The team at Australian Impact Investments (Aii) have a unique opportunity to analyse and understand the impact practices of Australia’s leading impact investors.
As a specialist asset consulting and advisory firm they spend a lot of time talking with the asset owners themselves, about how they want their capital managed, and the impact they hope to have.
All of this means the annual release of the Aii Impact Report offers a rare opportunity to look under the hood of leading managers’ impact credentials, while also taking the temperature of those choosing to allocate to impact. You can read it here.
This year, the retrospective look at the 2022 financial year focuses on the progress being made in building a ‘total impact strategy’. It’s a model that seeks to build diversified, risk-adjusted portfolios that are 100% focussed on impact.
OnImpact spoke with managing director, Kylie Charlton, and associate, Caitlin James, who has driven the compilation of Aii’s past five impact reports, about the report and the evolution of the sector that has enabled the exciting prospect of building diversified portfolios that gather opportunities from across the impact spectrum.
Building An Impact Portfolio; a ‘Total Impact Strategy’
There has always been interest in building a portfolio made up of impact investments from a range of asset classes, but in the past there’s been a lack of product available to achieve it.
Today the market has matured, and there’s now a suite of opportunities that can be combined to create a risk adjusted, diversified portfolio.
“It’s definitely possible to build a portfolio that is diversified across asset classes, and managed for impact, with the adoption of a total impact strategy.” says Kylie Charlton.
“A total impact strategy recognises that every investment has impact – positive, negative or neutral, views impact as a lens across classes and utilises a range of impact strategies across asset classes. These impact strategies include investment screening and shareholder advocacy through to impact investments and catalytic impact capital, with the level of impact varying dependent on the strategy adopted. The ultimate goal being to optimise the impact of the portfolio while simultaneously meeting financial objectives.”
It’s a reminder that impact investing is a lens to be applied to an investment, rather than a standalone asset class. All investments have impact, the key is finding tools to measure it and building systems to manage it.
“Impact is a lens to apply across a portfolio, and shouldn’t be viewed as an asset class, that would be too restrictive. If an asset class, the problem is that it is then relegated to a small allocation of a portfolio, rather than ensuring every investment decision gives consideration to impact, just as it would risk and return.” Kylie says.
“For us, this is absolutely critical to mobilise the volume of capital required to address social and environmental challenges, but also, to start to encourage all investment decision-making to give consideration to the impact it has on people and planet.”
The Aii impact report offers a glimpse into the firm’s proprietary investment analysis. It offers an insight into how they assess a manager’s impact credentials, and where they draw the line at branding a product as ‘impact’.
The core framework they use is the Impact Management Project’s ABC model, which defines the spectrum of impact from A) Avoid Harm, B) Benefit stakeholders, C) Contribute to solutions.
Category C is the gold standard for impact, the following are examples from the report of managers that Aii classify as category C:
Giant Leap Fund II
- a venture capital fund investing in impact start-ups
Murray Darling Basin Balanced Water Fund
- a fund investing in water rights to balance farming and environmental needs
Palisade Impact Fund
- A fund investing in next generation infrastructure promoting emerging transition, resource efficiency and digital inclusion
For Purpose Social Impact Fund
- investing in social infrastructure and services
Australian Unity Specialist Disability Accommodation Fund
- a fund investing in disability housing
The team has already put the strategy into practice, with an engaged client-base eager to push their capital further.
“In fact, we have just populated a $20 million diversified portfolio that applies an impact lens across asset classes resulting in each and every investment in the portfolio giving regard to risk, return and impact and being selected to meet the clients financial and impact objectives.”
What About Public Equities?
A diversified portfolio, built with strategic asset allocation, will need to include public equities, but long has the debate raged about whether funds, containing large companies, listed on a share market, can be managed towards impact.
Kylie and Caitlin argue that they’ve not yet found any listed funds that reach the impact gold-standard.
“We have not to date classified any listed equity fund as ‘Contribute to Solutions’ as we have not found them to meet our threshold requirements on additionality under our Responsible Investment Matrix (RIM).” Caitlin says.
“This is a direct result of listed equity funds being predominantly secondary market investors and not a primary source of capital for companies to draw on to fund solutions addressing social or environmental challenges. The exception to this is when a listed equity fund participates in a new capital raise of a company, say via a rights issue or IPO. It is also a function that we consider impact measurement essential to the assignment of a classification of ‘Contribute to Solutions’.”
A fund is diversified by asset class, but it should also be diversified by impact credentials. And this is how Aii build their diversified portfolios. They recognise there are pathways for investors to exert positive influence on public companies, and to measure what outcomes they can.
“A portfolio can meet its allocation to Fixed Income and Listed Equities via a combination of funds that employ responsible investment practices such as investment screening, thematic investing and shareholder advocacy strategies to ‘Benefit People and Planet’ or ‘Avoid Harm’.” Kylie says.
Some examples in the report include:
- Infradebt Ethical Investment Fund Series
- Artesian Green & Sustainable Bond Fund
- Nanuk’s New World Fund.
Impact Is a High Bar
To have a product labeled as an impact investment, a manager needs to be making a unique ‘contribution’ to the environment and the people within it. It’s not enough to simply maintain the status quo, or to skirt within legal rules.
Groups like Aii look for more, they look for ‘additionality’, they want to find evidence that the impact created would not have happened, were it not for that investment.
It’s a high bar, but it works to ensure the label, and the hard work that it describes, is recognised and rewarded.
There’s no shortage of deal flow being presented to Kylie and her team, but only a small proportion make the cut.
“On average we make client recommendations on 8-10% of the opportunities that come across our desk annually. We filter opportunities against risk, return and impact across a three-stage due diligence process. Our goal is to identify those opportunities that have, and can execute, against a sound impact thesis while delivering market competitive financial returns.” Kylie says.
“Opportunities fall out of our pipeline across the various stages with the typical reasons being insufficient impact thesis, poor impact measurement and management practices, incongruence on impact intentionality, out-of-market terms and conditions, limited team track-record, and limited investible pipeline.”
They’re a specialist impact asset consultant, but of course, their analysis must look into the financials and ensure the deal stacks up across the three dimensions of risk, return and impact.
“Recognising that we are curating opportunities for our diverse client base we are also simultaneously considering their appetite for different impact themes, asset classes, investment terms and geographies, so we direct our resources to opportunities that meet our clients’ demand.”
Growth and The Challenge of Hiring Impact Talent
When OnImpact spoke with Kylie towards the end of 2021, we discussed the tight jobs market that existed at the time. Kylie explained how they go about attracting the best talent, but at the start of 2023 that landscape is very different.
Kylie explains that today interest is growing in the sector, while the best roles remain scarce.
“We’ve just commenced recruitment for a Senior Associate (ESG) role and we’re seeing strong early signs of interest in the role. This interest is reflective of the increasing awareness and ongoing growth of impact investing, as well as that of the broader responsible investing sector.” Kylie says.
“Talent looking for a foothold into the sector also recognises that while opportunities are more numerous today than they have been in the past, they still do not come around every day. Having said that, and despite expectations that the labour market will slow over 2023 in line with predictions of slowing economic activity, high-quality applicants with demonstrable soft and hard skills continue to be in high demand and it is critical that we compete effectively for this talent.”