Australian Impact Investments (Aii), a pioneer in the world of impact investing, recently released their Annual Impact Report, in which they reflected on a challenging year marked by economic uncertainties, geopolitical tensions, and a world still grappling with the ongoing climate crisis.
Aii Associate Director Neeraj Aggarwal told OnImpact that whilst the year had challenges, there were a number of highlights. The first was investment returns. Whether you can generate risk-adjusted returns whilst generating impact, is one of the big questions in the impact investment market. In the report, Aii — for the first time — reported on risk-adjusted returns with three quarters of completed investments exceeding their target return profile.
Neeraj also highlighted the growing interest in catalytic capital investments and questions from clients around how Aii can be more intentional with its impact. Aii has done a lot of work in this space, putting a framework in place around that.
The Aii team provided the following summary of the Impact Report 2023, which can be found here.
Key reflections on FY23 – subdued private market activity
The 2023 financial year posed challenges on multiple fronts — economic, social, and political. Private market activity slowed, with clients committing $37.4 million, a significant drop from the previous year. This downturn mirrored the broader trend in fundraising and investment activity across private markets, influenced by global challenges.
Aii observed four key trends that shaped investment decisions in FY23:
- Climate Emergency: Unprecedented weather events emphasised the urgency of addressing environmental issues. We witnessed a shift towards environmental products, demonstrating a deepening understanding of the interconnectedness of people and planet health.
- Shaken Institutions: Geopolitical events, including the Ukraine-Russia conflict, contributed to energy price hikes and inflation, fostering market uncertainties. Investors, particularly in venture capital and private equity, exhibited a palpable nervousness, reflected in Aii’s private market pipeline.
- Evolving Regulation: The impact investment market faced regulatory challenges, with the EU’s SFDR influencing international markets. ASIC’s actions against misleading claims and the push for standardisation in impact reporting added another layer of complexity.
- Grassroots Energy: The Voice to Parliament Referendum highlighted the desire for investments empowering Indigenous communities. This trend aligns with a broader market shift towards catalytic or concessional capital allocations.
Outlook for 2024
While the private market is expected to remain subdued in 2024, Aii anticipates a heightened commitment to impact investments. As asset owners increasingly seek alignment between financial and impact objectives, the report emphasises the potential for impact investing to shape a more sustainable and inclusive future.
Neeraj Aggarwal, Associate Director at Aii, noted: “Although FY23 was a slow year for private markets – traditional and impact alike – we are encouraged by the growing number of asset owners seeking alignment between financial and impact objectives, and the role that impact investing will play in shaping a more sustainable and inclusive future”.
Codifying the Impact journey
Based on their experience working with dozens of asset owners, Aii has codified the impact investment journey into four steps: Educate, Establish, Implement, and Monitor. This framework guides asset owners in embedding impact into their portfolios, ensuring alignment with values, impact goals, and financial objectives.
Aii Associate Caitlin James said: “We work with asset owners of every shape and size to help embed impact into their portfolios. At the end of the day, we and our clients want to achieve alignment between values, impact goals and financial objectives”.
Evidencing risk-adjusted returns
Aii addressed a common question in impact investing – can risk-adjusted returns be achieved? The report provides a nuanced analysis of sixteen completed private market investments, revealing that 75% exceeded or met comparable benchmarks. This data signals the potential for impact investments to deliver not only positive outcomes for people and the planet but also competitive financial returns.
“We hope that by sharing some early data on returns across asset classes, we can dispel the myth that impact investors have to sacrifice returns to achieve genuine, positive social or environmental impact,” said Neeraj Aggarwal.
Finding authenticity in public markets
The responsible investment industry is growing, but with it comes the challenge of identifying products and fund managers genuinely committed to managing investments aligned with investor values. Using their proprietary Responsible Investment Matrix (RIM) to assess funds, Aii identified funds with strong fund manager intentionality, robust strategies, beneficial holdings, and clear efforts towards additionality.
Deepening impact with catalytic capital
A notable trend in FY2023 was the growing interest in catalytic capital investments. Aii introduced the Catalyse & Contribute rating on the Impact Spectrum, highlighting investments intentionally deployed to drive deeper impact. The spotlight falls on Ngutu College, a case study of catalytic capital in action, showcasing measurable impact on education and financial performance.
“The growing attention in the market to catalytic impact investment opportunities is exciting, as it opens the door for new, innovative investment opportunities that will drive deeper impact for our clients,” noted James.
The Impact of Aii’s approved investments
Despite a lower commitment from clients in FY2023, Aii approved two new private market investments, contributing to energy efficiency and storage, and reconciliation-focused education. The report presents impact metrics for investments classified as ‘Contribute to Solutions’ or ‘Catalyse & Contribute,’ demonstrating a measurable and positive effect on specific social or environmental challenges.
A new leaf
In a symbolic move, Aii unveiled a new logo in FY2023, featuring a leaf with two sides. This design mirrors Aii’s commitment to scrutinise investments beneath the surface, ensuring their health, and reflects the fingerprint of impact embedded in the collective DNA of their team and clients.
“We want our new logo and brand identity to reflect our deep commitment to looking below the surface of every investment, and embedding impact in everything we do,” said Caitlin James.
The full Aii Impact Report 2023 can be accessed via this link.