Expert guide: Everything you need to know about ‘impact investing’
Link copied to
Investing in an “impact fund” means sometimes chasing social or environmental good in lieu of bigger bottom line. Chief Investment Manager at Eight Investment Partners Kerry Series, shares why it’s worth the wait.
Impact funds aims to generate social or environmental good — in addition to financial gain — by investing in stocks such as clean technology. How do you choose stocks that qualify?
Our impact fund was seeded in February last year and the first thing we had to do was to set those parameters.
What I came up with was 10 impact focus areas – from renewable energy to education or healthcare – and a final list of which three were environmental and seven societal.
The list includes renewable energy, energy storage and efficiency, land and resource management, wellbeing (medical devices, health care services and pharmaceuticals), care and support, education, affordable housing and health living.
From an impact investing point of view there is wide debate about intentionality. But I think when you drill down on it, many management teams are mission-focused even if they don’t voice it when talking to investors.
It was about assessing what challenges the world is facing and therefore where impact capital needs to go.
How common are impact investments on the ASX?
Our broad impact investing universe represents less than 10 per cent of total listed companies – both by number and market cap.
We have been quite strict on our definition. Their core business has to be positively impactful and that is why there are so few.
How does your impact fund differ to conventional funds chasing bottom line growth?
We rank the environmental or social impact as being at least as important as the financial return.
In that way, we can advocate for sacrificing margins in the short-to-medium term in an attempt to scale their impact.
This is perhaps what sets us most apart from ordinary funds. We want to see the uptake of the impact increase rapidly and are willing to accept a lower profit margin to make that happen.
From an impact point of view – you want to see more people using the company’s products and services and we think in the long term that will provide a greater return.
What impact investments have performed best for you?
Two of the best so far have been renewable energy and education in terms of investment return. But we also seek to measure the impact return.
Measuring impact is not easy. Looking at renewables, measurement of decreased CO2 emissions is a useful scale. But the same types of metrics are not available for societal impact.
For instance, we know we need more investment in aged care. But what data can they give us to demonstrate that they are a quality operator and how can we measure that over time?
How can retail investors gain exposure to impact investments?
We are still in the early days for impact investing.
I am not sure it is advisable for retail investors to go out on their own, especially with an impact lens – simply because it requires talking to company executives to ensure they are delivering on impact.
The way we have structured the fund is for retail investors to get in with daily applications and redemptions – because most structured impact investments are for wholesale investors and require money to be locked up for longer.
In terms of interest, that is increasing and there is particular demand from younger investors for their investments to be aligned with their values.
Will impact investing overtake the social good of philanthropy?
Historically, money has been made and then donated back via philanthropy. But this model seeks to provide values-based investment from the get-go.
The way I like to describe it is doing capitalism better – capitalism 2.0.
There has been a lot of great progress as a result of the capitalist system but it has come at the detriment to factors such as environmental damage or unhealthy lifestyles in society.
If we can nudge the principles behind it to focus companies on addressing those problems – then there is great potential in for-profit businesses solving them.
If you look at the sectors attractive to impact investing, they are strong growth sectors of the economy – and I think that makes them good areas for investors to look at.
Environmental issues and societal trends like increased demand for aged care and healthcare are big opportunities and I think we will only see more and more companies focusing on solving those issues. These will classify as a potential impact investments.
Kerry Series is the Chief Investment Officer of Eight Investment Partners (8IP) and is responsible for its investment management activity.
Kerry has advised or invested in equities since 1992. His investment experience includes a number of senior roles. In 1999 he co-founded Perennial Investment Partners, which achieved strong investment performance and reached $20 billion in assets under management within eight years.
The 8IP Australian Equity Impact Fund was launched in January 2017 and registered as a managed investment scheme earlier this year. It is designed for investors seeking to invest in Australian companies that are solving the world’s problems. Using its proprietary impact measurement process, we direct capital to ASX listed companies that are solving these problems.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.