By: Ameeta Vijay
From silent votes at annual general meetings to booming public calls for action, investors are demanding positive, transformative impact in areas from climate action to equity for women and racialized communities. And as firms strive to meet their impact commitments, impact investing has emerged as a force in both public and private markets, across all asset classes and sectors. As a private market leader, it is important to understand this approach to investing, as well as key trends in the field.
What is impact investing?
Impact investing represents any investments “made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.” In the private markets, this may range from a bond offering in a wind farm project in Alberta to a private equity fund focused on sustainable food enterprises in Ontario. This approach sits at the high impact end of a spectrum of investing from traditional to responsible to sustainable to impact investing.
What are key trends in impact investing?
1. The impact investing market is experiencing exponential growth
According to the Responsible Investment Association, the Canadian impact investing market represents $20 billion in assets, having grown tenfold in the past decade. The global impact investing industry has a market size of $715B USD and ~18% five year CAGR. The impact investing industry is poised for continued growth and ripe for entry from mainstream investors. Further, although private debt has historically comprised the majority of impact investments, public equities have seen the highest growth; consequently, barriers to entry have lowered. In particular, since the energy, financial services, and microfinance sectors have the greatest AUM, Canadians benefit from a myriad of investment opportunities. As the industry matures, firms such as SVX help to demystify impact investing by connecting ventures, funds, and investors looking to catalyze investment capital for impact.
2. The Sustainable Development Goals (SDGs) are emerging as a leading impact lens for impact investing.
The SDGs are a powerful rallying tool as a “blueprint to achieve a better and more sustainable future for all.” Beyond their utility for public policy and community action, it is clear that the potential for impact investing to leverage this framework and rally behind the goals is starting to be realized.
According to the Global Impact Investing Network (GIIN), the United Nation’s Sustainable Development Goals (“SDGs”) have been extensively used by impact investors: more than 50% use the SDGs to set impact objectives, more than 33% use the SDGs to measure impact performance, and just less than 50% use the SDGs to report on this performance. Since 2015, the 17 SDGs have provided a “shared blueprint for peace and prosperity for people and the planet, now and into the future,” and are expected to increase in relevance to retail and institutional investors.
3. Investors, funds and companies are seeking impact integration across their businesses and portfolios
To continue to attract investments in the long-term, funds must consider how to optimally integrate ethical considerations into portfolios. Moreover, as strategies range in degree of social alignment (i.e., conservative integration may include divestment from sin stocks, while more aggressive integration may include portfolio SDG alignment), companies should determine their impact appetite – the question surrounding impact integration is not “Should we invest in impact,” but rather “To what degree will we?”
With growing investor consciousness on sustainability, companies will soon find that ESG measurement and reporting will become standardized. To win market share and meet these demands, these private sector agents will need to deliver competitive products and services that integrate environmental and social considerations directly into supply chain and business operations.
4. Governments are getting serious about impact investing (and generally, about sustainable finance).
In the most recent federal budget, the Liberals announced that they will be accelerating the deployment of the Social Finance Fund ($755MM CAD) with up to $220MM deployed over the next two years. This will connect charitable, non-profit, and social purpose organizations with non-government investors to provide financing needed to tackle persistent and complex social challenges. To further ensure successful participation in the social finance market, the Government also announced that it will be renewing the Investment Readiness Program ($50MM over two years). This renewal will improve social purpose organizations’ ability to scale operations and transform more lives by tackling social and environmental challenges.
“There is a persistent myth that investing for impact generates poor returns. Market data doesn’t support that myth.”
5. Impact investing is demonstrating positive financial performance in comparison to market benchmarks.
There is a persistent myth that investing for impact generates poor returns. Market data doesn’t support that myth. In fact, during the pandemic, there were many impact investors that outperformed the market. The Inspirit Foundation, who made a commitment to a 100% impact portfolio in 2016, saw the financial performance of their portfolio exceed market benchmarks in 2020. According to the 2020 annual investor survey by the Global Impact Investment Network (GIIN), 90 per cent of investors reported that their investments were in line or outperforming their financial expectations.
6. Key sectors of focus are emerging as priorities for impact investors (and mainstream investors), from diversity, equity and inclusion to climate action.
Impact investing is a fairly broad, all encompassing term, but it is clear that there are areas of greater interest and focus. Diversity, equity and inclusion has emerged as a key feature and focus of impact investing. This includes gender lens investing in womenled and serving enterprises through firms like Marigold Capital to organizations like the Equality Fund.
Moreover, climate action has emerged as a critical trend in impact investing, from individual investors investing in green bonds to major pension funds and other asset owners are actively realigning their investment strategies to incorporate climate change risks and opportunities. In November 2020, as a reflection of both of these trends, the CEOs of Canada’s eight leading pension plan investment managers, representing approximately $1.6 trillion in assets under management, joined forces to publicly commit to action on climate, inequality, and inclusive growth.
Over the last decade, society has fundamentally changed its problem-solving approach; the private sector has grown in importance as charities seek additional funding during the pandemic and businesses realize that profit-maximization must coincide with societal returns to ensure sustainable businesses practices. The future is full of opportunity for capital-raising companies that can satiate high net worth investors and foundations increasingly large impact-appetites.
Impact investing is shifting from the margins to the mainstream with ESG metrics and SDG alignment only marking the beginning.
Ameeta Vijay, CPA, CA (She/Her)
SVX Chief Compliance Officer & Chief Financial Officer
CEO of SVX
Source: The Private Investor Magazine