Impact investment an opportunity across all asset classes

By

13/09/2017

OPINION | Impact investing is unquestionably a hot topic and took centre stage at the Australian Institute of Superannuation Trustees annual Super Investments Conference (ASI 2017), on the Gold Coast, September 6 to 8.

A standout panel (see video below), with Global Impact Initiative chief executive Giles Gunesekera, First State Super head of responsible investment Liza McDonald, and Michael Traill – a leader in the field and trustee director of Sunsuper – addressed the opportunities and challenges.

Impact investing is an extension of environmental, social and governance (ESG) investing. It is about making specific investments that will have a measurable positive impact on society. In the United States, the high-net-worth and family office sectors are the big players. A recent survey showed only 6 per cent of US pension plans have made an impact investment, although 64 per cent wanted to in the future. In contrast, the European impact investing market has been led by pension plans and corporates, with one French pension plan having an allocation of between 5 and 10 per cent.

In Australia, First State Super, HESTA and Christian Super have been the trailblazers in the Australian institutional market. There are also positive signs that local family office space is ripe for growth, although Australian family vehicles don’t generally have the same scale of personal wealth as seen in the US.

McDonald and Traill told the audience that impact deals have to meet risk-return hurdles appropriate for their sector and deals have been rejected when they haven’t stacked up.

When panellists were asked if they would accept a lower financial return to get the social impact, it seemed there was some wriggle room. McDonald said there may be compromise around risk – no one can forecast with perfect accuracy for any investment. Traill noted if there is a choice between an impact investment where there is strong governance (for example, the company is not paying egregious salaries to executives and other desirable cultural attributes) versus a similar opportunity it is possible to take a modest haircut. “There is a little bit (of risk-return) space to play,” he said.

Given the breadth of opportunities available – with social housing being low-hanging fruit, for example – should funds be treating impact investments as a new asset class?

The consensus among the panel was definitely not, because impact investments can be across all asset classes. Perhaps, in fact, we are all doing them a disservice with the labelling, which could be construed to imply non-financial objectives.

It is possible to do business in a hard-nosed and commercial way and have a social purpose or not-for-profit enterprise sitting alongside. Traill, a former Macquarie Group executive who became a co-founder of current chair of Social Ventures Australia, jokingly described himself as an “unashamed sectoral cross-dresser”. He made the compelling point that it is lazy not to confront the challenge.

A key hurdle for pension funds looking to make impact investments is finding opportunities with adequate scale. The speakers noted feedback from the investment chiefs of major funds that it takes as much time to do the analysis on a social bond of $5 million as it does to assess the merits of a $200 million deal.

The solution is to use professional fund managers that have the ability to identify the investments consistent with the defined social purpose goal and have an established investment process. McDonald said First State Super is sourcing impact investment opportunities through its usual channels and infrastructure portfolio.

See: First State Super invests in retirement villages.

Traill’s view was that the market is in early stages of development and 3-5 years down the track, once some of these types of impact investments are generating an 8-12 per cent return, the area will naturally attract more capital.

“We are just dabbling at the moment,” he said.

Funds that are prepared to do the homework, get in early, and get the runs on the board will be rewarded. Longer-dated debt investments probably represent the best opportunities, but some smaller deals with an equity component will also be successful.

Impact investments also offer an opportunity to better engage those members who may otherwise be disinterested in superannuation. According to Traill, Millennials have a higher developed social conscience than any other demographic to come before them.

More generally, the superannuation industry is led by people who want to drive performance, have a strong respect for ethics and a duty of care to members. While Australian super funds may not be early adopters in impact investing, they will, quite probably, be fast followers.

Maria Wilton is the managing director of Franklin Templeton Investments Australia.