We are pleased to introduce The Investment Intelligence Podcast, where experts discuss all things investing, from recent market developments, to strategy, sustainable investing, asset allocation, risk management and more.
Impact investing’s recent growth looks set to continue, coupling social and environmental benefits with financial returns to help meet investors’ evolving demands.
With investors increasingly wanting their capital to have a positive real-world influence, the topic of impact investing is moving into the mainstream
Impact investing is defined by its intention to generate a positive, measurable social or environmental impact through investment, and the ongoing measurement of the impact alongside a financial return
Impact strategies exist across a broad range of industries and geographies
Impact investing has two primary goals – to generate financial returns, and help tackle social and environmental issues. In other words, impact investing seeks to support a social good while at the same time offering attractive risk-return profiles, and while monitoring the impact it is achieving.
Private markets have led the charge, incorporating a plethora of investment opportunities in areas such as energy efficiency, financial services, health and education, food and agriculture, and sustainable forestry. The private market can be accessed through both equity and debt; while equity, being lower down the capital structure, is riskier, it gives the investor more control over the asset.
A growing market
The market for impact investments is growing. In 2018, impact strategies held EUR500 billion under management worldwide, up from EUR120 billion two years previously1. To give a sense of the scale of the potential opportunity, these numbers are dwarfed by the capital that the United Nations anticipates is required to fulfil sustainable development requirements.
According to the OECD (Organisation for Economic Co-operation and Development), the cumulative size of infrastructure investments alone required to achieve UN Sustainable Development Goals (SDGs) – initiatives focused around climate change or hunger prevention for example – will total more than USD 70 trillion by 2030, about 3.5% of predicted global GDP2. More than 60% of impact investors, driven by a desire to integrate into a “global development paradigm”, track performance to one or more of the UN’s 17 SDGs, according to the Global Impact Investing Network3. The most commonly referenced are decent work and economic growth, no poverty, reduced inequalities, good health and well-being, climate action, and affordable and clean energy.
In other words, impact investing is more than an investment fad. The potential market growth is mirrored by investors’ shifting priorities, as a younger demographic is more likely to prioritise sustainability concerns when investing.4 This trend should continue to push impact investing further towards the mainstream.
Major international initiatives such as the UN’s SDGs, or the Paris Agreement on climate change, have catalysed and shaped this growth.
The growing significance of SDGs to portfolio managers was underlined by our recent survey of institutional investors, which saw 59% of respondents state that they were familiar with the UN targets.
Nevertheless, SDGs are not an investment template; they exist primarily to steer society rather than individual transactions. They can, however, help frame the impact thesis for an asset: what can it contribute to which goals, and how can this be done? The ability to source transactions where the social and environmental impact is directly correlated to the financial performance is therefore vital.
To identify these transactions, at Allianz Global Investors our impact portfolio managers analyse the specific impact of any project, identifying its ability to contribute positively, along with any challenges to such outcomes. Key performance indicators (KPIs) then need to be developed to align the asset with defined outcomes.
Tracking impact investment
While the financial performance is measured in the same way as any other real asset – through the internal rate of return – there are currently no benchmarks specifically pertaining to impact strategies.
At the beginning of every transaction, the KPIs should be embedded in the procedures and processes. These can be financial or impact-based.
Whether return or impact-focused, KPIs need to be specified from the start and written into the contract, with targets agreed between investors and the organisation responsible for driving the impact project (the vendor). These KPIs will establish specific performance targets and enable investor intervention in extreme cases.
Determining the detail around KPIs at the outset is where the skills of the investment team are vital. They must ensure that the counterparty’s management team is able to provide all necessary information and fulfil all impact due-diligence criteria. Such an approach creates a feedback loop between investors and management around strategic goals and the measurement of desired impacts. As this level of communication becomes commonplace, investors are noting “substantial progress [in the] sophistication of impact measurement and management practice”.5
Identifying and managing the process requires an experienced investment team, which will take into account many other factors, including investor demand and any regulatory drivers that would affect asset value.
Impact’s growth so far is just the beginning
While typically private markets investments are less liquid – and therefore generally the preserve of institutional investors – impact strategies may offer potential protection; most are backed by real assets, and carry the potential for lower volatility, as mitigation of social and environmental risk is “hard-coded” into the investment process.
As the environmental issues underpinning them become more important – to investors and society as a whole – the impact investing market will likely continue to grow, positioned to meet more environmental and social needs while still seeking attractive financial returns. The range of needs which impact strategies can help meet is vast, and changing priorities of investors will mean demand continues to rise in line; we have already seen dramatic growth, but we believe the impact story has only just begun.
Investing involves risk. Investments in alternative assets presents the opportunity for significant losses including , losses which exceed the initial amount invested. Some investments in alternative assets have experienced periods of extreme volatility and in general, are not suitable for all investors. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP (Australian Registered Body Number 160 464 200) is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG, licensed by FINMA (www.finma.ch) for distribution and by OAKBV (Oberaufsichtskommission berufliche Vorsorge) for asset management related to occupational pensions in Switzerland; Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan];and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.
ESG factors have historically been more commonly associated with equity investments, but the past year has seen a significant change with fixed-income investors pushing for ESG factors to be appropriately and demonstrably integrated into investment analysis and risk decisions.
Integrated ESG means the inclusion of environmental, social and governance factors in all investment process and risk decisions
The ESG focus relating to fixed-income investments has mostly concentrated on downside mitigation, but there is an opportunity to generate positive alpha from companies with improving and transitioning ESG profiles
A fully integrated ESG process draws on individual and collaborative expertise from diverse research teams covering ESG, equity and fixed income
The market has yet to adopt a common approach, with a debate around the merits of exclusion strategies compared with integrated ESG’s ability to invest and engage with issuers on a transitional path