Impact Investing: A Game Changer for Social and Environmental Change

InvestingMarketsMarket TrendsMarket InsightsEthicalSustainable investing (ESG)
Author: Reach Alternative Investments
19 February 2024

The Global economy has experienced a paradigm shift in recent years, as the focus moves from purely profit-driven motives to creating positive social and environmental change. Impact investing has emerged as a powerful driving force, enabling investors to play a role in addressing critical social and environmental challenges while generating financial returns. It has also gained significant traction in the Australian market, with increasing numbers of investors seeking opportunities to align their investment portfolios with their values.

In this article, we will delve into the world of impact investing, exploring how it works, its potential benefits, and offering some examples of its applications.

wind farm

What is Impact Investing?

Impact investing refers to the practice of investing in companies, organisations, or projects to generate measurable social and environmental impact alongside financial returns. The core idea behind impact investing is to use capital as a tool to drive positive change in the world, addressing pressing global issues such as climate change, poverty, and inequality.

Unlike other investments, impact investments seek to create a 'double bottom line' or 'triple bottom line,' which entails generating financial returns while also delivering social and environmental outcomes (this being the second bottom line). The ‘triple bottom line’ is a sustainability framework that revolves around the three P's: people, planet and profit. By maximising all three bottom lines, organisations are more likely to have a positive impact on the world while still improving financial performance. For example, the TPG Rise Series, an underlying manager in our Reach IV - Global Impact Fund, invests in Intersect Power. Intersect Power is a renewable energy company focusing on large-scale solar, storage, wind and green hydrogen projects and contributing to the global transition towards net zero. This approach has been embraced by investors ranging from individuals and families to institutional investors, such as superannuation funds, banks, and foundations.

How Does Impact Investing Work?

Impact investing can be applied across various asset classes, including equities, fixed income, private equity, and real estate. The process typically involves the following steps:

1.    Define impact objectives: Investors identify the social and environmental issues they are passionate about and establish clear objectives for their investments. This goes beyond simply excluding the “sin stocks” (alcohol, tobacco, gambling, pornography and controversial weapons).

2.    Conduct due diligence: Investors research and evaluate investment opportunities based on their potential to achieve the desired social and environmental outcomes, as well as financial returns. There are more and more opportunities that allow investors’ capital to have a positive impact without sacrificing financial returns or compromising on their investment goals.

3.    Invest: Capital is invested in funds, companies, projects, or organisations that meet the defined impact objectives and have the potential to generate financial returns. The capital should go directly to the investment to help it achieve its mission/objective; it should not simply be an exchange between shareholders of a publicly listed company/asset.

4.    Measure and report impact: Investors monitor and measure the social and environmental impact of their investments, using metrics and reporting frameworks such as the Global Impact Investing Network (GIIN)’s IRIS+ system or some other proprietary measure.

5.    Reinvest or exit: Investors may choose to reinvest their capital into other impact investments or exit their positions, depending on their financial and impact goals.

The Growth of Impact Investing in Australia

The Australian impact investing market has experienced substantial growth in recent years, reflecting a broader global trend. According to the Responsible Investment Association Australasia’s (RIAA) Australian Impact Investor Insights, Activity and Performance Report 2020, the total assets under management (AUM) in impact investments in Australia and New Zealand reached AUD 19.9 billion in 2020, almost 3.5 times the AUD 5.7 billion AUM in 2018. This growth has been driven by increased demand from investors, as well as a growing recognition of the potential for impact investments to address critical social and environmental challenges alongside financial returns.

growing tree

Furthermore, the 2022 Australian Impact Investor Survey conducted by the RIAA reported that 88% of respondents expect the impact investing market to grow substantially over the next five years, indicating a continued appetite for investments that align with social and environmental objectives. The survey also found that the majority of respondents were satisfied with both the financial performance (80%) and the impact performance (84%) of their impact investments, suggesting that impact investing is increasingly seen as a viable strategy for generating competitive financial returns alongside meaningful social and environmental outcomes.

Potential Benefits of Impact Investing

1. Long-term value creation: By investing in companies and assets that aim to address social and environmental issues, investors’ capital can directly contribute to the achievement of a company’s/asset’s missions/objectives so that they may have a positive long-term impact on society at large. This is different to buying the shares of a company/asset that is listed on a stock exchange, where capital (outside of an IPO or capital raise) is simply exchanged between current and new shareholders, rather than going to the company to help it grow.

2. Aligning investments with values: Impact investing enables investors to align their investment portfolios with their values, supporting causes they are passionate about while generating financial returns.

3. Diversification: By including impact investments in their portfolios, investors can potentially access new sectors, asset classes, and geographical regions, with the opportunity to enhance their overall risk-adjusted returns.

4. Enhanced risk management: Companies and projects with strong social and environmental practices may be better positioned to navigate regulatory changes, manage resources efficiently, and respond to stakeholder expectations, potentially reducing investment risk.

5. Demonstrating leadership: Impact investors can be seen as leaders in their communities, promoting responsible investment practices and driving positive change.

Challenges and Considerations in Impact Investing

While impact investing offers significant potential benefits, it also presents unique challenges and considerations for investors:

1. Limited investment opportunities: Although the impact investing market is growing rapidly, it is still relatively small compared to traditional asset classes. A large proportion of the investment opportunities in Australia are social impact bonds that are often oversubscribed by wealthy families and institutions. This results in a limited pool of suitable investment opportunities for investors that are outside of the family office network.

2. Measuring and reporting impact: “Impact” can mean different things to different people. Furthermore, some impact objectives, such as improved education are not easily measured. For example, while it’s possible to measure the number of students enrolled in a program, how do we quantify the effectiveness of the education and how it changed the lives of the students? In contrast, the impact of a carbon reduction objective is less subjective and there are widely accepted methods for quantifying their impact.

We believe investors can easily get comfortable with the connection between their capital and how the investment has a positive impact on society and the environment, but the lack of standard metrics and reporting can make it challenging for investors to assess the significance of that impact and how it compares to other investments. Nevertheless, we expect the measurement and reporting of impact to improve over time as the industry continues to improve and develop a standard set of metrics and reporting frameworks that addresses the subjectivity associated with those harder-to-measure social impacts.

3. Balancing financial and impact goals: Historically, impact investing and philanthropy went hand-in-hand. Investors needed to carefully consider the trade-offs between financial returns and impact objectives, as some investments offered lower financial returns in exchange for greater social or environmental benefits.

The Reach IV - Global Impact Fund

Impact investing is a paradigm-shifting and rapidly growing investment strategy that offers the potential for both financial returns and positive social and environmental outcomes. Impact investing represents a unique opportunity to contribute to social and environmental progress while diversifying investment portfolios and managing risk.

To address some of the challenges and democratise access to the private equity market, Reach Alternative Investments has set up the Reach IV - Global Impact Fund. Our impact fund targets intentional, measurable, and additional change in impact investing by providing access to the world’s largest fund managers at the forefront of impact investing. We focus on identifying managers who are taking purposeful actions, quantifiable outcomes, and contribute beyond what would occur without their involvement. It is enabled by proven strategies from top-tier managers and has been structured so there is no sacrifice of financial returns or compromise on investors’ investment goals.

If you would like to learn more about private equity and impact investing take a look at our education hub. If you're interested in joining the growing community of investors in the Reach IV - Global Impact Fund please reach out to a member of the team at [email protected].


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