening even further, with at least 20% of Canadian impact investments in public equities, according to the latest research in the RIA/RBC report. In fact, several mutual fund and investment companies now offer this option. For example, AGF Investments Inc.'s AGF Global Sustainable Growth Equity Fund, NEI Investments' NEI's Environmental Leaders Fund and Genus Capital Management Inc.'s Fossil Free Impact Equity Fund are just a few examples of investments in high impact public companies now available to responsible investors.
The RIA/RBC report also found that although a significant proportion of investments were made in clean technology, energy and social enterprises, impact investments were made in more than a dozen different asset sectors, from real estate and agriculture to health care, microfinance, financial services and information and communication technologies.
Overall, impact investments still make up a relatively small proportion of responsible investment products available to investors. However, the asset category presents a tangible opportunity for investors, particularly millennials, who want their money not only to produce meaningful long-term returns, but contribute to their local community and sustainable development generally.
Investment professionals who deepen their knowledge of impact investing are among the best prepared to tap this growing class of informed and values-driven investors intent on having their money make a difference.