Impact investing can be broadly defined as investing that has the intention to generate a positive and measurable social and environmental impact along with a financial return. By definition it is attempting to “kill two birds with one stone.” In the real world, we know this is an unlikely event – almost a freakish occurrence.
The global asset management industry is responsible for approximately $120 trillion to $130 trillion of investments across the world. In contrast it is estimated that just $50 billion to $100 billion of assets are allocated to impact investing – representing just 0.05 percent of total investments.
So given the new financial environment we are working in post the financial crisis of 2008, why is it that so little money has been directed or channelled into impact investing?
Having created an "impact positive" product at Nikko AM Europe back in 2010, we can cast some light on the key obstacles and challenges we’ve experienced in transitioning impact investing from niche to mainstream.
Our strategy is based around investing in green bonds issued by the World Bank. All the proceeds from these bonds are used to finance projects that help combat climate change or alleviate the adverse consequences of climate change. The green bonds issued by the World Bank generate the same yield as their conventional bonds – the end investor does not have to sacrifice financial return in order for the proceeds to have a positive impact on the environment.
Although this strategy has been successful, and received much interest and attention from the investment community with an "ethical" bias, to date it has failed to penetrate "Main Street" investment allocations.
The strategy was established to appeal to mainstream investors by being managed against global recognized bond indices with a clear mission to generate mainstream market returns. But in attempting to bridge the gap between impact investing and mainstream finance, we have often been left straddling the two – with suspicion from both communities that we are unable to deliver or fulfil the dual objectives.
This, despite the fact that after three years, we know we have outperformed the stipulated benchmark in gross terms1 by investing in bonds which generate a clear positive environmental and social impact.
So what have been the obstacles we have faced and what general deductions can be reached? There are three broad categories of resistance: First, general industry inertia to change; second, an overwhelming skepticism amongst the major participants within the asset management industry that mainstream returns are achievable; and third, unrealistic claims and assumptions from proponents of impact investment that have inadvertently hindered progress.
Let’s start with the general inertia within the asset management industry. ESG considerations are an increasing force in today’s asset management industry, and impact investing can be seen as the latest manifestation of this. However, J.K. Galbraith once said that “faced with the choice between changing one’s mind and proving that there is no need to do so, almost everybody gets busy on the proof.” This is reminiscent of the fund management industry, especially in the aftermath of the 2008 global financial crisis, and there remains a resistance to change. Multiple participants are involved, from consultants, trustees, distributors and fund management companies; aligning all ‘interests’ to the same priorities is always going to be difficult.