Mention ‘impact investment’ in policy and finance circles and you’ll likely see some raised eyebrows and the occasional shoulder shrug.
On the one hand, conservative commentators grumble about ‘woke capitalism’ distracting from the core business of shareholder returns. Florida has gone as far as to prohibit the state pension fund from any investments that factor in environmental, social and governance (ESG) risks. The re-election of Donald Trump will only encourage such approaches.
On the other hand, climate advocates and non-profits lament greenwashing by companies that use the sheen of impact to distract from existing bad behaviour.
In the middle, fund managers describe ‘impact fatigue’ from countless impact investment proposals that either fail to stack up on their promised impact or are just too small to be viable.
All of these debates cloud some basic facts. Impact investment is actually a simple proposition. The Global Impact Investing Network (GIIN) defines it as ‘investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return’.
And it is growing rapidly around the world. The GIIN estimates the size of the global impact investment market at US$1.57 trillion in 2024, with annual growth of 14% over the last five years.
Why does impact investment matter? The world faces a raft of critical challenges, from pandemic preparedness to refugee flows, from homelessness to ecosystem collapse. Each country is dealing with different combinations of these but none are completely unaffected by them. At a global level, the efforts to combat these challenges have been distilled into the UN Sustainable Development Goals – 17 broad areas for action underpinned by a set of specific targets.
The problem is that it will take vast amounts of investment to achieve the SDGs and governments alone can’t foot the bill. It’s currently estimated that the funding gap required is around US$4 trillion. Private capital is essential, which is where impact investing comes in. While the gap is staggeringly large, it still only represents less than 1% of global finance.
So, while impact investment has been growing and the share of finance required to meet the SDGs goals is small, there are still a host of barriers to unlocking greater impact investment here in Australia. In order to do this, it’s worth separating the facts from the myths.
Perhaps the biggest myth is that investors must sacrifice returns in order to achieve impact. Impact investing is not philanthropic granting, which has no expectation of returns. Impact investors expect some returns and the ability to recycle their capital. These returns may range, but there is space for institutional investors who by law require risk-adjusted market returns and private impact-first investors who may be willing to accept sub-market returns. Both groups are legitimate impact investors.
A second misconception is that impact investment is a distinct asset class – it is not. Impact can cover bonds, equities and real assets, public and private. It is an investment approach that can be applied across assets classes. As with asset classes, it’s still possible to have an ‘allocation’ to impact: this simply means that a certain share of a portfolio is invested through an impact lens.
A third myth is that impact covers only a narrow band of activity largely undertaken by non-profits, and that anything that is not purely undertaken for the purpose of impact is somehow illegitimate, or impure. All organisations generate positive and negative impacts, and any investment that deliberately increases positive impacts or reduces negative ones is impactful. Woolworths has issued green bonds to decarbonise its supply chain; this is a legitimate impact investment even if it’s simultaneously possible to object to Woolworths’s pricing behaviour.
Equally, if an investment generates profit alongside positive impact, this is still an impact investment. This is a particularly vexed question among governments and some philanthropists who don’t wish to subsidise private profit-making. But if concessional or ‘catalytic’ contributions crowd in additional private capital, or enable impactful activity that wouldn’t otherwise occur, it’s still a valuable impact investment.
These are the facts and myths the ‘impact curious’ investor must wrestle with. And we must distinguish them if we are to channel the capital necessary to overcome the world’s most pressing problems, while meeting the everyday requirements of returns, liquidity and investment committee mandate. The alternative is to succumb to impact fatigue – none of us can afford that.
This is the first in an ongoing series of articles curated by Impact Investing Australia designed to explore the basics of impact investing.
