Impact investing: How to make money and do your bit for the planet
Link copied to
Impact investing — which generates social and environmental impact alongside financial returns — has moved from niche to mainstream, says Jessica Roth — founder and director of the Social Impact Hub.
Describe the current impact investing space in Australia.
The impacting investing market in Australia has been growing rapidly in recent years and it is exciting to see so many new players entering the market.
What started as a niche market principally led by private family offices and philanthropy has now grown to entice institutional investors into the space. Major Australian superannuation funds are starting to make impact or ethical investments.
In the past few years there has also been a dramatic increase in funds in the space – and the creation of impact funds in Australia and also by the likes of global players like BlackRock and Goldman Sachs.
What are the major drivers behind the growth of these investments?
It all stems from the realisation that we can use the trillions in investment capital to help solve major problems in society, because government and philanthropy alone cannot address everything.
There has also been an awakening within the not-for-profit sector that reliance on charity is less sustainable and sometimes it is possible to use commercial mechanisms to achieve social and environmental good.
How can investors get in on impact investments?
Impact is just another lens you should use in addition to the normal consideration of risk and return. In that way, it should not be viewed as its own asset class but rather impact should be measured across all investments.
When we start widening the definition of return on investment to consider the consequences of an investment beyond just the financial return, but also considering the social, and environmental impacts, then we can measure the true cost of business and true return on investment. All investments have an impact – it is either positive or negative.
At the Impact Investing Hub we have set up a live deals library, to capture the opportunities online to allow investors to find them easily. Potential investors then contact issuers directly for further information and to invest.
Previously, investment opportunities have been based on networks, but the integration of technology is opening up the market in Australia.
What types of impact investments are there?
There is a wide range of impact investment product available. Initial grant capital has helped many social enterprises get investment ready, and that has created a new range of opportunities in the market.
Enterprises focus on everything from food waste to disability, sustainable tourism or housing and healthcare and through the deals library we are able to connect those projects with the people wanting to invest.
One type of product that has grown dramatically in the last few years is social impact bonds – it started with two pilot social benefit bonds from the NSW government a few years ago and now the majority of states have either issued or are working on developing social impact bonds.
Most banks have now issued sustainability or green bonds and there are significant amounts of capital flowing into the ecosystem.
Is it possible to still make money while doing good?
Yes! There is an emerging track record with impact investing – that there is not necessarily a trade off when it comes to investment returns.
Solving a societal problem can actually help underpin the success of a business – the long-term population trends and climate trends favour for purpose businesses.
In some ways, social business is not a new concept. There have been thousands of highly successful health and education enterprises for a long time but the measure of success has just been financial rather than also focusing on the impact or the outcomes. It is just this intentional focus on the social impact and the measurement of the impact that is relatively recent.
When you measure the impact as well as financial return you often find it helps generate good business outcomes as well as good for society.
How can you measure the impact of one investment over another?
One of the challenges in the industry is that there is no universally accepted methodology to measure impact and it is difficult.
While reporting on outputs is good, that does not necessarily translate to long term impact.
There have been a number of global attempts to standardise the approach, including great work by the Impact Management Project and the Global Impact Investment Network, but there is still more work to do. This area is rapidly growing, so hopefully we get to a point soon where the impact metrics are just as standard and comparable as financial metrics.
What lies ahead for impact investing in Australia?
A new game changer in the field is the opening up of crowd-funding equity, which will allow many smaller enterprises to get into the impact investing sphere, as they lower the burden of investment for the average punter.
Initially the sector was catalysed by philanthropy, and this was then followed by institutional investors, but now your ordinary mum and dad investors are increasingly able to participate in the market, partly through more managed funds offering impact portfolios and partly through equity crowdfunding.
I’m confident we will see an increasing diversity of innovative product come to market that will be suitable for all types of investors. Hopefully we will also get more transactions at scale to bring even more institutional money into the impact ecosystem.
Ultimately, I hope it is not a niche market, but rather impact is a consideration in all investing!
Jessica Roth is the Founder and Director of the Social Impact Hub, a purpose driven advisory and education business that created the Impact Investing Hub. The Hub aims to support the growth of the Australian impact investment sector, and in so doing, help finance solutions to some of our most challenging social and environmental issues.
Jessica is also the Impact Strategist for Blue River Group, an independent impact investment services firm, and a Sessional Lecturer at UNSW Law School. She previously opened the Sydney office of Impact Investment Group and served as a member of its Investment Committee. She is a graduate of UNSW and Harvard, where she studied social entrepreneurship, philanthropy and impact investing.