By Adam Bendell, CEO Toniic
Realizing the opportunity to use capital for greater purposes than financial returns alone, investors across asset classes are aligning their investments with their values. By doing so, they are embracing the belief that it is not only a benefit to transformational areas of need, but also a sound financial strategy that anticipates and takes advantage of new market opportunities. Investors new to the space may be cautious of the opportunity to fuel social and environmental good while achieving returns at or near market rates. Traditional investment advice says, “Make as much as you can regardless of values alignment, to have more to give away philanthropically”. Impact investors think differently. They are committed to helping transform the global financial system into a vehicle for good.
Toniic, a global action community for impact investors, recognizes that one of the greatest shortcomings in impact investing is the lack of analysis and reporting to provide investors with the essential context and vision to make investment decisions and move more capital into impact. It launched a new multi-year longitudinal study on impact investing called “T100” (www.toniic.com/t100). This ongoing effort aims to uncover the major impediments and accelerators to impact investing today and into the future. With the recent publication of the first report, “T100:Launch”, Toniic started to analyze aggregated portfolios, survey data and the personal stories of members to draw more attention to trends in investing and the surge of interest in investment portfolios, striving for 100 percent deployment in impact. The report explores why investors are seeking more impact in their portfolios, and the factors that impede or accelerate this transition.
While challenges and opportunities vary greatly across the classes of investors (high-net-worth individuals, family offices and foundations), impact themes, asset classes and portfolio sizes, the report does highlight some trends that bring greater context to drivers in the impact space.
Challenges to impact investing:
You can’t express all impact themes equally in all asset classes.
While most impact investors have a baseline “do no harm” philosophy, they go further by identifying specific social or environmental problems they seek to address with their investments. Since the problem space is so vast, most have picked a handful of specific focus areas called “impact themes”. They overlay impact themes over asset classes as an organizational framework for their portfolio to focus their targeted social or environmental impact.
The “T100:Launch” report shows that the ability to express a given impact theme across asset classes varies by theme. In private equity, environmental investments predominate, although those targeting the environment were able to do so in all asset classes except for cash and equivalents. Similarly, community empowerment was expressed across a diversity of asset classes, including real assets, fixed income, and cash and equivalents. Other themes appear less often in certain asset classes. For example, poverty alleviation is in almost all private-asset classes, but is not prevalent in public equity or debt. Education investments are more commonly found among fixed-income, private-equity and real-estate asset classes; improving human health is most frequently expressed within public equities.
So for some impact investors, like those focused on the environment, constructing an “all asset classes” portfolio is easy. For other impact themes, it is more difficult today.
Some asset classes lack sufficient impact products.
The “T100:Launch” report shows scarce impact investments regardless of impact theme in certain asset classes, notably cash equivalents and hedge funds. This may be due to the lack of availability of sufficiently impactful products in those categories. This is the case for cash; but for hedge funds, it may be that some impact investors reject the notion of financial engineering, preferring to make their investments in the “real economy” of goods and services. If correct, then there is a need to get more granular in asking questions, as some hedge-fund strategies (long/short strategies, for example) might be acceptable to a given investor while others (e.g., crude-oil trading arbitrage) might not. We intend to dig deeper in future studies.
Impact measurement is nascent.
Measurement is power—and helping to quantify the impact on the beneficiaries of the investee is essential to speeding deployment in the sector. While 100 percent of impact investors want to be measuring impact returns across asset classes, limited resources, lack of mandatory disclosure and inconsistent methodologies for calculating rates of impact return mean it is still difficult. Also, comparability across impact themes remains elusive. Investors seeking to compare impact opportunities between poverty alleviation and carbon reduction, for example, have no common ground on which to compare. This might not even be the end goal, but certainly comparability of impact within sectors is essential.
Thematic impact investments are generally illiquid.
While most investors don’t require liquidity across their entire portfolios, investors do have liquidity constraints, and those affect their available choices. In the “T100:Launch” report, thematic investments (those investments with the most targeted impact) are also the most illiquid, with 55 percent locked up for longer than five years. On the other hand, responsible (or ESG— environmental, social and governance—screened) investments are 91 percent liquid, at least partially redeemable in less than 30 days. It’s easiest to achieve deep impact within private equity, which is also illiquid, so there’s an observed correlation between depth of impact and illiquidity.
Accelerants to Impact Investing:
While the obstacles to impact investing are notable and to some extent constrain faster adoption, there are trending factors that stand to accelerate the move into purpose-backed investing over time.
Growing networks of impact investors.
Investor confidence comes not only from demonstrated financial return but also from connection to community. In fact, the single highest-rated factor in facilitating more rapid deployment of investments towards impact is having a trusted network of fellow impact investors to share ideas, deals, learnings, diligence and co-investments. As the impact-investing sector grows and matures, the community of investors sharing tools and resources becomes a means of stabilization and validation. Simultaneously, the growing size and sophistication of the sector is furthering the amount of research and product development being applied to it, raising visibility and suggesting a bright outlook for impact investing as an approach.
Aligned advisors speed deployment.
Traditional advisors who do not understand impact investing can be an impediment to clients seeking an impact approach. Aligned advisors are, conversely, an accelerator, particularly in fixed-income and public-equity asset classes. The “T100: Launch” report indicates a correlation between the use of knowledgeable advisors and investors receiving positive impact and return. Those investors acting without the assistance of an advisor had a heavier focus on cash and equivalents, real assets and private equity. Those acting with the assistance of advisors are notable in their speed in redeploying their portfolios to impact, especially in their first years investing in the space. With the help of advisors, some portfolios in the study were even able to move to nearly 100 percent alignment within the first two years of transition.
Access to quality investments across asset classes.
As more investors are drawn to the impact space and are demanding adequate returns on their investments, there is a need for a well-rounded suite of options for investors to consider. All impact investors seek both financial and impact returns. Some are willing to relax financial-return expectations in particular situations in order to maximize impact. Others aren’t, and seek both high financial and impact outcomes. Depending on minimum investment size, impact theme and asset class, there can be a lack of investment opportunities. Because the industry is new, a greater percentage of fund managers are first-time managers. Investors’ willingness to take the additional risk of working with first-time managers also accelerates deployment.
What this means for impact investing in 2017 and beyond.
The “T100:Launch” report identifies high-impact portfolios being achieved today. It shows that a transition to 100 percent impact is possible for a wide range of investors, from those investing in developed countries to those in emerging economies, from direct investments to public equity, real estate and fixed income. There is reason for increasing confidence that both the impact and financial return expectations of a range of impact investors can be met. However, the very real obstacles of inconsistencies across asset classes, shortages of financial products and lack of rich toolsets are serious shortcomings that the impact-investing industry needs to address.
For attentive financial-service innovators, these challenges present opportunities. As large and traditional financial-services providers get into the “impact space”, the range of products will grow, the visibility of impact investing as a viable strategy will increase, and more innovation will be catalyzed. There is a tremendous latent market for values-aligned investments, and those who meet that demand with authentic impact products stand to reap both great financial rewards and improve social and environmental outcomes for the planet, just like the impact investors they serve.