Sustainable investments
Sustainable investments
Podcast
23.5.2022
Impact investments aim to generate a measurable social and/or environmental impact without sacrificing a positive financial return.
From my last blog post, we know that ESG investors take a different approach: they look at a company's sustainability profile in terms of its environmental, social and governance risks and opportunities. These form the basis for deriving the impact on the company's financial performance. ESG investors therefore focus on the financial materiality of ESG activities.
Impact investors want much more: they aim to make a contribution to solving the world's urgent ecological and social problems. Most of the global challenges and development fields are mapped in the 17 UN Sustainable Development Goals (SDGs) and thus form a system for classifying impact fields.
In order to make impact or the achievement of impact measurable, it should be an additive investment that is made with a defined impact target over a longer period of time. Based on this narrow definition, we consider it questionable whether it is possible to achieve impact with a public market investment such as a daily tradable equity fund.
Asset classes from the private markets - real estate, infrastructure, private debt and private equity - appear to be much more suitable. Here, funds are used for specific investment projects over a longer period of time and can achieve their intended effect or impact over the investment period.
Investors often ask themselves whether the return suffers as a result of the impact targets. The answer to this is as short as it is clear: No. Achieving impact can very well go hand in hand with achieving an attractive and standard market return.
As with any investment, it is important to have clear risk/return expectations when investing in impact investments. Supposedly safe investments such as fixed income investments (investments in fixed-interest securities) naturally yield lower returns than equity investments. This also applies to impact investments.
In the fixed income sector, for example, there are also highly relevant social impact strategies that focus on education, healthcare or civil society. However, if you look at the returns, these are mostly modest at 1-3% p.a. Investments of this type fall into the so-called "impact first" category. Achieving a return is of secondary importance here.
The situation is different for impact investments in the private equity and venture capital segment. Here, achieving impact and generating the usual market return for the asset class are equally relevant for most investors. A market study conducted by the Global Impact Investing Network (GIIN) in 2020 shows that this was not always the case. As the study reports, just 10 years ago the assumption was that there was a trade-off between impact generation and financial performance.
This assumption about impact investments can be explained by the fact that impact initiatives used to be associated primarily with philanthropic activities rather than profit-making. Today, private equity impact investments are pioneering the financing of disruptive technologies that are needed to solve the major challenges facing our world.
When taking a closer look at the challenges associated with climate change, it becomes clear that a large proportion of the investments will have to be made by the private sector. It therefore makes sense to provide exciting investment opportunities that combine "purpose" and "profit". Doing good and earning money has long since become a reality.
In view of the enormous amount of capital required to finance the necessary innovation boosts, looking at past impact private equity performance is likely to be a conservative approach. The Impact Investor Survey by GIIN (2020) distinguishes between two types of investors: those who expect a below-market rate of return - i.e. those for whom the focus is on impact - and those who expect a normal market rate of return ("market rate").
In the past, investors with a below-market return expectation were able to achieve an average gross IRR of 11% p.a. for impact PE investments in emerging markets and a gross IRR of 10% p.a. in developed markets. Investors with a return expectation at market level, on the other hand, have achieved an average gross IRR of 18% p.a. (in emerging markets) and 16% p.a. (in developed markets).
You can find out what you can expect from FINVIA in terms of specific impact investment opportunities in the next blog post.
You can read part 3 of this blog series here.
Sustainable investments
23.5.2022
Barbara Wokurka
Investors often ask themselves whether the return on impact investments suffers as a result of the impact goals. What is the truth of this myth?
Impact investments aim to generate a measurable social and/or environmental impact without sacrificing a positive financial return.
From my last blog post, we know that ESG investors take a different approach: they look at a company's sustainability profile in terms of its environmental, social and governance risks and opportunities. These form the basis for deriving the impact on the company's financial performance. ESG investors therefore focus on the financial materiality of ESG activities.
Impact investors want much more: they aim to make a contribution to solving the world's urgent ecological and social problems. Most of the global challenges and development fields are mapped in the 17 UN Sustainable Development Goals (SDGs) and thus form a system for classifying impact fields.
In order to make impact or the achievement of impact measurable, it should be an additive investment that is made with a defined impact target over a longer period of time. Based on this narrow definition, we consider it questionable whether it is possible to achieve impact with a public market investment such as a daily tradable equity fund.
Asset classes from the private markets - real estate, infrastructure, private debt and private equity - appear to be much more suitable. Here, funds are used for specific investment projects over a longer period of time and can achieve their intended effect or impact over the investment period.
Investors often ask themselves whether the return suffers as a result of the impact targets. The answer to this is as short as it is clear: No. Achieving impact can very well go hand in hand with achieving an attractive and standard market return.
As with any investment, it is important to have clear risk/return expectations when investing in impact investments. Supposedly safe investments such as fixed income investments (investments in fixed-interest securities) naturally yield lower returns than equity investments. This also applies to impact investments.
In the fixed income sector, for example, there are also highly relevant social impact strategies that focus on education, healthcare or civil society. However, if you look at the returns, these are mostly modest at 1-3% p.a. Investments of this type fall into the so-called "impact first" category. Achieving a return is of secondary importance here.
The situation is different for impact investments in the private equity and venture capital segment. Here, achieving impact and generating the usual market return for the asset class are equally relevant for most investors. A market study conducted by the Global Impact Investing Network (GIIN) in 2020 shows that this was not always the case. As the study reports, just 10 years ago the assumption was that there was a trade-off between impact generation and financial performance.
This assumption about impact investments can be explained by the fact that impact initiatives used to be associated primarily with philanthropic activities rather than profit-making. Today, private equity impact investments are pioneering the financing of disruptive technologies that are needed to solve the major challenges facing our world.
When taking a closer look at the challenges associated with climate change, it becomes clear that a large proportion of the investments will have to be made by the private sector. It therefore makes sense to provide exciting investment opportunities that combine "purpose" and "profit". Doing good and earning money has long since become a reality.
In view of the enormous amount of capital required to finance the necessary innovation boosts, looking at past impact private equity performance is likely to be a conservative approach. The Impact Investor Survey by GIIN (2020) distinguishes between two types of investors: those who expect a below-market rate of return - i.e. those for whom the focus is on impact - and those who expect a normal market rate of return ("market rate").
In the past, investors with a below-market return expectation were able to achieve an average gross IRR of 11% p.a. for impact PE investments in emerging markets and a gross IRR of 10% p.a. in developed markets. Investors with a return expectation at market level, on the other hand, have achieved an average gross IRR of 18% p.a. (in emerging markets) and 16% p.a. (in developed markets).
You can find out what you can expect from FINVIA in terms of specific impact investment opportunities in the next blog post.
You can read part 3 of this blog series here.
About the author
Barbara Wokurka
Barbara Wokurka is responsible for impact investing at FINVIA. She can look back on 30 years of professional experience working for financial service providers and in the real economy in the areas of corporate finance and asset management.
She laid the foundations of her career at Deutsche Bank in Frankfurt and London in the Corporate Finance division before joining Porsche AG in 1999 to set up and head up asset management for the Group. In 2007, she moved to Quoniam Asset Management GmbH, where she initially looked after German Tier 1 clients and then took over sales management for the international market as a partner, including the establishment and management of the Quoniam branch in London.
