Why you need to build your impact investing portfolio before it's too late
Authored by Michelle Di Fabio.
(Photo source: 2017 ASI conference)
It’s irrefutable, all superannuation and pension funds should consider an allocation to impact investing. Although there are challenges to enter the impact investing market, these should not be mistaken as barriers. The impact market is worth over US $77 Billion globally (GIIN), although it’s a small market when compared to Australia’s $2.3 Trillion superannuation system. There is significant opportunity for superannuation and pension funds to make a difference and carve out a competitive advantage through impact investing. In particular, the Australian superannuation system is well placed to drive and influence this sector and build the scale it needs. Funds who pioneer in impact investing will be rewarded.
At AIST's Australian Superannuation Investment (ASI) conference, we discussed as a panel the opportunity and challenges for the superannuation sector and practical steps to access the impact investing market. (view the full panel Q&A, approx. 60 min here).
1) Does impact investing need a re-brand?
As an industry are we doing ourselves a disservice by calling the sector ‘impact investing?’ Impact implies there is a trade-off between risk and financial returns, however that doesn’t have to be the case. The Goodstart Early Learning transaction (SVA) is an example of an impact investment achieving above market returns, this investment strongly possessing infrastructure-like characteristics. With the right leadership these investments can achieve an 8-13%+ return. Impact investments can sit within multiple asset classes including private equity, property and infrastructure to name a few.
What about fiduciary duty? Funds can absolutely meet their fiduciary obligations by investing in impact, as risk/return targets should align to their existing portfolio targets. In meeting fiduciary obligations, funds should also be very explicit about what their social objectives are.
A key differentiator for impact investing is the intention to create social returns alongside financial returns and actively measure them.
2) Funds who aren’t looking at impact will be left behind
While there are many drivers growing the impact market (including foundations, endowments, family offices, investor demand and alignment to values), we are seeing a shift in $ to the millennial generation and an increasing demand for impact.
As stated by the World Economic Forum, 36% of millennials feel their primary purpose is to improve society; and over next four decades the baby bomber generation will transfer US $41 Trillion in assets to the millennial generation.
How is your fund thinking about the long-term and changing investor demands?
3) Impact investing is a core part of fund strategy, not just a lens to invest
Impact investing is more than investment strategy, it’s a broader part of organisational strategy and brand positioning. Impact investing is about values and strategic alignment with your fund’s value proposition while linking investment opportunities to member’s retirement outcomes. Impact investing can create a point of difference for funds, particularly in a relatively undifferentiated superannuation market with intensifying competition.
There is an untapped opportunity for funds to tell their impact story to engage members, stakeholders and staff through impact reporting and communications and other touch-points. Pioneering funds have already taken a leadership role and will stand to benefit.
The 17 UN Sustainable Development Goals is a terrific framework to begin the conversation and align your organisational strategy and values to your impact goals.
4) Organisational and Board buy-in matters
Having an impact strategy is not enough. Impact investing is a journey, you need internal investment team, CEO, investment committee and ultimately board commitment and buy-in.
Funds can start by having the conversation internally and should look to recruit board members with responsible investing and impact investing expertise to provide leadership and guidance.
5) Collaboration is the key to growing the impact market and building scale
Although there is a strong desire for impact investing, there is unmet need as we haven’t originated the scale of deals. Scale continues to be raised as the key challenge.
Funds can get started by having the conversation internally and with industry colleagues to learn from experience. Most importantly, you don’t have to be a large fund to start. Smaller funds are in a good position to start and allocate capital to smaller deals.
As an industry, we have the opportunity to drive large scale change and have already seen early adopters in superannuation and pension funds globally lead the way. Has your fund considered an allocation to impact investing?
Michelle Di Fabio (Managing Director, Strategic Global Advisory) joined the 2017 Australian Super Investment conference (ASI) conference committee and chaired this session with the objective to continue to give impact investing a voice in superannuation and raise awareness, an important industry that will continue to grow and gain influence.