How can impact investing move to the next level?
Investors are paying closer attention to which projects can have the biggest positive impact on society and the environment.
As impact investing starts to gain more traction among investors, greater benchmarking of its performance is now needed for it to attract more capital in the coming years.
Institutional and private equity investors are becoming increasingly conscious of the social and environmental impact of their investment decisions, as well as the financial returns, amid a global push on reducing carbon emissions and boosting corporate responsibility.
Around one fifth of insurance companies and pension funds are developing impact investing plans, and 44 percent are considering the strategy, according to the UK National Advisory Board on Impact Investing. AXA, BlackRock, Bain Capital, Goldman Sachs, TPG and UBS are all upping their game.
While some existing benchmarks on both Environmental, Social and Governance (ESG) pillars and sustainability ratings are giving investors more overview of the environmental impact of their portfolios, this is only the start.
Benchmarking needs to become much more comprehensive to enable investors to quantify the impact of their investments, says Beth Ambrose, director, Upstream Sustainability Services at JLL.
“It’s about giving investors in what is a relatively new sector for real estate the reassurance that they are indeed having an impact,” she says. “There’s more need for greater transparency so that investors can have confidence in the ability of platforms to generate the impact and the returns they seek.”
The UN Sustainable Development Goals (SDG), launched in 2015, are gaining traction more broadly among investors both within and beyond real estate. Around two-thirds of respondents to the Global Impact Investing Network's 2019 survey said they are now using UN SDGs to track their performance when impact investing.
“There are some positive signs of more tracking by major investors and investment platforms,” Ambrose says. “But broadly speaking, the reason it isn’t there yet is due in part to the sector’s infancy. As the sector evolves, that should change.”
Impact is not something that can always be measured easily as there is a strong human element to some of these investments, she explains.
“Behavioral change takes longer to see manifest and ultimately requires patience, making those with long-term investment strategies more aligned.”
However, investments must also be viable and offer attractive returns, Ambrose says. The Global Impact Investing Network survey also found that 66 percent of respondents target market-rate returns for their impact investments.
Housing in focus
Affordable housing remains a major focus for impacting investing. The property arm of Caisse des Dépôts raised €900 million for a social impact fund for housing developments in French cities this year, while the UK’s housing market is drawing in capital.
Places for People Group’s PfP Capital fund management business has a £150 million fund, in partnership with the Scottish government, to invest in rental properties, offering affordable housing to low and modest earners.
Launched in April 2018, Legal & General Affordable Homes is working with 14 UK housing associations. The Co-op pension scheme in the UK awarded a £50 million mandate to PGIM Real Estate to invest in social and affordable housing across the UK.
“It’s very much a geographical strategy, with funds targeting areas where there is greater need and more potential for impact,” says Philip Hirst, director, Upstream Sustainability Services, JLL. “A deprived area can offer the opportunity to make a real difference and generate strong returns.”
With the growing focus on sustainability and community in the corporate world, and record levels of dry powder, impact investing is well positioned to draw in more capital, Hirst believes.
At least US$1.5 trillion of new capital is set to target global real estate over the coming years, according to JLL. A record US$330 billion is sitting unspent in real estate private equity funds.
“Investors will increasingly look for opportunities to invest and to be a force for good,” says Hirst. “That will stretch across a range of sectors where investments can have a positive social, and environmental, effect. Real estate - in all its forms - has a massive impact on both.”