Impact products’ value quadruples over 2.5 years

Ben Hurley

By

23/07/2018

Australian investment products that deliver social and environmental impacts quadrupled in dollar value between 2015 and 2017, driven by consumer demand and a corresponding push from financial advisers, a new report has found.

Australia had 51 active impact investment products worth $5.8 billion at December 2017 – up from $1.2 billion in 2015 – states the Benchmarking Impact 2018 report, published by the Responsible Investment Association Australasia (RIAA) in partnership with Swinburne University’s Centre for Social Impact. The report covers the period from July 1, 2015 to December 31, 2017

While impact investing is still in its infancy, the ongoing accumulation of robust related data around investor demand and product returns is providing a growing incentive for the broader financial industry to step in with new products, RIAA chief executive Simon O’Connor says.

“At this point in time, we have [people from] many different parts of the finance sector who are watching and monitoring, very closely, impact investments,” O’Connor says. “What they want to see is the track record and trend over time. So being able to provide performance and time-series data on this is really helpful for something we are keen to see, which is the continual scaling up of impacts and the bringing in of more institutional investors.”

Huge contribution from green bonds

The lion’s share of growth in impact investments for the time frame of the report came from 14 green bonds, which contributed $4.9 billion. For this reason, fixed income makes up 87 per cent of the investments by dollar value.

These green bonds come from a variety of issuers, including banks, universities, property companies and government agencies. O’Connor says other bonds aimed at social or environmental outcomes are emerging, including sustainability bonds and gender bonds.

Real assets made the second largest contribution by dollar value, at 10.6 per cent. The majority of these are property and infrastructure investments explicitly targeting reduced carbon emissions. But they also include a fund that is restoring water flows to the environmental wetlands along the Murray-Darling Basin, and the Australian Chamber Orchestra’s Instrument Fund, which invests in rare and fine musical instruments.

Private debt accounted for the largest share of the number of investments made, with 56.

Investors mostly satisfied

The financial performances of impact investments have largely met investor expectations, the report finds. Institutional investors that offer these products hold them to the same performance standards as other assets from the same class. In contrast, O’Connor says, other private investments targeted at important social outcomes in areas such as mental health and family support and, therefore, sometimes offer lower returns.

Fixed income products showed an annual return of 6.8 per cent, private debt products 8 per cent, social impact bonds 4.6 per cent, and real assets 5.8 per cent. While the return for the social impact bond was lower than investor expectations, only one of the seven social impact bonds has commenced making payments (and this bond was performing ahead of expectations).

Products included in the report vary widely in size and aim. They include the Social Enterprise Finance Australia loan fund, which provides loans from $50,000 to $2 million for organisations with a social, cultural or environmental mission.

Another is the Queensland Treasury Corporation’s Green Bond, a $750 million seven-year bond issue to finance projects that support Queensland’s transition to a climate-resilient and environmentally sustainable economy.

Keeping the bar high

The report defines impact investments as those that not only screen for negative effects, but also intentionally set out to achieve environmental or social outcomes. They have to be investment products available to wholesale or retail investors, and they have to be domiciled in Australia. Also, the RIAA counts only those that explicitly measure, quantify and report their environmental or social outcomes.

They also need to bring returns, thus excluding philanthropy. Sustainability-themed funds in areas such as renewable energy, green property and sustainable agriculture are also excluded, despite having beneficial impacts, as they aren’t setting out initially to achieve social and environmental outcomes as a primary objective.

The report also does not include any of the emerging public equities funds being labelled as impact funds, because they either lack the explicit intent to achieve a social or environmental impact, or they do not measure their outcomes.

 O’Connor says the inclusion criteria has intentionally been kept strict.

“Our intention is to keep the bar pretty high to ensure what people call impact investments really are delivering impact,” O’Connor says. “There’s increasing discussion that we need to ensure there is strong integrity underpinning all the impacts that we’re reporting from this industry, and that we can be very clear in articulating and quantifying that impact that is occurring.

“When you have $2.6 trillion sloshing around in the superannuation fund industry, all of those investment decisions are having an impact on the shape of our economy and the shape of the society Australians are retiring into. It’s really important that we consider those impacts and understand those impacts.”

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