Impact investing finds its way on lists of more major players

Updated with correction

Impact investing, traditionally associated with family offices and specialized foundations, is attracting more attention from pension funds and other large institutional investors as the approach goes mainstream.

"I think different large asset owners are coming around," said Hugh Lawson, head of ESG and impact investing for Goldman Sachs Asset Management in New York.

"They seek exposures to high-growth sectors where there is a strong business case, in things like renewable energy, and that just so happens to coincide with impact investing. There is a kind of overlap where the world is headed in terms of growth space," he said. "The real objective is providing capital for enterprises that you believe have a positive function overall."

While pension funds in Europe may be leading the impact investment movement, "that has come to the U.S.," he said. "Institutions now want to have a fairly granular understanding of what they own and how they do it."

Between institutional and high-net-worth investors, "we are seeing a lot of growth in new investors entering the market," said Amit Bouri, CEO of the Global Impact Investing Network in New York, a non-profit organization aimed at increasing the scale and effectiveness of impact investing around the globe.

The GIIN has seen 17% compound annual growth rate in global impact investment assets over the last four years. Its ninth Annual Impact Investor Survey released June 19 notched its largest number of respondents — 266 institutions including pension funds — and assets under management, $239 billion, with most respondents reporting that their investments met or exceeded expectations for both impact (98%) and financial (91%) performance. The increasing recognition of credibility and track records is giving institutions more comfort, and some benchmark studies "have demonstrated that market rates of return are achievable," Mr. Bouri said.

The GIIN's 2018 annual impact investor survey showed a 60% increase in impact investments since 2016, while 2019 survey respondents predicted 13% growth in the amount of capital they will invest this year, and 14% growth in the number of investments.

The top five asset classes in the 2018 survey, as a percentage of reported impact AUM, were private debt at 41%, private equity at 18%, public equity at 14%, real assets at 9% and public debt at 6%.

Some of the institutional hesitancy until now could be confusion over defining impact investing, and how it differs from environmental, social and governance strategies that have become increasingly accepted investment goals for institutional investors. For Fran Seegull, executive director of the U.S. Impact Investing Alliance in New York, an organization working to build an impact investment ecosystem in the U.S., the answer is simple. "ESG is the how and impact investing is the what," she said.

For Kirsty Jenkinson, director of sustainable investment and stewardship strategies for the $226.1 billion California State Teachers' Retirement System, West Sacramento, the definition may be beside the point, which she said is more about how to allocate capital to address global issues.

Then there is the question of which asset class buckets to put it in, if at all. When it comes to impact investing, "what we are exploring is whether we can do more due diligence across the asset classes," Ms. Jenkinson said. CalSTRS does not currently have any impact investments.

In the past, there has been much focus on private equity as a way to have impact, but "we don't see that as much now. It is across classes," said Amy O'Brien, head of responsible investing at Nuveen in New York. While definitions matter, the key pieces are intentionality and competitive financial returns, said Ms. O'Brien. Nuveen has more than $1.2 billion in capital commitments in private market impact investments and it manages $3.5 billion in public market impact investments.

Impact investing strikes a chord for institutional investors when it comes to risk management, which includes not missing out on potential opportunities. "When talking to institutional clients, everything is couched in the vocabulary of risk or opportunity. I'm either going to miss something or be harmed by something," said David Chen, principal and chairman of Equilibrium Capital in San Francisco, which connects public pension funds and other large investors with private impact investments. Equilibrium's AUM could not be learned.

"If there is money to be made with clean water, etc., this is an institutional trend. Most portfolios end up being macro trends. We are nothing but a huge macro trend," Mr. Chen said. His institutional clients "don't want to hear that you are going to save this platform or that. They want to hear that you've found profitable niches," he said. He declined to name any clients.

A perceived shortage of investment vehicles suitable for larger investors is also being addressed, advocates say, spurred in part by recent impact funds from major players like Blackstone Group LP, KKR & Co. Inc. and TPG Growth.

An online database managed by ImpactAssets Inc., a non-profit financial services company working to increase the flow of impact capital, notched a record number of private debt and equity fund manager applications for its manager database in 2019. The 50 managers making the cut manage an estimated $28.5 billion in assets devoted to creating measurable, positive impact.

Margret Trilli, ImpactAssets president and chief investment officer in Bethesda, Md., who cites early adopters like the $65.8 billion Alaska Permanent Fund Corp., Juneau, and $11.7 billion University of California endowment, sees three things different for institutional investors when it comes to impact investing. They need help with access to the deal flow; the deals and funds are smaller so some work with aggregators of investment vehicles, "and they need a bit of flexibility in terms of how they think about asset allocation," she said. "For institutional investors, it is not a matter of compromising on returns."

With plenty of deal flow out there, "I do think it will grow. There are going to be a few fast movers and the rest will watch for a little bit," Ms. Trilli said.

Officials at Alaska Permanent and UC could not be reached for comment.

Institutional investors should hold impact asset managers up to the same level of scrutiny on the return side, said Jeff Brenner, president and CEO of IMPACT Community Capital LLC in San Francisco, with $2 billion in 12 impact funds. "If yields are lower, why bother?"

"All things being equal is the impact component," said Mr. Brenner, who sees institutional customers and employees asking more about impact investing. "It's becoming more and more of a compelling argument," he said.

Nuveen's Ms. O'Brien agrees that client and pension beneficiary demand "may actually put pressure" on institutional investors, although the lead will always be financial return.

"We have needed more awareness in this space. Now we are really into adoption," Ms. O'Brien said. She sees the United Nations' Sustainable Development Goals becoming the common language of impact investing, with the need for a common framework for measuring outcomes, to scale up.

As issues like fossil fuels, climate change and income equality come up as almost daily topics, "I don't think there is any turning back the clock," said Ms. Seegull of the U.S. Impact Investing Alliance. "Whether pension funds respond or ignore impact investing is their choice, but the model of maximizing shareholder value to the exclusion of everything else — that is a fading paradigm."