With impact investing, as opposed to general responsible investing (RI), clients have a specific goal. These investors want to see explicit proof of positive social or environmental impact in addition to financial returns.
Organizations such as the Toronto-based Responsible Investment Association (RIA) and New York-based Global Impact Investing Network (GIIN) use terms such as “intentionality,” “evidence” and “measurable” to define impact investing. The investment vehicles used often include venture funds, bonds and private securities, which can in turn be invested in special projects, such as building affordable rental housing or places of worship or producing solar panels.
However, one issue is “the definition of ‘impact investing’ is very broad,” says Fred Pinto, senior vice president and head of asset management at Toronto-based NEI Investments, a division of Aviso Wealth Inc. “It includes, quite frankly, a number of different investment vehicles on the private and public side. It also includes community development investing.”
Mike Thiessen, partner and director, sustainable investments, at Vancouver-based Genus Capital, agrees that more clarification is needed on the meaning of impact investing. He breaks down the basic categories of RI this way: basic responsible investing means considering ESG factors; sustainable investing means actively integrating ESG analysis into your models and screens; and impact investing means engaging with and investing in companies that are making measurable positive impacts.
As an example of the last approach, Thiessen says, his firm offers a fossil-free impact fund that invests based on metrics such as the amount of revenue a company earns through renewable energy.
The impact industry represents a small fraction of RI overall.
The RIA’s 2018 Canadian RI Trends Report found that only $14.75 billion in assets under management (AUM) were dedicated to impact strategies as of December 2017, compared with $2 trillion for RI assets generally.
The RIA’s Feb. 2019 follow-up report on impact investing trends found that the impact space is growing, with impact funds and fund managers increasingly gaining share over players such as credit unions; out of the nearly $15 billion in impact AUM, impact funds and fund managers held close to $8 billion, or 54% of reported assets. A 2019 GIIN report cites “significant momentum,” pegging the size of the international impact market at more than US$500 billion in 2018, with much of that activity in the U.S. and Canada.
“There is a growing base of private impact investment fund options for accredited and institutional investors, [but] there are fewer options for retail investors,” the RIA report states, indicating a need to “democratize” the impact space.
Thiessen says that several ETFs focussed on the United Nations’ 17 sustainable development goals (SDGs) have launched, and he expects more investment opportunities for retail clients who want to make an impact.
“We’re also seeing [that] more clients want to get into private investments,” Thiessen says. “Mainly, [this is] high net-worth individuals and families. We’re seeing a lot of interest from institutions, but none of them have taken the leap yet.”
Given the disparity in access and difference in available products, it’s not surprising that impact investors have different goals and concerns from those of general RI investors. The RIA has found that the top ESG considerations of traditional RI investors are climate change and water/waste management, while portfolio performance concerns and lack of qualified advice topped the list of perceived risks. In comparison, impact investors are most passionate about local community development and sustainable development, while top perceived risks include loan default, investment loss, liquidity risk and exit risk.
Indeed, investment liquidity is a main barrier, says Sandra Carlisle, head of responsible investment at London, U.K.-based HSBC Global Asset Management. “Impact investing is still largely in private markets,” she says. “I think what will be interesting over the next couple of years is to see where we see impact being applied.”
Carlisle points to the green bond market and “more liquid asset classes like fixed-income” as areas of opportunity, although she concedes that the former is “growing slowly and still represents a tiny percentage of total bond issuance.”
For now, advisors can educate clients while watching impact trends. Pinto says NEI wants to be a “big player” when it comes to investing in water infrastructure, energy efficiency, waste recovery and sustainable food production. He says investors want to see changes in those areas and more than generic risk/return measurements.
Meanwhile, Thiessen expects “an acceleration of impact investing, especially as we see performance numbers. It will continue to encourage new investors. [Also], we have a lot of clients who put 5% or 10% into impact, but I think we’ll see that increase.”
For her part, Carlisle wants to see innovative products and strategies that help investors achieve “sustainable impact goals in a scalable, liquid way” over the next two years:
“The SDG agenda is being seen as a framework that can be adapted in different ways to [address] long-term risk and investment questions.”