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How can impact investments add value to a portfolio?

Shifts in consumer culture and investor values push funds to focus on more than just returns
4 MIN READJanuary 07, 2020

With diminishing relations between society and business, many companies and banks are eager to find investments that yield both financial and social returns. One avenue is impact investing, defined by McKinsey as the act of “directing capital to enterprises that generate social or environmental benefits”. For example, in a time of environmental turmoil, many companies often employ some form of climate change mitigation in their CSR policy.

For real estate investors, this might come in the form of the development of affordable housing or the commital to using more sustainable construction materials. 

Some of Europe’s most senior and influential real estate players met to discuss impact investing at Europe GRI, in Paris, to explore just how important positive intentions are when it comes to investing.

It seems that the growing demand on socially responsible investments has spurred some of the biggest fund managers to look into this. In the US, impact assets grew by as much as 38 percent in the last 3 years. 

The problem is it’s hard to actually measure and quantify the success and value of certain pursuits. One senior fund manager of a large investment fund has been placing capital into sports arenas for children, but also described in detail their committal to plant a few thousand trees over the next financial year.

It was difficult to quantify just how good the social returns are, but small pursuits like this certainly makes stakeholders feel proud, engaged, and brands that build more of an identity for themselves are more likely to garner loyal clients and customers.

But according to the room, in order to return profit, a brand must be built and acquire returns from profitability, not sustainability. The sustainable part is integrated in the investment model and not evaluated as a separate pursuit.

Before, achieving both social and financial returns wasn’t possible, but now almost every large investor has some form of ESG screening process in their business strategy. According to one study which described women and millennials as more susceptible to caring about impact, the trend is projected to accelerate given the likely transfer of wealth to these groups. 

While investors can see a clear upside in impact investments with new/returning clients, they accept the reality that these investments can’t be scaled adequately to create attractive returns - not to mention most likely carrying higher risk and lower liquidity. Impact investing has been forecast to grow to around $300 billion by 2020, a small fraction of the projected $2.9 trillion private equity market.

Some impact investments across the US and Asia however have demonstrated just how capital can be employed sustainably and meet the financial expectations of investors. Looking at 48 investor exits in India between 2010 and 2015, they produced a median IRR of 9-10%.

The top third of these yielded a median IRR of 34%, indicating quite decidedly that it is possible to achieve profitable exits in social enterprises. What perhaps is more important though, is that the impact investments in India specifically positively touched the lives of 60-80 million people in India alone. 

As investors reexamine their understanding of impact investing, the capital commitments that they make are sure to expand. That will undoubtedly provide new challenges. But our research suggests that this nascent asset class can meet the financial challenges as well as achieve the social returns sought by providers of capital globally. 

To meet and partake in discussions with some of Europe's biggest investors,  join some of GRI Club's upcoming annual events. Among the GRI Club events taking place in Q1 and Q2 include France GRI (22 - 23 April), Deutsche GRI (12 - 13 May, 2020) and Italia GRI (13-14 May). 

Article by Matt Harris

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