What is ‘impact investing’?
It is defined by the Global Impact Investing Network as ‘investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return’.
Traditional investments are solely for-profit. Investors are driven by the incentive of short-term financial gains and disregard the lack of impacts or negatives of the investments. For example, an investment in non-renewable sources of energy, like oil, comes under this category.
On the other hand, we have philanthropic donations that focus on the benefit of society, without expectation any returns. This could be in the form of a donation by a high net worth individual such as Bill Gates, in the form of medical equipment to a Less Economically Developed Country (LEDC).
Impact investments are an amalgamation of philanthropy and traditional investing, and works to combine the best of both worlds.
Why Is Impact Investing So Important?
The Paris Climate Agreement and the 2030 agenda represent the urgent need for change, in order to ensure a sustainable world for future generations.
To deliver these as well as the Sustainable Development Goals (SDG), developing countries need around USD 4 trillion a year.
Private-sector financing of the SDGs is one of the standout benefits of impact investing: it allows the billions of dollars of ‘private equity capital’ to be put into investments that can fund progress towards the SDGs whilst generating steady returns.
Trends In The Industry
GIIN’s annual impact survey reported that the global ‘assets under management’ of the industry increased from USD 60 billion in 2015 to USD 502 billion in 2019 (beginning), with about 50 percent of this increase coming in 2018-2019.
This growth can be attributed to the new generation of adults: Millennials, who want their investments to align with their moral views. According to SRI reports, 95 percent of millennials are interested in impact investing, and that by 2025, millennials are expected to make up about 75 percent of the American workforce.
Indicators Of Financial Prowess
A detailed investigation of over 2000 studies by the German investment fund DWS and the University of Hamburg, discovered that 63 percent showed a fairly strong correlation between ESG performance and positive returns, whereas only 10 percent showed a negative relationship. Yes, this is generalised to ESG performances, but they serve as a metric for the next step – impact investing.
A promising study conducted by Bain and Company focuses solely on private equity and its relation to ‘impact’.
They analysed a sample of around 450 PE-led exits carried out between 2014 and 2019, concentrated in the Asia-Pacific region, and isolated that involved impact funds or those that had a focus on high-scoring ESG sectors such as clean technology, ecology, renewables, education, waste or water. A key finding was that the median multiple on invested capital was 3.4 for investments with social and environmental impact, whereas that for other deals was significantly lower at 2.5. They also observed lower variability in returns for these deals. This all suggests that impact investments may indeed be suited for a market that heavily prioritises financial profits.
Private Equity Focus
Within the last few years or so, there has been observable increase in the involvement of private equity firms with impact investments.
Take TPG, an American investment group or private equity firm with USD 79 billion of AUM, which has started the world’s largest impact fund. Its Rise Fund raised USD 2 billion, and The Rise Fund II, inaugurated after the success of its predecessor, is aiming to raise USD 3.5 billion.
Bain has raised a first double impact fund with USD 390 million in 2017 and is raising a second Double Impact fund with a target of USD 600 million.
BlackRock includes over USD 40 billion in clean energy investments for clients who wish to access the green and energy transition sectors. A lot of major finance players like KKR, Morgan Stanley, Goldman Sachs, etc, have taken on impact investing projects, albeit small, thus showing a gradual shift in their portfolio contents.
Long Road Ahead
There is a long journey ahead for impact investing, yet industry shifts suggest that it does indeed have the potential to serve a vessel for traditional investors, specifically in private equity firms. It is the gradual addition to the portfolio of the top players (like Bain and TPG) that is an early sign of the shifting mechanisms of the industry.
These are the early days of a process that will take years to complete, perhaps even decades.
Rome was not built in a day, and neither will a sustainable impact economy be furnished in the short-term; then again, all good things take their own time.
(Siddharth is a passionate Economics student with research experience in finance and government polices. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
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