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Shifting the conversation towards impact investment

15/01/2019

The growth of impact investing industry has coincided with a growing realisation that what we finance now and over the next decade will transform our world in the next century and beyond.

Institutional asset owners are increasingly looking to invest not only for financial return but also to benefit society and the environment. This movement is visible in the broadening range of socially or environmentally responsible investment strategies as well as in the growing emphasis on integration of environmental, social and governance (ESG) factors into asset managers’ investment processes.

Three years ago, the United Nations 2030 Sustainable Development Goals (SDGs) set the vision, framework and targets for the transition to a sustainable and resilient society and the Paris Climate Agreement followed suit by providing a pathway forward to limit global temperature rise to well below 2 degrees Celsius, and maybe even 1.5 degrees. These global sustainability initiatives have helped to shift the conversation on sustainable and responsible investing – investors are not only thinking about how their investments can target sustainable long-term returns but also how they can generate tangible impact to tackle fundamental global challenges driven by climate change, natural resource scarcity and an ageing population, for instance.

Sustainable finance is still only a small fraction of overall financial activity in private markets but growing attention from investors around climate change, for example, led by institutional investors has fuelled innovation from the financial industry. The range of environmentally-focused or ‘green’ investment products and solutions, that aim to target better outcomes for the environment and society, is ever expanding. Similarly, private sector capital is increasingly being deployed to address social needs, such as bridging the housing affordability gap.

With investor focus moving from sustainable returns to ‘impactful’ returns and solutions, the impact investing industry has seen rapid growth in investor inflows, a proliferation of new opportunities across asset classes and growth in the number of impact investing strategies with track records of achieving both impact and financial performance. Impact investment aims to positively impact society, beyond the risk mitigation or harm avoidance focus of many ESG strategies with the dual objective of generating measurable environmental and/or social benefits and a level of financial return.

Using the SDG framework to demonstrate real-world impact

We believe impact investing has a pivotal role to play in closing the US$5 to $7 trillion SDG funding gap, as estimated by the UN Commission on Trade and Development (UNCTAD). While the 17 SDGs and their respective targets have not been designed as a framework for investment in the first instance, impact investors have found that using the SDG framework to develop their own taxonomies (aimed at grouping investments according to relevant activities of a company or project) can help articulate and clarify how their impact investments work towards achieving global development and sustainability priorities.

Although clear alignment with the SDGs relies on having a robust process to measure and report the social and environmental outcomes of each investment, in addition to typical financial performance metrics. Impact can be measured through tangible outcomes that help protect the environment or deliver benefits to society.

For example, an investment that aims to create new energy-efficient homes to make the built environment more energy and resource efficient will make a major contribution to reducing carbon emissions. We consider this type of investment qualifies as an impact investment under the category ‘green buildings’ according to our criteria and aligns with Goal 7 ‘Affordable and clean energy’, Goal 11 ‘Sustainable cities and communities’ and Goal 13 ‘Climate Action’.

Impact investing in action – mapping impact to the SDGs

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Investing for a better future by targeting impactful returns

The growth of the impact investing industry has coincided with a growing realisation that what we finance now and over the next decade will transform our world in the next century and beyond. This has added further weight to impact investing as a diverse and viable opportunity for investors to actively address key global challenges. Investing for impact means investing in a more sustainable future, which not only protects the environment and benefits society, but also helps deliver sustainable economic growth and returns for investors.

1 Impact metrics are intended to provide an indication of expected outcome. tCO2e = tonnes of carbon dioxide equivalent. Expected metrics are based on assessments made relative to average residential properties in their respective regions.
2 Source: M&G, as at February 2018. Given the AAA rating assigned by M&G credit analysts and rating agencies Moody’s and Fitch respectively, comparable liquid public bonds are largely issued by development banks and supranationals.

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