Why impact investors don't have to sacrifice financial returns
Families and private investors say long-term impact investing delivers social and environmental outcomes while growing capital and managing risks in an era of global disruption.
More than 300 respondents with an estimated accumulated net worth of $264 billion from 41 countries surveyed by Campden Wealth reported an average return on impact investments of 9% in 2019, compared to 12% for traditional investments.
The competitive myth-busting rate was among the findings of the new Investing for Global Impact: A Power For Good 2020 research report by Campden Wealth with Barclays Private Bank and GIST Initiatives, which launched today.
Almost half (45%) of respondents said one could choose to target lower financial returns, or take on greater risk, but one did not have to give up returns in impact investing. CampdenFB asked family philanthropists, family offices and private investors if this was their experience as well.
Jaimie Mayer (pictured) chairs the New York-based Nathan Cummings Foundation and was the great-granddaughter of the founding Canadian-born US businessman, investor and philanthropist.
“We reject the false trade-off between financial returns and impact,” Mayer told CampdenFB.
“To the contrary, we believe that impact investing offers a number of tools to strengthen our process, and we instead see the question as: how does one optimise the relationship between financial returns and impact to best support the goals of the institution?”
Mayer said there was a number of reasons why family offices and private institutions may want to incorporate environmental, social and corporate governance (ESG) and impact factors into their strategy.
“First, incorporating extra-financial information, such as ESG factors, can offer superior risk management or downside protection. It can also offer a source of alpha—or outperformance—by identifying hidden gems and opportunities that traditional investors overlook or undervalue.
“Third, it offers investors a tool to engage private market resources to solve real problems in a more just and sustainable way. And fourth, it can create alignment to ensure that these significant decisions around the deployment of resources are made consistent with the institution’s values.
“Each of these is a valid reason to consider adding ESG or impact factors to your strategy, and all of them are supported by credible data. At Nathan Cummings Foundation, these concepts have allowed us to expand the aperture of our thinking around how our investments can support our mission and amplify our impact. We believe it’s a healthy conversation for any institution to have.”
A family member of a European single family office said in the report their first criteria was financial returns. “But it doesn’t mean we compromise on responsibility. And we try to find the companies and the funds that believe in the same philosophy.”
A private investor in Europe said his impact investments were producing very good returns.
“Some companies track themselves and compare their performance to stock market returns. They are doing quite well.”
Gordon Power (pictured top) co-founded Earth Capital Holdings, a global investment management group focused on technology and infrastructure that addresses international opportunities in the climate change nexus of energy, food and water security. As chief investment officer, Power handles the investment activities for Earth Capital.
“Having spent 35 years in the private equity space, I have learnt that impact investment strategy brings both long-term capital preservation and growth,” Power told CampdenFB.
“In my experience, I have witnessed that returns from sustainable investments have shown a 1.6x multiple increase over non-sustainable investments during the same period. Why? Well, sustainable investments are resistant to global shocks. It is through impact investment that one can sustain, preserve and grow long term capital.”
Leigh Hazelton (pictured middle), private markets research analyst at Russell Investments, told CampdenFB it was difficult to comment on the levels of return achieved as it was unclear what the split would be between debt and equity in the investor’s portfolios, and whether there were any other notable difference in characteristics.
“We do not believe that investors need to sacrifice financial returns, as the best approach to investing with a purpose is to identify long-term, attractive investment themes, typically underpinned by demographic shifts or transitions, that have the potential to generate market-adjusted rates of return, and which can be supplemented with the measurement of a meaningful environmental and/or social outcome,” Hazelton said.
“We believe that private markets can offer investors the best access vehicle due to an enhanced ability to influence and measure the impact their capital has on their desired outcomes. An extra benefit to seeking to make a difference via private markets is the enhanced additionality that can be achieved versus public markets.”
Drew McNeil (pictured bottom), head of client relationships at the multifamily Wren Investment Office, told CampdenFB there was a “massive dispersion” of return expectations among impact managers, as there was in traditional private equity investments.
“Equally, there is also a wide range of social and environmental impact outcomes to consider,” McNeil said.
“It is a very personal choice for investors—if the intentions and outcomes are aligned with their values, then the financial returns should matter less. The benefit of impact investing relative to philanthropy is that it recycles capital.”
