Sometimes a crisis can help bring positive change. For impact investing, the COVID-19 pandemic and the inequities it exposed are boosting its outlook.
Impact investments are made with the intention of generating positive and measurable social, economic and environmental outcomes as well as a financial return. Asset owners and managers put them under various asset and strategy buckets, including ESG or sustainable investing — and note that the one shorthand definition to differentiate ESG from impact is that ESG tends to be more about risk management, while impact investments are specifically intentional.
Measuring comprehensive returns remains elusive. Among respondents in the Global Impact Investing Network's 2020 annual investor survey, 67% said they pursue competitive, market-rate returns. They also reported that portfolio performance overwhelmingly meets or exceeds expectations for both social and environmental impact and financial return, with just 12% reporting underperformance. When asked about impact, 78% said it met expectations and 21% said it exceeded them.
Still, as work progresses on standards and metrics, investors are leery of greenwashing. They “are more concerned that you actually deliver on what you promise,” said Nicholas Hegarty, senior vice president with global private markets investment manager Partners Group AG in New York. The firm has $109 billion under management, of which $4.2 billion is managed or advised under a dedicated impact fund methodology.
More broad-based acceptance of impact investing is “moving along incrementally in a positive way. We are still in an education phase and ‘prove it’ phase. It’s going to take some time,” he said.
Fran Seegull, executive director of the U.S. Impact Investing Alliance in New York, an organization building an impact investment ecosystem of asset owners, managers and service providers in the U.S., said the market’s response to the pandemic and its unequal impact across society helped investors, “especially pension funds, understand that there are systemic risks from climate change, income, wealth and racial inequality. I do think there has been a rising awareness of these risks among asset owners,” Ms. Seegull said.
Pension fund officials are increasingly hearing from beneficiaries who want reassurance about the world they will retire into, said Dean Hand, research director for the Global Impact Investing Network in New York. “We are hearing this more and more, that the cost of not doing (impact investing) is actually much larger” and it raises the question of fiduciary duty.
“I think pension funds are trying to figure out how to respond,” Ms. Hand said.
Deadlines help, too. The 17 U.N. sustainable development goals officially adopted by 193 member countries to address big problems like inequality, climate change, health care and education have a 2030 deadline. The goals are lofty and non-binding, but are increasingly being used by institutional investors as they integrate ESG into their overall investment strategies, industry sources said. Added to that are several deadlines for complying with climate action targets in the Paris Agreement, the international treaty calling for countries to limit greenhouse gas emissions to achieve a climate-neutral world by 2050.