Theories and new investment practices take time to be widely adopted. Capital typically struggles grasping a new concept before flooding the thematic with inflows.
It does not matter if we are talking about index investing, hedge funds, derivatives, credit portfolios or any of the hundreds of investment products available. Adoption takes time. Once the theme or process is widely accepted, performance drives inflows rather than a proof of concept thematic.
The latest thematic to have taken hold is ESG but it too has a long history with the first sustainable mutual fund (Pax World) launched in 1971 (two United Methodist ministers were looking to avoid investing church dollars in companies contributing to the Vietnam War). The uptake took time, by 1994 in the US just 26 sustainable funds were available to investors. The UN Principles for Responsible Investing were written in 2006.
Impact investing had been practiced for decades but the term is now widely accepted to have been created in 2007, followed by the Global Impact Investing Network launched in 2011. The UN Sustainable Development Goals were born at a conference in 2012 and adopted in late 2015.
This time frame from inception to adoption is not unusual; the first hedge fund was founded in the late 1940s, but widespread adoption took decades.
Vanguard’s first index Fund was developed in 1976 and saw extremely limited inflows for years, raising almost no additional capital in its first five years of existence. Flows into sustainable funds surged in 2020 with more than $150 billion in inflows in Q4 alone.
Once an investing thematic is labelled and accepted by investors the question moves from what it is to how a particular firm or manager defines their process.
What is Impact Investing?
Impact investing is a form of investment with the dual intent of generating positive social and environmental impacts together with financial returns. The industry grew by over 40% in 2020.
An the approach to impact investing
All businesses can and should understand their holistic impact, both positive and negative (“externalities”)
This understanding will create businesses that are financially stronger, more resilient, and greater contributors to the wellbeing of their communities, people and the planet
The ‘Impact Investing’ team plays a leading role in supporting companies across all sectors with intention and capacity to deliver positive impact ̶ whether or not delivering impact was their foundational principle
Supporting businesses across the impact maturity spectrum to aspire to excellence will deliver the broadest positive impact across the universe of small business in Australia.
This growth equity investment style is particularly suited to this inclusive and hands-on approach to impact.
It targets investment opportunities in businesses that have a deep understanding of the positive effects they have on their broader stakeholders and actively measures those effects. The definition of these businesses is ‘Impact Natives’. They integrate impact into their business models, and their success metrics are well aligned to measures of positive impact.
Implicit is the belief that many other businesses have unrealised impact potential and demonstrate strong impact intentionality. One could define these businesses as ‘Impact Naive’. The Impact Investing team works with them to ignite this latent potential. The Investment Process takes qualifying Impact Naive businesses on a journey to define their impact mission and intended positive outcomes, to identify and strengthen their ESG metrics and to appreciate their total impact footprint, both positive and negative. These transitioning businesses are ‘Impact Adopters’.
Impact measurement methodology incorporates:
An investment scoring system that concurrently scores an applicant’s impact and financial potential
An outcomes-based impact measurement tool like the Impact Management Project’s Five Dimensions of Impact
A 360° stakeholder assessment based on ESG criteria adapted for use with Australian SMEs
Impact and sustainable investing is established and has entered the growth phase. Investors now need to focus on manager selection and impact mandates. Impact growth equity funds focussed on Australian SMEs exist and are becoming ever more popular to investors.
Author David Nolan