Photo Credit: Chris Lawton
From BlackRock CEO Larry Fink’s bombshell acknowledgement that “climate risk is investment risk”, to Microsoft’s plans to be carbon neutral by 2030, sustainability has been dominating headlines. But beyond avoiding harm, impact investing aims to be part of the solution, representing the next step along the investment spectrum. For years considered niche, impact investing is now poised to be one of the most widely discussed topics of 2020.
As society and investors continue to demand more than profit from corporations and portfolios, here are the trends to watch in this space for the next year:
1. From the Fringe to the Mainstream
BlackRock is the world’s largest asset manager, with $6.96 trillion under management. By committing to eliminate “high risk” investments such as coal and screening for fossil fuels, the investment giant is raising the stakes for other financial institutions and bringing ESG (environmental, social, governance) investing into the mainstream.
“With the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward,” said Fink in his annual letter to CEOs in January.
According to Palladium Regional Director Christina Shim, others have come to the same conclusion.
“Investors acknowledge that this is of growing interest and it seems that every bank and investment firm is trying to play in the space,” she observes. “We’re especially hearing from the private equity, hedge fund, and wealth management spaces that they’re receiving more demand signals for ESG and impact.”
The Global Impact Investing Network (GIIN) estimates the current impact investing market at $502 billion as of April 2019. Whether following BlackRock’s lead or the growing body of research, we’re going to see this number increase significantly in 2020.
2. Growth and Maturity
This surge in interest is requiring institutions to develop fundamentally new products and services, competing to differentiate themselves and maturing the market as a result.
“As the industry increasingly seeks to get to scale, and specifically to products that have sufficient scale to attract institutional investors, we will see more transactions that play to that,” predicts Steven van Weede, Managing Director of Palladium’s Capital Advisory business, Enclude.
Van Weede gives the example of securitisation transactions, where portfolios of assets are bundled and risk tranched to play to different investor risk preferences. He’d also like to see fund-of-fund strategies make a comeback, as a means of aggregating deep impact opportunities to reach the required scale.
As for BlackRock CEO Larry Fink, he expects “these sustainability-focused models to become the flagships themselves” as they move from traditional market cap-weighted indexes to those weighted by ESG factors.
Meanwhile, other asset managers will “have to match or better, and soon,'' activist Bill McKibben told ImpactAlpha. “It seems like ‘worse for the planet than BlackRock’ is not a great slogan.”
3. Impact Integrity
While any growth may seem to be a good thing, measurement and reporting will be a crucial element to maintain the effectiveness and perception of investing for impact.
Palladium Innovative Finance Director Roland Pearson cautions that “we must avoid the threat of ‘green-washing’ or ‘impact washing’, which undermines the bona fide intent and potential of these approaches.”
Van Weede agrees: “As institutional investors enter the fray, there is increasingly a need to develop a common understanding of how we measure, verify and report on impact.” He expects to see the lively and healthy debate continue on these issues and the emergence of private and public organisations to address them.
Maintaining integrity and realising impact investing’s true potential also requires the correct balance of social and financial returns.
“It’s not an impact investment without an impact, and it’s not a sustainable investment if it doesn’t generate a financial return,” notes Andrew Tillery, head of Palladium Impact Investments. “All of our investments assume impact. We scope for impact before we look at the business thesis and if they don’t reach a certain threshold, then the business thesis is irrelevant.”
Measurement and verification will be key in 2020 as those committed to results work to maintain the fundamental principles that underpin investing for impact.
4. Gender Lens Investing
“Empowering women and girls is one of the fastest ways to reap social and economic dividends,” says Julie Bishop, former Australian Foreign Affairs Minister and Palladium Board Member.
This reality has led to a shift in the way women and girls are perceived, from program beneficiaries to financial movers and shakers. It’s estimated that $12 trillion could be added to global GDP by 2025 by advancing women’s equality, and women who work typically invest 90% of their income back into the health, nutrition, and education of their families (compared to 30-40% for men).
“We’ve only just scratched the surface of the enormous potential here,” says Tillery, who manages the Palladium Impact Fund I with a strong gender lens.
Van Weede agrees, adding that intersectionality will bring further focus and impact to gender lens investing.
“We’re seeing an interesting meeting of gender and climate, as women are often most affected by climate change,” he notes. “Although climate is best aligned with the zeitgeist (and rightfully so), we will see increasing overlap between gender and health, gender and education, and gender and agriculture as well.”
Pressure from investors and the public is continuing to mount, challenging governments, businesses and institutions to deploy capital toward more sustainable ends. The breadth of opportunities to take on the world’s greatest challenges is matched only by the challenges themselves, and 2020 is the year to join the movement.
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